Thursday, June 30, 2011

Frederic Bastiat

Frederic Bastiat (1801-1850)
210 years ago today, Frederic Bastiat was born. Most famous for the broken window fallacy, and for years thought of as primarily an economic journalist, his under-appreciated economic theory has recently become more highly regarded. His great theoretical work is Economic Harmonies in which he reveals himself to be an earnest Christian economist and profound theorist. Early on in that work, he has a wonderful passage explaining why good economists must never shirk from their duties.

In the introduction he entitles, "To the Youth of France," Bastiat lays out the intellectual contest between economists and socialists. He identifies specific errors made by Ricardo and Malthus that socialists point to in an effort to turn political economy against itself. Bastiat could have rhetorically circled the wagons, justifying their errors by descending into mere politics. His devotion to truth, however, required another path.
I have already said that in Political Economy every erroneous proposition must lead ultimately to antagonism. On the other hand, it is impossible that the voluminous works of even the most eminent economists should not include some erroneous propositions. It is ours to mark and to rectify them in the interest of science and of society. If we persist in maintaining them for the honor of the fraternity, we shall not only expose ourselves, which is of little consequence, but we shall expose truth itself, which is a serious affair, to the attacks of Socialism.

A wise lesson for us all. The task of the economist is to get the analysis right, regardless of who is shown to be in error on a particular point. This is one of the great services the good economist provides to society.

Wednesday, June 29, 2011

Taxes on Businesses are Costs

Earlier this month I wrote about why businesses, even large corporations, cannot painlessly pass taxes on to their consumers. The main reason I cited is that such taxes, being assessed against the producer, are costs of production. Raising such costs increase the general minimum selling price for sellers, reducing the supply and quantity sold for the good in question.

Another response to such taxes, however, is highlighted by Andrew Moorflield, global head of oil and gas at Lloyds Bank. As he explained Monday at the Reuters Global Energy and Climate Summit, "In terms of new production that we're looking at financing, it is moving toward Norway and away from the UK." This shift from Britain's North Sea to Norway is due to a surprise tax imposed on the British oil industry. Such are the consequences of higher taxes. They reduce the incentive to invest, which in this case reduces the quantity of capital directed toward oil production in Great Britain. Incomes and jobs in the British oil industry will be lower than they would otherwise. 

Tuesday, June 28, 2011

What Malinvestment Looks Like: Spanish Edition

The malinvestment in Spain falls mainly on the plain (or words to that effect). I have already blogged about photos, satellite and otherwise, documenting ghost towns and empty, sometimes only partially completed, and abandoned construction projects in Florida and China. These projects are what they are because their builders ran out of money and there were not enough potential buyers to make the projects salvageable.

Business Insider has a collection of satellite photos of new Spanish airports (one of which forced into bankruptcy) and several towns with eerily similar empty, sometimes partially completed, housing developments. One of the towns featured in the collection is Soto Del Henares, where more than 13,500 homes have been built while only 3,000 people live there. Prudent Investor kindly posted a 4-minute video tour of Soto Del Hanares back in April.

These photos and video are further testimony that money cannot buy prosperity. Those who think that merely boosting nominal spending will usher in economic expansion mistake GDP for the social economy. They are tangible evidence of what is wrought by artificial credit expansion: wasteful investment and capital consumption. They also provide an answer to those who wonder why an economy cannot adjust from malinvestment back to productive investment as fast and as easily as entrepreneurs can undertake the initial malinvestment. During inflationary booms, some capital is sunk into capital goods that are not easily convertible to other uses. These photos and video should be a lesson to us all.

Monday, June 27, 2011

Bovard on How Welfare Breeds Corruption

Over at Just Watch the Game, John Steigerwald points to an excellent article by James Bovard in the Wall Street Journal. In "The Food Stamp Crime Wave," Bovard documents how abusing government income transfer programs is now easier than ever. Things are so bad that "Millionaires are now legally entitled to collect food stamps as long as they have little or no monthly income." This is one more example of how welfare breeds corruption.

Bovard cites cases in Wisconsin, Washington, Iowa, Michigan, and New York, indicating that this is not merely a problem limited to one locale or region. The main reason for the latest corruption, besides the mere existence of the welfare state itself, is that "thirty-five states have abolished asset tests for most food-stamp recipients." Therefore very wealthy people are able to qualify for food stamps as long as they are able to legally report very low incomes. Bovard reports:
The food-stamp poster boy of 2011 is 59-year-old Leroy Fick. After Mr. Fick won a $2 million lottery jackpot, the Michigan Department of Human Services ruled he could continue receiving food stamps. The Detroit News explained: "If Fick had chosen to accept monthly payments of his jackpot, the winnings would be considered income, according to the DHS. But by choosing to accept a lump sum payment, the winnings were considered 'assets' and aren't counted in determining food stamp eligibility."
Such regulatory changes along with increasingly lax monitoring and enforcement has resulted in a massive increase in the number of people on the dole. As Bovard reports, "the number of food-stamp recipients has soared to 44 million from 26 million in 2007, and costs have more than doubled to $77 billion from $33 billion."  This is one more piece of evidence that welfare transfer payments reduces the opportunity cost of not working and that they, therefore, encourage idleness. Idleness other productive people pay for. Nice work if you can get it.

Sunday, June 26, 2011

Where is Your Treasure?

In Matthew 6:19-21, Jesus is recorded as saying “'Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal, but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal. For where your treasure is, there your heart will be also."

This passage came to mind as I saw this collection of houses the city of Detroit, through various incentive programs, will pay people to occupy. The city's intention is to lure people back to blighted neighborhoods. Many of these homes were very grand in their day. It is sad to see their present state of disrepair. They are good reminders that none of our worldly possessions are eternal.

As Isaiah said, the grass withers and the flower fades. It is the Word of God which stands forever.

Saturday, June 25, 2011

Our Health Is Overinsured

So says my friend and colleague Tracy Miller. Why? His latest op-ed explains:
The problem with many existing health-insurance plans is that they cover the cost of routine treatment for illnesses, such as colds and flu that occur frequently, or the cost of care for conditions, such as pregnancy, that are heavily dependent upon the choices of the person who is insured. Basic economics teaches that paying for routine treatment via a third-party insurance company will raise the total cost of that treatment. This happens for two reasons: First, the insurance company, as middleman between the consumer and the healthcare provider, has costs that must come out of what the consumer pays. Second, insurance that pays for routine care lowers the cost of each doctor visit to the consumer, thus increasing demand. Higher demand with a given supply means higher prices.

As Miller alludes to, the problem with all third-party payer schemes is that they artificially increase demand for services, putting continual upward pressure on fees and, hence, health care costs.

Friday, June 24, 2011

Interview on the Ethics of Capital and Interest

In conjunction with my recent Acton University lecture, "The Ethics of Capital and Interest," I was interviewed by Joseph E. Gorra for the Evangelical Philosophical Society. In the interview I discuss the nature of money, ethics of capital accumulation and interest, the Biblical view of man, the Austrian causal-realist tradition of economics, and how Christian philosophers might cooperate with Christian economists. You can read the entire interview by clicking here.

Thursday, June 23, 2011

The Fed Says Let the Bad Times Keep Rollin'

The Federal Open Market Committee announced yesterday that they will keep up record monetary stimulus after QE2 finishes. They correctly see that the economy is still stagnant and unemployment is still high. Ben Bernanke says the pace of recovery is "frustratingly slow." In a moment of honestly he revealed, “We don’t have a precise read on why this slower rate of growth is persisting.”

An important reason the Fed remains mystified is its basically Keynesian economic framework. This framework leads them to think spending, and especially consumer spending, is the driver of the economy. The monetary base remains at historically high levels, because the Fed thinks that by pumping such a large amount of money into bank reserves, banks will feel comfortable to lend, entrepreneurs and potential home buyers will feel comfortable borrowing, and spending will increase across the board. This, so the theory goes, will boost incomes and national GDP. It is the theory that we can achieve prosperity through printing press.

In fact, what drives the economy is voluntary savings and investment which funds capital accumulation, entrepreneurial activity, and research and development. Artificially lowering interest rates during QE ad infinitum merely perpetuates capital malinvestment, retarding productivity and prosperity. 

Also yesterday the always interesting James Grant provided some expert commentary on Fed policy on "In Business with Margaret Brennan" on Bloomberg TV.

He notes that what the Fed has in fact achieved through QE2 is a weaker dollar, a higher gold price, slower economic growth, and higher price inflation.. Additionally the Fed has managed the artificially prop up stock prices. In speaking to that consequence, he surmises that either the Fed owns the stock market or the stock market owns the Fed.

Wednesday, June 22, 2011

Christian Antropology and Economic Method

My article "Christian Anthropology and Economic Method" has just been published in the most recent (Fall 2010) issue of Areopagus Journal. The issue is devoted to the theme Christian economics and in addition to my article includes work by Paul A. Cleveland on the natural law case for the free market, Eric Schansberg on a Christian understanding of economics, and Thomas Tacker on the importance of private property for life and liberty.

In many ways, I think the theme is really more like Christianity and economics. Some people who hear of a Christian perspective of economics respond, "What's next? A Christian view of dentistry? Automobile maintenance?" Such a response misses the point. Good economics is good economics whether its done by Christians or unbelievers. Christianity does come to bear, however, on epistemology, our understanding of what it means to be human, and economic policy. It is there that Christian doctrine touches how and why we do economics and also for what end.

My article sets forth some of the implications of the Christian view of man and the method best used to discover economic truth. I lay out the Scriptural doctrine that man is made in God's image and is, therefore, a rational actor. Humans engage in purposeful behavior. I then explain:
The Christian view of man as a rational actor has certain important implications for economic method. Any sound economics that is relevant for the created order in which God has placed us must take human action fully into account. In fact the very starting point for economic analysis is human action. The first task of economics, consequently, is to logically unpack the implications of human action. Sound economics, therefore, discovers truth by beginning with the premise that humans act and then deduce implications of their actions.

The economic method described here is praxeology. It is the method used by the Misesian, causal-realist tradition of economics. This fidelity of praxeology to the Christian view of man is what solidified my conviction that economics is a legitimate calling. It is a vocation worthy of devoting my life to. Because good economics discovers real truths about the created order, such praxeological economics reveals something of the glory of God.

Tuesday, June 21, 2011

Joseph Salerno on the Fed's Two Options: Bad and Worse

Joseph Salerno, one of the most insightful economists working today, was quoted in the New York Post about our current inflation and the Fed's monetary policy. The author of the Post story understandably only had room for a small portion of what Salerno said. Salerno posted his full remarks on the Mises Blog and they serve as a good, concise discussion of the current economic state of affairs and the Fed's policy options.

Salerno says
The bottom line is that we are experiencing a false, inflation-driven recovery. When it is finally unable to ignore the signs of inflation any longer,the Fed will raise interest rates and terminate QE2 (scheduled to end this month). At that point the economy will begin to stagnate like the Japanese economy of the 1990s and we will face a protracted period of extremely slow growth and high unemployment.
This might explain why, according to economists at the Council of Foreign Relations, we households are still so heavily laden with debt.

Alternatively Salerno notes that the Fed could merely keep the inflation going, which would be much worse. As he says, "If the Fed persists in its inflationary policy then it will usher in galloping inflation like the U.S. experienced in the 1970s combined with high unemployment–and I do not think that price and wage controls will be too far behind."

Monday, June 20, 2011

George Ayittey on the Cheetah Generation

George Ayittey on the Cheetah Generation vs. the Hippo Generation. From PovertyCure:

George Ayittey is an economist from Ghana and professor at American University. He is the author of Africa Unchained

Sunday, June 19, 2011

The Ethics of Capital and Interest

Friday morning I lectured at Acton University about the ethics of capital and interest. I began by laying out what I call the positive case for capital and interest and then examined some moral objections that have been raised against capital accumulation and the charging of interest.

The positive case for capital accumulation, indeed for all economic activity, is rooted in the cultural mandate. God gave mankind the cultural mandate in the Garden before sin had entered the world. In Genesis 1:28 we read “Be fruitful and multiply and fill the earth and subdue it and have dominion over the fish of the sea and over the birds of the heavens and over every living thing that moves on the earth.” Genesis 2:15 reads “The Lord God took the man and put him in the garden of Eden to work it and keep it.”

David Bruce Hageman identifies four tasks in the cultural mandate: ruling, filling, working, and keeping. People are to fill the earth. Humans are called to transform the original garden into a beautiful city. After the fall, however, the ground was cursed, scarcity became aggravated, and conflict arouse between God and man and between man and man. The cultural mandate, however was not rescinded.

In light of the cultural mandate and the nature of the cursed ground, how do we fill the earth with people without our starving to death or killing one another in a barbaric struggle for survival?  We must engage in consumption and production. We can’t exercise dominion if we are starving to death. Sustaining an expanding population requires increases in productivity. This is only possible when people formed communities where wide diversity of talents and gifts could be pooled together.

Economics teaches us that capital is a necessary source of prosperity. Capital goods are produced means of production. They include tools, machines, intermediate goods, and goods in process. As such they form the intermediate stages of each production process.

Using capital goods increases the productivity of the user. They allow people to produce more output per unit of land and labor. They also allow us to produce goods that could not be had at all without capital goods, such as watches and computers. By increasing our productivity, capital goods advance people in time toward their objective in producing consumer goods.

However, before capital goods can be used, they must be produced. People must make the capital goods first before they can be used to produce a consumer good or goods closer to consumption. Capital goods arise, consequently, from combination of land, labor, and time.

The more numerous the stages of production, the greater the opportunities for the division of labor. This further increases our productivity through the Law of Association which says that cooperative action is more efficient and productive than isolated action of self-sufficient individuals.

Producing capital goods requires saving. By saving we mean the restriction of present consumption.  In order to accumulate capital, people must be willing to put off present consumption and make available to workers resources they need to live for duration of production process in which they participate. The capitalist is the one who saves so that he will have resources available to invest in the production of capital goods. Savings is also required for capital maintenance, because capital goods wear out and become obsolete over time. Technological advance also requires savings, because research and development is funded out of savings, and to be operational, technology must always be  bound up in physical capital goods.

The willingness to save is constrained by time preference. People value present money more highly than they value the same amount of money in the future. To be willing to invest money now, people require a premium to compensate them for the waiting time they must endure.

This payment compensating for time preference is called interest. Interest, therefore, is income earned by capitalist/savers for supplying present money in exchange for future money. If capitalists invest savings for a particular project, they must do without use of their money for a particular period of time. Interest compensates them for this service of advancing present money to someone. Interest, then, is payment for rendering services of advancing money in the present to either entrepreneurs or owners of factors of production. The principle is the same regardless of whether capitalist saves and invests in the loanable funds market, financial instruments (stocks and bonds), or physical production.

The conclusion of the matter is that capital accumulation is a tremendous and necessary source of prosperity that allows us to better fulfill the cultural mandate. Interest is the income for providing the service of advancing money in the present which funds all capital accumulation.

Notwithstanding the social benefits of capital accumulation, several moral objections have been raised against it. One of the most popular is the Marxist claim that capital accumulation is a matter of stockpiling surplus value at the expense of exploited labor. In fact, capital is not the result of only land and labor. It is result of combining land, labor, and time. The capitalist is actually laborers' benefactor by advancing income in the present to workers which sustains them through time-consuming productive process.

Another argument against capital accumulation is that capitalists have too much power. In free society, however, the only way for a capitalist to accumulate capital is to better serve others. If they do not do what consumers want, they will reap losses and lose their capital. They only wield true power if they obtain special privilege from the state protecting them from competition in some way. The real problem in this case is state intervention, not capital accumulation.

Another argument against capital accumulation is that it leads to income inequality. Again however, in a free society, capitalists accumulate capital by more successfully serving others. “The workman is worthy of his hire.” If he satisfies the needs of others, why should not the capitalist increase his wealth?

Finally, in the Bible, God specifically instructs us to be good stewards with capital.
I passed by the field of a sluggard, by the vineyard of a man lacking sense, and behold, it was all overgrown with thorns; the ground was covered with nettles, and its stone wall was broken down. Then I saw and considered it; I looked and received instruction. A little sleep, a little slumber, a little folding of the hands to rest, and poverty will come upon you like a robber, and want like an armed man" Prov. 24:30-34.

Know well the condition of your flocks, and give attention to your herds, for riches do not last forever; and does a crown endure to all generations? When the grass is gone and the new growth appears and the vegetation of the mountains is gathered, the lambs will provide your clothing, and the goats the price of a field. There will be enough goats' milk for your food, for the food of your household and maintenance for your girls”Prov. 27: 23-27.
There are also a number of moral objections to interest. One popular argument appeals to scriptural condemnation of usury. It is important to recognize that according to the biblical language, usury is equivalent to interest. The prohibition against interest, however, is a prohibition against charging interest for charitable loans made to people in extreme need. It was not a prohibition of interest on commercial loans.

Other criticisms of interest run back to Aristotle. It is argued that money is barren and time belongs to all. Therefore, charging interest is either charging something for nothing (money is barren) or charging for something that he does not own (time). However, money in fact is an economic good. It is not barren, but provides service to holder. Also the saver/investor in lending or investing does without the use of his property--his money--for a specific period of time. Again, the workman is worthy of his hire. The capitalist/saver provides a service by advancing present money to those who desire it. This service is worthy of his compensation.

Saturday, June 18, 2011

Businesses Cannot Simply Pass on Taxes to Consumers

Over at John Stiegerwald's Just Watch the Game, he linked to this post by Exxon which tries to explain the difference between their costs and revenues for the past year. I cannot vouch for the complete veracity of all in Exxon's report. That is not my intent.

One thing that struck me, however, was the claim in the comments section that even if taxed, the corporation never pays it because it passes the tax on to the consumer. This is a common understanding of who pays taxes on businesses. However, the economic reality is not so simple. For businesses, a tax is an additional cost of production in the sense that, in order to sell a good, not only do they incur the cost of producing the good, but in order to sell the good legally, they must pay some money to the state. Suppose, for example, that the state imposes a $1 tax on gasoline, a product previously untaxed. The effects of such a tax can be seen using the graph below:

Before the tax the market price of gas was, in this example, $3.00 per gallon and the quantity sold in the market would be QMKT. Because of the increased cost of producing and selling a gallon of gas, sellers' minimum selling price for each quantity increases by the amount of the tax, or $1. Their requiring an additional dollar for each gallon decreases supply from S to STGas stations would try to sell the same quantity QMKT but would not be able because of the law of demand. When assessed a new tax, firms do indeed try to cover that tax by raising prices if possible. The problem they face is that as people are not willing to buy the same quantity at the higher price.

If Exxon or anyone else would attempt to pass on the whole tax to consumers, they would create an excess supply. The quantity supplied would be greater than the quantity demanded. Therefore, the more eager sellers--those sellers who are willing to sell at a lower price--would bid down the price until everyone who wanted to sell can sell. This new price would indeed be above the pre-tax price of $3.00, but below what it would be if the gas sellers could pass on the entire tax to the consumers, $4.00. In the example, demand is such that the price would settle at $3.40. Consumers pay $3.40, but sellers must pay $1.00 of that revenue to the government. Therefore, the selling price they actually receive is $2.40. At this lower price, sellers sell a lower quantity of QT .

The consequences of a tax on gas, then, are these: Consumers pay higher prices for less gas. Sellers receive less revenue per gallon sold, reducing profits. Businesses cannot painlessly pass taxes on to consumers.

Friday, June 17, 2011

Samuel Gregg on Christian Anthropology

I have mentioned already that I am lecturing at this year's Acton University 2011. Wednesday morning I had the privilege of sitting in on an outstanding lecture by Dr. Samuel Gregg, director of research for the Acton Institute. Gregg delivered the opening foundational lecture "Christian Anthroplogy," and it was excellent.

He rightly noted that any sound social theory must understand humans correctly, and this means it must take Christian anthropology seriously. By Christian anthropology Gregg means simply what God reveals to us in both general and special revelation about what humans are like.

He lays out six characteristics of human beings that Christian anthropology identifies.
  • A human being is an embodied person. He is a seamless amalgam of the physical and spiritual. They are constituted by a physical body, intellect, reason, and a will.
  • Humans possess reason. Reason helps us to know what we are to do. We are capable of contemplating the deep nature of things in a way no other created being is. It is this contemplation that allows us to make sense of the knowledge we learn from science.
  • People have wills. Our will moves us to do this or that. It is conditioned by heredity and environment, without being determined by it.
  • Humans are inherently creative beings. In this we mirror God in our particular creaturely way.
  • Humans are fallen. Our experience as well as Scripture teaches us this. A proper understanding of our fallenness is very important for our social theory. Because of our sinfulness, there is no heaven on earth. Such a view of man protects us from utopian thought and, instead, encourages a sort of Christian realism.
  • Humans are simultaneously individual and social beings. Each of us are loved by God as individual persons. At the same time we are taught to love our neighbor as ourselves.
This perspective is the same one I take in my book as I develop economics from a Christian perspective. From the premise that God made us in His image as purposeful actors, we can unpack the concept of human action and can, as long we make no logical errors, discover economic laws that are as sure as what God says about us in His Word.

Thursday, June 16, 2011

Enterprise Not Aid

I am presently at Acton University 2011 where I will be lecturing over the next two days about the nature and function of money and the morality of capital and interest.  Last night during the evening session, The Action Institute announced it was launching a new initiative called PovertyCure. PovertyCure wants everyone to stop asking why are so many still so poor and begin asking the right question: what causes wealth?

As I point out in the introduction to my Economic Expansion and Development course at Grove City College, poverty is the historical norm. Instead of asking why are so many still poor, we should instead ask how did we become rich?  The short answer is we were allowed to take advantage of a more extensive division of labor using accumulated capital wisely invested by entrepreneurs. Aid breeds dependence. Enterprise breeds prosperity. That is the solution to poverty and that is the vision of PovertyCure. I encourage you to watch their video promo:

Wednesday, June 15, 2011

America's Exceptional Economy

One of the great joys of teaching economics at Grove City College is being part of a department that includes Jeffrey Herbener, the most underrated Austrian economist working today.  This past April, at the annual Center for Vision and Values conference, Herbener gave a brief lecture during a panel on the American economy and entrepreneurship.

In his lecture entitled, "America's Exceptional Economy." Herbener traces out the reasons America's economy was once truly exceptional and briefly explains its decline. The key to both is private property. It was adherence to the concept of private property as both a Christian ethical and practical good that explains why America's economy became the envy of the world. It is statist encroachments against property that explains her decline. During Herbener's lecture he draws upon the work of Francis Wayland, Ludwig von Mises, and J. Gresham Machen. You can watch the entire lecture by clicking here. Herbener's lecture follows introductions and begins at approximately 2:10 into the video.

Tuesday, June 14, 2011

The Welfare State Subsidizes Poverty

Here is a picture that supports the point made by Walter Williams, myself, and countless other economists: We get more of whatever we subsidize. If we give subsidies for producing bad art, we get more bad art. If we subsidize wasteful production, we get wasteful production. If we subsidize poverty, we get more poverty.

Look what has happened to the U.S. poverty rate since 1959:

Since the late 1930s there had been a general decrease in the percentage of U.S. citizens living in poverty which continued through the late 1960s. The uninterrupted decline halted in 1969 and bottomed out completely at around 11% in 1973.

It is ironic that it was in 1968 when President Johnson launched his war on poverty. It was Johnson's "Great Society" legislation that put in place the poverty entitlement programs that continue today. That was when the government committed itself to subsidizing those who earned lower incomes. Those subsidies created an incentive to remain poor. Not everyone, of course, decided to quit their jobs and live on the dole. The poverty rate did not increase to 100%. However, it did stop its general decline and has hovered around 13% ever since.

Monday, June 13, 2011

Dow Jones Index in Longest Slump Since 2002: What Gives?

Bloomberg News reports that the previous six weeks of continual stock market declines constitutes the longest slump since 2002. Longer even then anything in 2008. How is this possible? If Keynes, Bush, Obama, Romer, Paulson, Geithner and Bernkanke were right, this should not be happening. Over the past four years, the U.S. Government and its sponsored agencies have undertaken unprecidented fiscal and monetary stimulus. The media championed their moves as bold leadership made by people who were not going to sit on their laissez-faire hands while the financial system imploded. They said that government deficit spending would get the economy moving again by putting cash into hands of consumers, boosting consumer spending which supposedly makes up 70 percent of the economy. When GDP numbers increased, it was taken as a sign that the government experts were right, having saved us from financial Armageddon.

It turns out it just is not so. As I have written before, money cannot buy prosperity. Savings and investment and wise entrepreneurship? Yes. Inflation and government spending? No. We should not confuse GDP growth with economic prosperity.

Monetary inflation via credit expansion, which is the Federal Reserve's bread and butter, was able to prop up the financial system for a couple extra years. Doug French reports, however, that there is still trouble with a capital T which rhymes with B and that stands for Banking System. Increasing statistical evidence is mounting indicating that, even according to official numbers, the economy is not functioning well enough to put people back to work.

This is because credit expansion funded by monetary inflation instead of voluntary savings does not contribute to capital accumulation, but capital consumption through malinvestment. It funds an inflationary boom which makes it look like things are better than they are. As soon as the flow of new money slows, however, economic reality reasserts itself and several projects that looked profitable are revealed to be unsustainable and must be liquidated, ushering in another recession.

Thus it appears that the stock market may be running out of steam because of perceptions that the QE2 money has run out and Bernanke is not yet willing to commit to QE3. Without the artificial stimulus, the market may be correcting itself to expectations more in line with economic reality.

In his book, Money, Bank Credit, and Economic Cycles, Jesus Heurta de Soto explains how government intervention in the money market can manipulate the stock market. He writes:
Only when the banking sector initiates a policy of credit expansion unbacked by a prior increase in voluntary saving do stock market indexes show dramatic and sustained overall growth. In fact newly-created money in the form of bank loans reaches the stock market at once, starting a purely speculative upward trend in market prices which generally affects most securities to some extent. Prices may continue to mount as long as credit expansion is maintained at an accelerated rate. Credit expansion not only causes a sharp, artificial relative drop in interest rates, along with the upward movement in market prices which inevitably follows. It also allows securities with continuously rising prices to be used as collateral for new loan requests in a vicious circle which feeds on continual, speculative stock market booms, and which does not come to an end as long as credit expansion lasts. As Fritz Machlup explains:
If it were not for the elasticity of bank credit, which has often been regarded as such a good thing, the boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted.
Therefore (and this is perhaps one of the most important conclusions we can reach at this point) uninterrupted stock market growth never indicates favorable economic conditions. Quite the contrary: all such growth provides the most unmistakable sign of credit expansion unbacked by real savings, expansion which feeds an artificial boom that will invariably culminate in a severe stock market crisis (pp. 461-62).

These words of Heurta de Soto are, as they say, as timely as today's headlines.

Sunday, June 12, 2011

A Biblical View of Poverty: Cuased by Foolishness

The Scriptures teach us that people can bring poverty on themselves through laziness and greed. The Bible also teaches that another cause of poverty is foolishness. The word foolishness, as used in Scripture, does not mean stupid or mentally dull. A fool is someone who is immoral and pernicious. It is not easy for our modern minds to accept that God's providence has anything to do with one's level of prosperity, but as it says in Psalm 75:6-7
For not from the east or from the west
and not from the wilderness comes lifting up,
but it is God who executes judgment,
putting down one and lifting up another.
Elsewhere in Scripture, God specifically instructs us that poverty can be the result of one's own folly, one's own poor moral decisions. Speaking of the Israelites who came out of Egypt, Psalm 106:13-15 reads "But they soon forgot his works; they did not wait for his counsel. But they had a wanton craving in the wilderness, and put God to the test in the desert; he gave them what they asked, but sent a wasting disease among them."

In Proverbs we are taught that "the mouth of a fool brings ruin near" (Prov.10:14-16) and that "poverty and disgrace come to him who ignores instruction, but whoever heeds reproof is honored" (Prov. 13:18). Additionally, a foolish man "devours" what treasure and oil is in his household (Prov. 21:20), and a woman's folly will destroy her own house (Prov. 14:1).

The bottom line is that a general consequence of foolishness is impoverishment. One reason some people are poor, consequently, is that they ignore God's instruction and they instead lead wanton, profligate lives. A 2004 study by the National Poverty Center, for example, found that substance use and abuse was an important "barrier to self-sufficiency" and hence a contributor to poverty. Again this does not mean that all poor people are immoral and foolish. It is to say that there are often negative economic consequences to foolish behavior.

Saturday, June 11, 2011

Shave and a Haircut $14,000????

Aaron Rounds Barbershop
Over at The Art of Manliness, Aaron Round tells the story of how and why he turned his garage into a barbershop. Here is a man who wants to be a barber and has people demanding his services, but cannot freely pursue his dream. Why? He does not have the 14,000 Australian Dollars to pay for the general hairdressing certificate required to professionally cut hair. Not even that would cut the mustard, it turns out, because he would have to pay for additional classes in shaving and men's hairdressing.

He decided to take the first step toward living his dream by turning his garage into a barber shop. Since he cannot charge money for his services he is settling for cutting hair for family and friends on the weekends and saving up any donations until he can afford the government license. Good for Mr. Round, a man passionately committed to his dream and who is willing to take strong measures in pursuit of that dream.

It should be apparent, however, that what stands between him and his dream is the state. There is no good reason for the government not to allow Mr. Round to use his garage and barbering supplies as he sees fit. Anyone who is willing to voluntarily pay Mr. Round for a haircut demonstrates that he values his service more than the money and Mr. Round would value the money more than the service. Who gets hurts by this arrangement? No one. Both parties benefit. It is clear, therefore, that government intervention in this market is reducing the number of haircuts available to the general public. By artificially reducing the supply of hair cuts, the price of hair cuts is being kept artificially high as well. Such regulation is socially destructive.

Some might argue that government licenses in the barber industry helps maintain a uniform standard of high quality and safe hair cuts. If that was the real motive for the regulation, however, why is cutting hair for free legal?  Why is Mr. Round legally able to give potentially bad hair cuts away for free? Murray Rothbard cogently recognized that the economic purposes of such government licenses is to restrict competition, thereby giving established firms special privilege. In his Power and Market he writes:
How much these requirements are designed to “protect” the health of the public, and how much to restrict competition, may be gauged from the fact that giving medical advice free without a license is rarely a legal offense. Only the sale of medical advice requires a license. Since someone may be injured as much, if not more, by free medical advice than by purchased advice, the major purpose of the regulation is clearly to restrict competition rather than to safeguard the public (p. 1097).

Friday, June 10, 2011

The War on Poverty Has Hurt Minorities

So says economist Walter Williams. Williams first explained his case twenty-five years ago in his book, The State Against Blacks. He recently discussed the destructive nature of the welfare state during an interview by John Stossel. Walters explained the negative consequences of income transfer payments and minimum wage laws.

 Williams is an economist on faculty at George Mason University and is a member of the board of trustees at Grove City College and the Hoover Institution. His latest book is Race and Economics. You can read about Williams breaking out of the ghetto in his autobiography Up from the Projects.

Thursday, June 9, 2011

Have We Cultivated a Culture of Living Off of Other People?

A recent poll indicates that might be the case. Henry Blodgett of Business Insider indicates that "Americans Are Still in Deep Denial About the Deficit." He cites a Washington Post-ABC poll which reveals
The survey finds that Americans prefer to keep Medicare just the way it is. Most also oppose cuts in Medicaid and the defense budget. More than half say they are against small, across-the-board tax increases combined with modest reductions in Medicare and Social Security benefits. Only President Obama’s call to raise tax rates on the wealthiest Americans enjoys solid support.

People want to maintain their government largesse, but do not want to pay for it. The want the "wealthy" to do so.

As the graph indicates, in fiscal year 2010, 58% of national government spending went for entitlement programs. Unless we get a handle on these expenses, things will only get worse.

Things will get worse partly because of demographics. USA Today reports that
The first of 77 million Baby Boomers turn 65 this year and qualify for Medicare. Enrollment will grow from 48 million in 2010 to 64 million in 2020 and 81 million in 2030, according to Medicare actuaries. That 33-million increase in the next 20 years compares with 13 million in the last 20.

This increase in eligible recipients plus President Bush's prescription drug program has caused a $25 trillion (with a 't') unfunded liability over the lifetime of those currently in the program. That amounts to $212,500 per household.

Additional liabilities are as follows:

  • Social Security: $21.4 trillionObligation per household: $183,400
  • Federal debt: $9.4 trillionObligation per household: $79,900
  • Federal employee retirement benefits: $2 trillionObligation per household: $17,000
  • State, local government obligations: $5.2 trillionObligation per household: $44,800
All told, under current legislation, USA Today analysis estimates that taxpayers are on the hook for the $61.6 trillion in unfunded obligations that amount to $527,000 per household. This is an ugly picture.

It is also what happens when a nation mistakes something that is nice to have for a right and confuses forcing someone else to pay for that something with charity.

Wednesday, June 8, 2011

Are Nobel Prizes in Economics Enough to Make One a Good Policy Maker?

Peter A. Diamond complained in Sunday's New York Times that, even though he won a Nobel Prize in economics, senate approval of his nomination to serve on the board of the Federal Reserve is being held up. In doing do, he makes the case that in order to do monetary policy right, it is important to know something about unemployment, his own area of expertise.

I, for one, am not so sure that winning the Nobel Prize in economics should be taken as prima facie evidence of sound overall economic analysis. Paul Krugman, Joseph Stiglitz, and Paul Samuelson all won Nobel Prizes and I find most of their economic analysis abysmal. Even the work of Milton Friedman, another Nobel Laurette greatly disappoints when it comes to economic method and monetary analysis.

It turns out that a main reason to maintain a healthy skepticism about the pronouncements of Nobel Prize winners is that the committee awarding the prize has demonstrated decidedly destructive biases in their awards. That is the conclusion of economist Nikolay Gertchev, a PhD economist now working for the European Commission in Brussels. In his article "The Economic Nobel Prize," Gertchev first documents the bias toward mathematical economics and the relativism that results from empirical positivism.

About research programs of Prize recipients, he notes
The vast majority of rewarded contributions, while pertaining to different fields ofscientific investigation, and hence raising different questions, share in common two basic views, which will be addressed separately in the next two sub-sections. According to the first view, the market process is inefficient. According to the second view, the failures of this inefficient market process need to be corrected, and government policies are potent and well suited for achieving this goal.
Gertchev explains the destructive practical consequences of such a bias in his conclusion:
The most fundamental problem that such a pro-government and anti-market bias is causing for a Prize that claims to be scientific is its relation to truth. The single goal of scientific research should be the discovery of new knowledge, either through correcting past errors or through the discovery of previously unknown truths. Truth, however, does not appear to be a primary concern for the Prize committee in economics.
You can watch Gertchev's presentation of his article here:

PFS 2010 - Nikolay Gertchev, Not New, Not True, Irrelevant or Evil: How Economic Nobel Prizes Are Won from Sean Gabb on Vimeo.

Given such a track record, perhaps not only is it not enough for a Fed Governor to be a Nobel Prize winner. Perhaps it is undesirable.

Tuesday, June 7, 2011

China Learns from the Fed

It sounds as if the Chinese government is taking a page out of the Bernanke play book. Reuters reports that 2 to 3 Trillion yaun (308-463 billion dollars) worth of local debt will be even more socialized by taking it off municipalities' books and shifting it to state banks and newly created companies. I see this as more evidence that China's economy is on less than secure footing. Unless the Chinese government halts the credit expansion machine, China could be in for a Great Recession of its own. As it stands, slowing inflationary credit expansion will result in a necessary recession, but the longer the Chinese government puts it off, the worse it will be when the inevitable bust comes.

A government simply cannot will economic expansion into existence by government spending and monetary inflation. It is a classic Keynesian mistake for the state to confuse GDP growth for economic prosperity.

Sunday, June 5, 2011

A Biblical View of Poverty: Caused by Greed

Thursday, I began examining the various causes of poverty as outlined in the Bible. I cited E. Calvin Beisner who did the heavy lifting documenting that God's Word indicates that poverty is often self-caused. It is the natural consequence of the actions that lead to poverty. Thursday I provided scriptural evidence showing that laziness is one source of self-caused poverty.

Another source of poverty people bring on themselves is greed. This may seem paradoxical at first, because it would be natural to think that greedy people would be anything but poor as they fill their bank accounts with cash by always grasping for more. In Jeremiah 6:12-13 the weeping prophet communicates judgement on those greedy for unjust gain and as a result, they would have their homes turned over to others.

In Proverbs we are taught that greedy people trouble their own homes (Prov. 15:27). This is partly because greed often results in poverty. "A stingy man hastens after wealth and does not know that poverty will come upon him" (Prov. 28:22).

As Charles Bridges notes,
And how often in our own day, has greediness of gain plunged whole families into misery by ruinous speculations! For where the enriching blessing of God is not desired or sought, we cannot wonder that it is withheld!
In Habakuk 2, the prophet contrasts the righteous who shall live by faith with the idolatrous Chaldeans.  He pronounces woe against those who seek to enrich themselves through injustice. Habakuk proclaims
“Woe to him who heaps up what is not his own—
for how long?—
and loads himself with pledges!”

Will not your debtors suddenly arise,
and those awake who will make you tremble?
Then you will be spoil for them.

Because you have plundered many nations,
all the remnant of the peoples shall plunder you,
for the blood of man and violence to the earth,
to cities and all who dwell in them.

“Woe to him who gets evil gain for his house,
to set his nest on high,
to be safe from the reach of harm!

You have devised shame for your house
by cutting off many peoples;
you have forfeited your life.

For the stone will cry out from the wall,
and the beam from the woodwork respond.
Habakuk here makes it clear that the Chaldeans who made a practice of heaping up what was not their own, placed themselves in debt, plundered nations, obtained dishonest ("evil") gain so as to become financially secure actually were devising shame and economic spoliation for themselves and their households. Some even forfeited their own lives. 

Friday, June 3, 2011

A Good Way to Support the Arts

The Absinthe Drinker by Pablo Picasso
If successful and wealthy celebrities want to support the arts, this is the way to do it: by spending their own money. That is what The Andrew Lloyd Webber Foundation is doing. With the money received from last year's sale of a Picasso portrait (shown at right) owned by Webber, his foundation is beginning a £32 million grant program. Good for him. No one is getting ripped off. No one is forced to choose between forking over their income or being sent to the gulag. A person who cares about the arts is putting his own money (not someone else's) where his heart is.

Thursday, June 2, 2011

A Biblical View of Poverty: Causes

Quite a bit of debate has been generated from my recent op-ed "What Would Jesus Cut?" In fact I received a blistering response just today. An earlier reader voiced displeasure at my statement that "Like it or not, institutional entitlement payments to the poor encourages idleness, one of the primary reasons that many households earn low incomes." That reader thought I was unkindly blaming the victim. In order to make sense of the issue, it is important to have a clear understanding on what God teaches us in His Word about poverty.
Sunday, I discussed the nature of poverty as defined in Scripture, explaining that the Bible characterizes poverty as an absolute lack of the bare necessities of life. This is a far cry from the relative lack of what most people have that often is what moderns think of as poverty.

In his book, Prosperity and Poverty, E. Calvin Beisner has done excellent work in documenting the nature and various causes of poverty mentioned in the Bible. On the basis of those causes, he divides poverty into two categories: self-caused and imposed. There are many passages in Scripture that teach that often poverty is the result of unwise personal decisions. Sometimes people are poor because of laziness. Another reason for poverty is greed; not on the part of an oppressor, but on the part of the poor person himself. Another source of poverty, according to Scripture is foolishness. Finally, shortsightedness is identified as a generator of self-caused poverty. I will discuss each of these over a series of blog posts. Today I will only focus on the first source of self-caused poverty.

One reason some people are poor are because they are indeed lazy. The Bible makes clear that people are responsible to be productive in order to support themselves. In 2 Thessalonians 3:6–12, or example, the Apostle Paul tells his readers:
Now we command you, brothers, in the name of our Lord Jesus Christ, that you keep away from any brother who is walking in idleness and not in accord with the tradition that you received from us. For you yourselves know how you ought to imitate us, because we were not idle when we were with you, nor did we eat anyone's bread without paying for it, but with toil and labor we worked night and day, that we might not be a burden to any of you. It was not because we do not have that right, but to give you in ourselves an example to imitate. For even when we were with you, we would give you this command: If anyone is not willing to work, let him not eat. For we hear that some among you walk in idleness, not busy at work, but busybodies. Now such persons we command and encourage in the Lord Jesus Christ to do their work quietly and to earn their own living.
Paul's line of reasoning is if an able body person does not work, then he should not eat. Instead, he is encouraged to work and earn his own living.

In Proverbs there is a passage that more straightforwardly teaches that laziness causes poverty.
Go to the ant, O sluggard; consider her ways, and be wise. Without having any chief, officer, or ruler, she prepares her bread in summer and gathers her food in harvest. How long will you lie there, O sluggard? When will you arise from your sleep? A little sleep, a little slumber, a little folding of the hands to rest, and poverty will come upon you like a robber, and want like an armed man (Prov. 6:6-11).

In this passage, the ant is held up as a positive example who voluntarily engages in labor and production with “diligent foresight” in summer and harvest, so she has food for winter, as noted by commentator Charles Bridges. Labor and productive activity is a virtue. The willingness to put off present consumption and endure toil in the summer allows for consumption in winter. This points to lower time preference and thrift being economic virtues. Bridges also emphasizes that the ant is not hoarding as if a miser, but wisely saving for future provision.

The sluggard or lazy person, on the other hand, cares only for, in Bridges words “present ease.” He does not want to work. (Whether he just wants to bang on the drum all day is unknown). The passage in Proverbs is clear that, because he does not work, instead slumbers in his laziness, poverty comes swift and hard.

The link between slothfulness and poverty is affirmed in many other passages in the wisdom literature. We find that an idle person will suffer hunger (Prov. 19:15) and have nothing (Prov. 13:4; 20:4). Toil brings prosperity, but mere talk brings poverty (Prov. 14:23). The very house of a lazy person will deteriorate (Eccl. 10:18). Proverbs 10:4 says straight up "a slack hand causes poverty.".

There is no escaping the conclusion that Scripture teaches that laziness results in poverty. This point was not lost even on the producers of the Looney Tunes.

A Christian response to poverty needs to keep these facts in view. It is especially important that we do not develop poverty programs that encourage a person who is poor due to laziness to persist in his laziness. Acknowledging this point is not harsh or cruel, it is part of a biblical view of poverty.

Wednesday, June 1, 2011

Reckless Endangerment: Another Reason to End the Fed

The more I hear from Gretchen Morgenson and Josh Rosner, co-authors of a new book Reckless Endangerment, the more I like. The book is about the cause of the financial crisis to hit in 2008 setting in motion the Great Recession.

I have not read the book, so cannot vouch for its contents, but the following interview segments from The Daily Ticker are quite interesting and revealing. Morgenson and Rosner seem to have the inside scoop about how cozy the Federal Reserve is to large commercial banks, thereby subsidizing and encouraging ever-more risky malinvestment. They note how corporatist (in a fascist sense) the who financial system is. The scary thing is that they report that the flurry of bailouts, monetary activism, and regulation has left the system even more precarious than ever. So far the Fed has merely further enshrined the doctrine of "Too Big to Fail."

One area in which I disagree with them, however, is their view of regulation. They are right to recognize that bank activity needs to be regulated, however, they seem to imply that it needs to be more strongly done by the state. They accept Alan Greenspan's verdict from a couple of years ago that he and the Fed were wrong to rely on banks' self-regulation. The implication they take is that we need better real regulation by the government over the banking system.

The reason self-regulation did not work, however, is that they were protected from the best regulation of all: the regulation of the market. They did not have to regulate themselves, because they knew that the Fed had their financial back. The profit and loss system of the free market is a stern regulator, because the entrepreneur is encouraged simultaneously by both a carrot and a stick to make only wise, productive investments. With the Fed standing ready to fix problems due to too many unsound decisions, bankers and financial institutions made a tanker-load of entrepreneurial errors.

Morgenson rightly notes in the last segment that one of the Fed's main errors was that it equated safety and soundness with profitability. However, in our current Fed-supported fractional reserve system, a bank can generate temporary profits for quite some time by engaging in activity that actually contributes to, well, reckless endangerment. The regulation by the market that promotes safety and stability is a profit and loss system. It is only when banking entrepreneurs must bear the full cost of their losses that they are careful not to make foolish or even evil financial decisions. Accepting that any institution is "too big to fail" is to participate in dismantling the regulation by the market. "Too Big to Fail" is a natural outcome of a banking system backed by a central money creator we call a central bank.

In any event, I recommend the following interview segments: