Corzine Used Other People's Money - What's the Problem?

Bloomberg news reports that MF Global Holding Ltd.'s chief executive officer, Jon S. Corzine is in a LOT of hot water. An internal e-mail is evidence that that Corzine ordered $200 million from a customer account moved JP Morgan to cover an overdraft. Of course a spokesman for Corzine denies making any such order of even implying approval for such a transfer of funds. It may turn into a case of he said-she said. Nevertheless it got me to thinking about the nature of our banking system.

A revealing part of the article includes a fascinating bit of information:

Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter was not returned to JPMorgan, the memo said.

Now what I find fascinating is the idea that money deposited by customers in an investment account is still considered their own and not an asset of MF Global. It seems to me that is exactly the right way to look at it. The money deposited at MF Global by customers in their accounts remain the property of the customers. The firm should not be able to tap into that fund to finance whatever they want to finance.

Interestingly while that same common-sense reasoning should apply to the commercial banking system in general, unfortunately it does not. Alas, in our current fractional-reserve banking system, customer demand deposits become assets of the bank that they can use as they see fit. What is good for MF Global should be good for you neighborhood depository institution. Deposits by customers should be considered property of the customers and not assets owned by the bank. Banks should not be able to use those funds that are payable on demand to finance loans or other investments they want to make. Jon Corzine is in some serious legal trouble and may be found guilty of monetary malfeasance. Every day commercial bankers in our fractional-reserve banking system do the same thing Corzine is alleged to have approved. The only difference is that it is legal for commercial bankers to do so.

A Moral Imperative for Wealth Redistribution?

Lisa Sharon Harper at Sojourners does not like Paul Ryan's proposed budget at all. In fact she says Ryan's budget show's "moral cowardice." Her ethical premise from which she critiques Ryan's proposed budget is that "Christianity and most of the world’s faith traditions explicitly demand protection for the poor and the preservation of the lives and dignity of all."

While this may be a true premise, Harper's conclusion depends on her assumption that protection and preservation of the poor requires the redistributionist welfare state. While she rightly notes that much of our problem was due to increased military spending necessary to prosecute our wars in Iraq and Afghanistan, Harper nevertheless asserts that our current budget problem is a revenue problem. She concludes that a budget with proper moral fiber would be one that raises taxes on the wealthy.

There are a number of problems with Harper's analysis as well as her ethical framing of the issue. She quotes the Center on Budget and Policy Priorities which asserts that if we extrapolate Ryan's budget into the future, "by 2050, most of the federal government aside from Social Security, health care, and defense would cease to exist." Would that was the case. In fact, Ryan's budget proposal includes virtually no cuts of substance. Not a single government agency is done away with. Money is indeed added to military spending.

To get an idea of how anemic Ryan's proposal is, it promises to balance the budget in 30 years!! Let that sink in for a moment. In that sense alone can we say that Ryan's budget does indeed suffer from "moral cowardice." Ryan's proposal does not plan to have the debt paid off in 30 years, it merely plans not to achieve a year where our federal government lives within its means for three decades. This is the budget that Democrats and Republicans are fighting tooth and nail over. You know our country is in trouble when our rulers battle to the political death over whether to balance the budget in 30 years or in 40 years.

From an economic standpoint, deficit problems are always spending problems and not revenue problems. What matters for economic performance is the magnitude of government spending, because it is government spending that represents how much of society's wealth is being claimed and used by the state. The larger the percentage of income controlled by the government, the less productive society will be, because more economic decisions will be made by government bureaucrats who have neither the incentive or ability to direct scarce economic goods to their most valued ends.

Sure we could reduce the deficit by raising taxes on upper-income brackets. However, doing so will merely reduce their ability and incentive to save and invest. Therefore, increased taxation would promote capital consumption and relative social impoverishment. Additionally, increased taxation does nothing to reduce government control of the economy.Whether funded by taxes or borrowing, government spending prooves to be a drag on the productive economy, reducing standards of living which clearly does not benefit the poor we are to protect and defend.

Harper's reasoning is also ethically troubled, because no where does Christian doctrine teach that mandates to minister to the poor requires coercive income transfers. There are Scriptural directives for charity on the part of individuals, the family, and the church; but not the state and never through coercion. To ameliorate social problems in a Christian way requires not only seeking to achieve Christian ends. It requires using Christian means as well.

Bernanke Tells Students We Need More Consumption

In his series of lectures entitled The Federal Reserve and the Financial Crisis he is delivering at Georgetown, Chairman of the Federal Reserve, Ben Bernanke keeps pitching them. In his first lecture, "The Origins and Mission of the Federal Reserve," he explained his views on the nature of central banking and his thoughts on the gold standard (he does not like the proposition).

In his second lecture, "The Federal Reserve after World War II" delivered Thursday, Bernanke said that U.S. households need to spend more on consumption in order to continue economic recovery.

“Consumer spending is not recovered, it’s still quite weak relative to where it was before the crisis. In terms of debt and consumption and so on we’re still way low relative to the patterns before."

This is the sort of analysis that is natural for people who mistake GDP for economic activity. Certainly increased consumption spending will boost GDP, but more consumption will not provide for sustained recovery. After the initial round of consumption, where will we get more consumer goods to consume again? Only if they have been produced. The larger the percentage of our income we spend on consumption, the less we save and invest and the lower our productivity.

After a period of capital consumption due to malinvestment encouraged by the central bank, the only way for the economy to get back on its way to economic expansion is via capital accumulation. That requires more saving not less, which means less consumption not more. Perhaps one of the reasons we got into the crisis is that people took on too much debt and engaged in too much consumption, while the Fed bank rolled the whole thing. If so, getting back to pre-crisis levels of debt and consumption is the last thing we need right now.

Roundtable on MAN, ECONOMY, AND STATE

The Ludvig von Mises Institute has just posted the video of the roundtable discussion on the Semicentenial of Murray Rothbard's Man, Economy, and State held at the most recent Austrian Scholars Conference. I was honored to be on the panel along with some very esteemed scholars such as Guido Hulsmann, David Gordon, Jeffrey Herbener and Joseph Salerno. The moderator of the session was Peter Klein. If you missed the live stream the first time you can have a look:

Murray Rothbard on American Economic History

I am rather slow to find out all that is bot good and available on the internet. Case in point is my finding just last night that an entire course of lectures by Murray Rothbard on American Economic History from the Civil War through World War II. The course is entitled "The American Economy and the End of Laissez-Faire: 1879-World War II" and was taught by Rothbard while he held a position at Brooklyn Polytechnic in 1986. All of them have been made available by the Ludwig von Mises Institute and are free for the listening.

The first lecture is called "The Civil War and Its Legacy" and is presented here with much gratitude.

Bruce Bartlett, Keynesian?

It appears that Bruce Bartlett has finished turning his academic truck around and finally learned to stop worrying and learn to love Keynesian economics, at least as it relates to tax policy. Three days ago he wrote in a blog post at the New York Times Economix (HT: Tom Woods). that higher tax rates on the rich will increase government revenue. Responding to a Wall Street Journal op-ed written by Alan Meltzer, Bartlett writes, "If the rich are going to continue to get richer in low-tax countries and high-tax countries alike, then it must mean that high tax rates have far less of a disincentive effect on the rich than conservatives like Professor Meltzer continually proclaim."


Later in the piece he specifically goes after supply-side economists, who have been claiming since the Reagan administration that if we raise taxes too high, tax revenues will actually fall, because the incentive to be productive will diminish to the extent that the tax base falls.

A common reason given by conservatives for why tax rates must not be increased is that the government won’t get much, if any, additional revenue and might even get less due to the Laffer curve. If tax rates are too high, they say, the rich will stop working and investing in job-creating businesses and instead spend all their time vacationing and seeking out tax shelters. Therefore, revenues will fall.

However, one never sees conservatives cite any empirical evidence in support of their contention. It is simply asserted as self-evident that the rich will go on strike, as they did in Ayn Rand’s famous novel, “Atlas Shrugged,” even though the nation clearly did quite well during times when the top income tax rate was far higher than it is now.

Bartlet should know what he is talking about. He once traveled in Austrian circles and then himself became enamored with supply-side economics. More recently, he became famous for his criticisms of George W. Bush. Of course, there is plenty for which to criticize Bush. In his last term alone, he increased total federal government spending by over 48%!

Nevertheless, now Bartlett has moved past being a Bush critic to what seems to be approaching a full fledged Keynesian economist by arguing that increased taxes does not cause a drag on the economy because "the nation clearly did quite well during times when the top income tax rate was far higher than it is now."

The economic history he cites, however, is not an argument for higher taxes. It is merely evidence that there are more things that affect relative prosperity than taxes. More important than taxes is government spending. The problem is that we spend so much and it has to funded somehow. Sometimes its funded through taxes, sometimes through debt, and sometimes inflation. All of these funding sources create negative economic consequences. Additionally, government spending directs scarce economic goods away from their most highly valued uses, hampers the market division of labor, and, hence, reduces social productivity, leaving us relatively impoverished.

Bartlett's position on taxation is a stark change from what he wrote in, "Keynesian Policy and Development Economics," a chapter in the book Dissent on Keynes, published back in 1992. Criticizing the Keynesian perspective on taxation, he says,

In the Keynesian model, taxes affect the economy only through their impact on aggregate demand. Thus, all that matters is the aggregate amount of tax revenue relative to spending; it does not really matter what the marginal tax rates are or what the structure of taxation is, except to the extent that progressive tax rates are preferred to regressive ones because those with higher incomes might be inclined to save some of their income, thus depressing aggregate spending.

I am relieved to see that he does not seem to be calling for "the United States go back to the top rate of 50 percent that prevailed during most of Ronald Reagan’s administration, let alone the 91 percent rate of Dwight Eisenhower’s." However, focusing on the lack of government revenue is concentrating on the wrong side of the fiscal coin. The best thing Bartlett could do is to remind his readers of the New York Times that the real economic culprit is not excessively low taxes on the wealthy, but excessively high government spending.

Organizing Entrepreneurial Judgment

A brand new book developing the theories of entrepreneurship and the firm, Organizing Entrepreneurial Judgment: A New Approach to the Firm, sounds like on of the most promising books on these topics in quite some time. You can watch the book's authors, Nicolai Foss and Peter Klein discuss the contents of the book in this video recorded a few days ago at the Austrian Scholars Conference.

Below is a description of the book from the publisher:

Entrepreneurship, long neglected by economists and management scholars, has made a dramatic comeback in the last two decades, not only among academic economists and management scholars, but also among policymakers, educators and practitioners. Likewise, the economic theory of the firm, building on Ronald Coase’s (1937) seminal analysis, has become an increasingly important field in economics and management. Despite this resurgence, there is still little connection between the entrepreneurship literature and the literature on the firm, both in academia and in management practice. This book fills this gap by proposing and developing an entrepreneurial theory of the firm that focuses on the connections between entrepreneurship and management. Drawing on insights from Austrian economics, it describes entrepreneurship as judgmental decision made under uncertainty, showing how judgment is the driving force of the market economy and the key to understanding firm performance and organization.

The Pure Time-Preference Theory of Interest

At the Authors Forum at this year's Austrian Scholars Conference Jeffrey M. Herbener discussed the book he edited featuring a collection of articles defending the pure time-preference theory of interest developed by Ludwig von Mises. In his introductory essay and in his remarks, Herbener explains the neglected important contribution of Frank Fetter. You can watch Herbener's presentation below:

MAN, ECONOMY, AND STATE turns 50!

This year marks the 50th anniversary of the publication of Murray Rothbard's Man, Economy, and State. Long considered Rothbard's Magnum Opus, it is a tremendous achievement and still deserves to be read by everyone who is interested in economic theory and policy.

The final event of this year's Austrian Scholars Conference will be a roundtable panel session today on the semicentennial of the book. I am honored to participate, along with Peter Klein, Joseph Salerno, David Gordon, Guido Hulsmann, and Jeffrey Herbener.

Some of my remarks will be based on part of an article I wrote a number of years ago, "Samuelson and Rothbard: Two Texts and Two Legacies," in which I compare Paul Samuelson's Economics: An Introductory Analysis with Man, Economy, and State. My brief prepared remarks will be discussing why Man, Economy, and State works so well for teaching principles of economics. Its main virtues along these lines is that Rothbard is a very engaging and clear writer and his building up an edifice of economic truth from the premise of human action. As such, readers of Rothbard learn a body of economic laws that they can take to the bank (and a 100% reserve bank at that!). The bulk of my text is based on the pedagogy of Rothbard's great achievement. Man, Economy, and State is deserving of this conference session drawing attention to its many contributions because economic truth never grows old.

Word has it that the session will be streamed live today at 5:30pm Eastern, 4:30pm Central. You can watch it here:

Stream videos at Ustream

Austrian Scholars Conference 2012

The Austrian Scholars Conference begins today! The kick-off is what I expect to be an excellent authors forum, including my department chair, Jeffrey Herbener, talking about the new book he has edited, The Pure Time Preference Theory of Interest. I will contribute to a panel discussion Murray Rothbard's Man, Economy, and State in light of the 50th anniversary of its publication. You can look at the conference schedule here. If you cannot attend the conference, you can at least watch the memorial lectures streamed live by clicking here.

Inflation Strikes Back!

Economic Policy Journal is reporting that there is serious evidence of developing price inflation. This squares with whay my department chair, Jeffrey Herbener told a group of students a Freedom Readers lecture last November. Freedom Readers is a lecture series sponsored by the Grove City College Center for Vision and Values. You can watch his lecture, "Inflation Strikes Back" by clicking here.

Was Mises Clueless about Currency Devaluation?

The Market Monetarist thinks so. Responding to an excerpt from Mises' Human Action discussing currency devaluation, he claims that Ludwig von Mises was "clueless about the effects of currency devaluation."

His basic claim is that Mises

forgets the real reason why it might make perfectly good sense to allow the currency to weaken. If monetary policy has caused nominal GDP to collapse as was the case during the Great Depression (or during the the Great Recession!) then a policy of devaluation is of course the policy to pursue. Hence, von Mises totally fails to understand the monetary implications of devaluation.

The author says that the reason for this lack of understanding is that Mises and Rothbard both had a hard time understanding there is good and bad deflation.

What are we to make of this criticism? In the first place, the author overstates his claim about the cluelessness of Mises. The word clueless means just what it says: clue-less, as in without a clue. It is clear from the Market Monetarist's post that not even he thinks that Mises was literally without a single clue about currency devaluation and deflation. One could just as accurately claim that the Market Monetarist is clueless about Mises and Rothbard. Neither claim would be true. To be mistaken about something is not to be necessarily clueless.

To move past rhetoric and into economics, it should be noted that Joseph Salerno has done excellent work in helping us understand the difference between "good and bad deflation." In his article, "An Austrian Taxonomy of Deflation--with Applications to the U.S" Salerno documents that both Mises and Rothbard did distinguish between benign and undesirable inflation, noting that both explicitly criticized intentional deflationary central bank policies.

Both, for example, thought Great Britain made a mistake when it sought to return to the gold standard at the pre-WWI parity. This required a serious price deflation which contributed to economic disruption. "The sensible thing to do," wrote Rothbard in What Has Government Done to Our Money?, "would have been to recognize the facts of reality, the fact of the depreciated pound, franc, mark, etc., and to return to the gold standard at a redefined rate: a rate that would recognize the existing supply of money and price levels."

The Market Monetarist then cites George Selgin's "great discussion" of Mises's views about deflation, noting Selgin conlcudes that Mises, given his perspective on deflation, should have embraced a monetary policy aimed at stabilizing nominal spending. Jeffrey Herbener has criticized Selgin's (and Larry White's) interpretation of Mises' views on gold and money in "Ludwig von Mises on the Gold Standard and Free Banking." Herbener's analysis indicates that Selgin's and White's interpretation of Mises may not be wholly accurate after all, but are, in fact, "dubious."

Specifically on the point of nominal income stabilization, he documents that Mises' proper understanding of the non-neutrality of money precludes nominal spending stability as the target to pursue for a healthy economy. Citing Mises' Theory of Money and Credit, Herbener explains,

Only if one assumes that goods-side influences are unchanged can he identify, from any change in price, the money-side influence. But goods-side influences are in continual flux and indissolubly intermixed with money-side influences. And this is true whether nominal income is rising, staying the same, or declining. A constant nominal income does not ensure constancy of the underlying demands for and supplies of goods and money and thus is no guide to bifurcating goods-side and money-side influences and, by implication, no guide to monetary policy that targets money’s value. Moreover, if nominal income could be kept constant only by a government policy of changing the money stock to offset any changes in money demand (thereby neutralizing any money-side influence) as Mises thought would be necessary to conduct such monetary policy, far from neutralizing the effect of the change in money demand, this would inject a second money-side influence into the economy on top of the (presumed) change in money demand. Even if monetary policy could put the additional money directly and immediately into the hands of those particular people whose money demands had changed and in an amount proportional to the changes in money demand for each person, a change in money supply would still fail to neutralize a change in money demand since the effects on prices of the two changes are determined by subjective valuations, which can be different in different circumstances (Mises 1980, pp. 218–19). What makes the managed monetary system less stable than the gold standard, according to Mises, is that it lacks this policy-induced money-side influence on money’s purchasing power" (pp. 72-73).

The Market Monetarist concludes by saying, "I never understood people who support free markets could also be in favour of fixing the price of the currency – to me that makes absolutely no sense." One reason Mises opposed currency devaluation is that in his context, it does not merely allow for flexibility of prices, but actually redefines the monetary unit. What I have a hard time understanding is why people who support free markets can also be in favor of fixing the supply of money through government intervention.

Frank Fetter (1863 - 1949)

Frank Fetter (1863-1949)

Frank Fetter was born on this date 149 year ago. Fetter was an American "Austrian" economist who made important contributions to the theory of interest and the entrepreneur in between the two world wars. Yet, he is one of the less well-known economists in the causal-realist tradition. I encourage you to learn more of the man had his work by reading Jeffrey Herbener's biographical article on Fetter that appears in Great Austrian Economists. 

As Herbener writes,

In the period between the founders of the Austrian school (Menger, Böhm-Bawerk, and Wieser) and its next generation (led by Mises and Hayek), Frank Albert Fetter was the standard bearer of the Austrian tradition. [See the Fetter Bibliography] His 1904 treatise, Principles of Economics, constructed a general theory of economics in the Austrian tradition that went unsurpassed until Ludwig von Mises's treatise of 1940, Nationaloekonomie. Yet Fetter, an American Austrian long before the interwar migration from Austria, has not received due recognition for his many contributions to the tradition.

In light of the important of Fetter's contributions to economics, it was heartening to see two papers delivered at the most recent Austrian Student Scholars Conference deal in a serious way with some of Fetter's economic theory.

Western Tradition on Chapter 2

Dr. J, a.k.a. Jason Jewell, has a nice discussion of the second chapter of my book on his blog The Western Tradition. He provides a nice summary of the chapter and some commentary on the issues raised.

Chapter 2 is devoted to an exposition of the general principles of human action. The foundations of economic analysis lie in the general principles of action, because all human interaction--the subject of economics proper--is human action. Economics, therefore, begins by identifying principles that apply to all action and that, therefore, apply to action in exchange. The law of marginal utility, for example, is a law that applies to all action and undergirds the economic laws of supply and demand.

Dr. J., by the way, is a model for all who desire to know more about the created order for the glory of God. He is in the middle of taking his readers through a seven-year great books reading project as well as having just embarked on an economics reading project.

Should Cinemas Raise Prices for Oscar-Winning Movies?

That is the question asked by Rafi Mohammed. The answer is, only if demand increases relative to supply for those movies.

That is basically the conclusion Mohammed came too. He also noted the entrepreneurial facet of product pricing.

While I am a big proponent of setting prices to capture value, in this instance I’m wary of raising prices. Consumer sentiment regarding cinema prices is akin to a tinderbox waiting for the spark to flare up. Why? Consumers can easily calculate the premiums they are paying to enjoy the cinema experience. Instead of paying $11 per-person at the box office, they know that in a few months they’ll be able to rent the DVD at Redbox for a buck or so. Similarly, they know that concession-priced popcorn, candy, and soda can be purchased for a fraction of the cost elsewhere. A $35 night at the movies can be replicated at home for $5 or so.

If Oscar-winning movies did actually experience an increase in demand, however, the marginal consumers would be willing to pay the higher price.