Walter Williams at Grove City College

Grove City College recently announced tremendous news. Economist Walter Williams will be this year's graduation commencement speaker. Williams is well known for his sound, straight forward economic commentary as well as for numerous books and articles on economic issues. He is the John M. Olin Distinguished Professor of Economics at George Mason University and a member of the Grove City College Board of Trustees. He is an engaging speaker and I am eagerly anticipating his remarks.

Here is an interview Williams did recently with John Stossel about the negative consequences of our "War on Poverty.

Monetary Exchange and Market Prices

At his blog Western Tradition Jason Jewell takes on Chapter 5 of my book, Foundations of Economics: A Christian View. The chapter is entitled "Indirect Exchange and Market Prices" and explains the emergence of monetary exchange out of barter and the process of price determination in a free society. Jewell again does a very able job summarizing my work.

The FED Is Bailing Out the Eurozone and It Is a Bad Idea

So says Philipp Bagus, associate professor at Universidad Rey Juan Carlos. He makes a compelling case by explaining what the Fed is up to and what are the consequences that will follow in his article "The Fed's Swap Bailout of the Eurozone." 

Bagus was recently asked by Ron Paul to assist his staff at a meeting of the House committee that Paul chairs.  He reports on what two Fed staffers had to say about the Fed's actions and clearly explains exactly how the Fed is bailing out the Eurozone.

He also notes the many costs of such a policy. Like Mark Spitznagel, Bagus understands that, as with all creation of fiat money, the bailout facilitates a wealth transfer to those who receive the new money first at the expense of everyone else. He also cogently explains that, by helping the European Central Bank prop up banks who lend to the various European governments, it is supporting insolvent and irresponsible governments. As Bagus states,

The project of the euro leads to an ever-increasing rescue fund, and gradually toward a fiscal union and more centralization. A European financial government and the European super state, which would most likely abolish tax competition in Europe, are on the horizon. The highest cost of the Fed policy, therefore, may be liberty in Europe.

Bagus' entire article is very compelling and provide many insights for those wondering what the U.S. Federal Reserve has to do with Europe's economic woes.

Quote of the Day

In preparing for my conference lecture about government spending I came across a tremendous bit of wisdom from Ludwig von Mises. In an essay entitled, "Economic Aspects of the Pension Problem," originally published February 23, 1950 in The Commercial and Financial Chronicle, he makes an observation that is as timely as today's budget debates:

What the doctrine of balancing budgets over a period of many years really means is this: As long as our own party is in office, we will enhance our popularity by reckless spending.

Mises' essay was subsequently republished in the compilation, Planning for Freedom, which is an excellent introduction to his thought.

I found the above passage and many others in the tremendous The Quotable Mises compiled by Mark Thornton.

How the Fed Benefits Those Who Get the New Money First

Mark Spitznagel

Mark Spitznagel, founder and chief investment officer of the hedge fund Universa Investments L.P., knocks the ball out of the park in today's Wall Street Journal. With the precision of a Henry Hazlitt, Spitznagel explains exactly "How the Fed Favors the 1%."

The Federal Reserve benefits its favored class in the method it uses to push new money into the economy. The Fed does not increase everyone's cash balances simultaneously in the same proportion. It injects reserves into commercial banks and they then lend new money to borrowers. This injects money into the economy at specific places at specific times. As I said this morning in my conference presentation,

Increasing the money supply merely increases the amount of money being spent on the same quantity of goods, so overall prices increase and the purchasing power of the dollar falls. Those people who receive the new money first benefit while those people on fixed incomes are harmed. However, there is no general social benefit from inflation.

This point was made in the middle of the 18th century by Richard Cantillon and was also noted by the 20th Century's greatest economist, Ludwig von Mises.

The contribution of Mises is likewise recognized by Spitznagel. He writes,

In the 20th century, the economists of the Austrian school built upon this fact as their central monetary tenet. Ludwig von Mises and his students demonstrated how an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last. Monetary inflation is a process, not a static effect. To think of it only in terms of aggregate price levels (which is all Fed Chairman Ben Bernanke seems capable of) is to ignore this pernicious process and the imbalance and economic dislocation that it creates.

Spitznagel cites Mises' students Rothbard and Hayek in explaining the pernicious effects of monetary inflation then hits the nail on the head has he explains the specific beneficiaries of our current inflationary monetary regime.

The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough: banks (imagine borrowing for free and then buying up assets that you know the Fed is aggressively buying with you) and those favored entities and individuals deemed most creditworthy. Flush with capital, these recipients have proceeded to bid up the prices of assets and resources, while everyone else has watched their purchasing power decline.

This has to be one of the greatest commentaries to appear in the Wall Street Journal in a long time.

Critical Economic Issues

 

Tomorrow morning my department chair Jeffrey Herbener and I will be presenting the lecture "Conservatives and the Economy: Assessing the Critical Issues," at the annual conference hosted by Grove City College's Center for Vision and Values. This year's conference theme is The Challenge 2012: The Divided Conservative Mind. Herbener will be speaking on the importance of sound money and I will be explaining the negative economic consequences of government spending.

Titanic Fact and Fiction

100 years ago this morning the RMS Titanic sank in the North Atlantic sending 1,514 souls to their death. Unfortunately, what many think they know about this tragedy they remember from the 1997 James Cameron film named after the boat. To commemorate the centennial of the event, Cameron's movie has been re-released to mislead another generation of movie goers.

Cameron perpetuates the myth that the tale of the Titanic is essentially a Marxist morality play. In the movie, every single person of wealth is a bigoted, up tight, mean-sprited, money-grubbing snob bereft of the joy of life. Meanwhile EVERY SINGLE poor person who is relegated to third class steerage is a happy-go-lucky, stout-swigging, dance-jigging salt-of-the-earth neighbor who is glad to know ya.

There are so many problems with Cameron's myth that I do not have time to begin refuting them. To that end, I recommend Stephen Cox's article "Titanic Lies" published two years after the big movie. Cox notes that Cameron was not the first to modify the actual history of the tragedy to score political points. Such prevarication began almost immediately after news of the sinking broke.

Cox ultimately hones in on Cameron's version of the myth.

Then there is the 1997 Paramount film Titanic. Like its subject, it is the most expensive vehicle ever constructed; but it is not exactly a vehicle of ideas. Call it a vehicle of impressions, then; and the major impression it conveys is that the Titanic carried two contrasting worlds of humanity--the world of the rich, who were arrogant, stupid, and occasionally homicidal, and the world of their impoverished victims.

The hero is a starving artist who nevertheless (or therefore) understands Life; the equally fictional heroine is a privileged dilettante at war with her social class, among whom she alone appreciates Art, understands Freud, and is frank about Sex. Arrayed against this ideal pair are such hopeless lunatics as Mr. Ismay, who causes the disaster by forcing a reluctant captain to try reaching New York ahead of schedule because he wants Titanic (the largest ship in the world) to attract the attention of the press.

After the speeding vessel strikes the iceberg, Ismay displays stupidity and cowardice, the hero and the heroine courageously exemplify their love, and lifeboat seats are sold to the rich.

What can you do with a boatload of fictions and clichés? 

You can look at the facts.

The Titanic was built for the emigrant (steerage) trade and depended on that trade to make money. Her expected competitive advantage came not from her promise of speed but from her promise of comfort and dependability. Her steerage accommodations were regarded as the equal of the first-class accommodations provided by previous generations of North Atlantic steamers. The Titanic's advanced features were the product of late-nineteenth- and early-twentieth-century capitalism's startling progress in meeting the needs of all classes of consumers.

Cox has also written a larger book on the same topic, The Titanic Story: Hard Choices Dangerous Decisions that I highly recommend as well. 

While Cox's work is an important counterbalance to the Titanic myth, he does not touch very much on the moral and theological rot contained in the movie. In the character of the heroine, Rose, mentioned above, the film celebrates rebellion against one's parents, and infidelity toward one's betrothed. Rose utters such memorable lines as the one delivered to her fiance after he is rightly angered to find out his fiance has been baring more than her soul to some street artist. "I'd rather be his whore than your fiance," evidently forgetting their is a third alternative. The ever-imaginative Cameron then has Rose and Jack steam up the windows of a car in the hold of the ship while fornicating in the back seat. They have the entire Titanic, the largest moving vehicle of its day, and they do it in the back seat of a car! Indeed a better name for the film would be Tramp Steamer.

One of the things most disturbing about the film is its true-to-Marx philosophical materialism. Never forget the last line uttered by the elderly Rose: "Jack saved me in EVERY WAY it is possible for a person to be saved." How utterly sulfuric. Screwtape could not have said it better. Evidently Rose had forgotten Matthew 1:21 "She will bear a son, and you shall call his name Jesus, for he will save his people from their sins.”

It is a solemn enough occasion to meditate upon the tragic loss of life resulting from the sinking of the Titanic. Alas we are not to be spared Cameron's movie, now remastered in 3-D and even fit for IMAX. This is another sad turn of events, because of the wicked nature of the film. A Tramp Steamer that is ten times the size of the original. Ten times as steamy and ten times as trampy! 

Western Tradition on Chapter Three

Dr. J at the tremendous Western Tradition has an excellent summary of Chapter 3 of my book, Foundations of Economics: A Christian View. In Chapter 3 I follow Murray Rothbard's example in deriving both the law of marginal utility and the law of returns from the fact of human action. As such, these laws are general laws of human action, and not of economics in the narrow sensed. However these laws, precisely because they apply to all human action, under gird a number of economic laws.

Ludwig von Mises Contra Social Darwinism

After Paul Ryan released his proposed budget, it was criticized by some on the left as a "moral disgrace" and by President Obama as "Social Darwinism." Jay Richards responds to that criticism by first providing some hisoriagrphy on the use of the term and then by noting how many of the staunchest proponents of the free market rejected the concept.

Richards has good reason to cite Mises, because Mises understood that the essence of the free market is not social competition, but rather social cooperation, the very thing Sesame Street kept preaching to us as little children.

As early as his 1922 book Socialism, Mises was critical of the application of Darwinian biological theory to economics. Later, in his Human Action (1949) he also specifically distinguishes between Darwinism as a biological theory and social darwinism as a sociological theory.

However, the notion of the struggle for existence as Darwin borrowed it from Malthus and applied it in his theory, is to be understood in a metaphorical sense. Its meaning is that a living being actively resists the forces detrimental to its own life. This resistance, if it is to succeed, must be appropriate to the environmental conditions in which the being concerned has to hold its own. It need not always be a war of extermination such as in rhe reiarions between men and morbific microbes. Reason has demonstrated that, for man, the most adequate means of improving his condition is social cooperation and division of labor. They are man's foremost tool in his struggle for survival (Human Action, p. 175).

Distinguishing between biological competition and social competition, Mises explains:

Social cooperation under the division of labor removes such antagonisms. It substitutes partnership and mutuality for hostility. The members of society are united in a common venture.

The term competition as applied to the conditions of animal life signifies the rivalry between animals which manifests itself in their search for food. We may call this phenomenon biological competition. Biological competition must not be confused with social competition, i.e., the striving of individuals to attain the most favorable position in the systcm of social cooperation. As there will always be positions which men value more highly than others, people will strive for them and try to outdo rivals. Social competition is consequently present in every conceivable mode of social organization. If we want to think of a state of affairs in which there is no social competition, w-e must construct the image of a socialist system in which the chief in his endeavors to assign to everybody his place and task in society is not aided by any ambition on the part of his subjects. The individuals are entirely indifferent and do not apply for special appointments. They behave like the stud horses which do not try to put themselves in a favorable light when the owner picks out the stallion to impregnate his best brood mare. But such people would no longer be acting men.

In a totalitarian system social competition manifests itself in the endeavors of people to court the favor of those in power. In the market economy competition manifests itself in the facts that the sellers must outdo one another by offering better or cheaper goods and services and that the buyers must outdo one another by offering higher prices. In dealing with this variety of social competition which may be called catallactic competition, we must guard ourselves against various popular fallacies (Human Action, p. 275).

The point is that a free economy is essentially on in which people cooperate in the division of labor, not a bitter, dog-eat-dog struggle for survival. By participating in the division of labor, everyone is more productive, which allows for society in general to be more productive and achieve a higher standard of living. This fosters life, prosperity, and a flourishing culture.

Howden: Will the Nickel Be the Next to Go in Canada?

The Canadian Royal Mint has announced it will stop producing the Canadian penny. David Howden, a Canadian economists who is presently Professor of Economics at University of St. Louis, Madrid Spain, asks, "Will the Nickel be Next?" He answers that it is entirely possible if the Bank of Canada does not stop inflating.

Howden explains why the penny is no longer worth minting:

Let’s not shoot the messenger here. It’s not that copper has gone up in value and as a result it is not fit for the task any longer. It’s that the value of 1¢ has gone down so much that it is no longer fit for copper. We can easily blame this all on some innocent bystander and sweep the problem under the carpet. But the fact of the matter remains: We pushed the poor penny as far as it would go and it finally broke. We kept issuing money until the poor penny was bound to be redundant. A rising copper price confirms this fact, but didn’t cause it.

When a central bank increases the money supply, people find they possess an excess supply of money. They mitigate this excess supply by spending the cash they do not want to hold. This increased spending drives up the demand for goods, which results in higher prices. Some of the goods for which the prices are higher are metals used to mint coins.

Canada's central bank has inflated the money supply so much over the years that the purchasing power of money has dropped to such an extent that the face value of the penny is worth less than the metal that is in every penny. This is already true, by the way for the old pre-1982 U.S. copper penny and the current U.S. nickel.

It does not have to be this way. Howden ends his essay with a rousing call to arms for his fellow Canadians:

The death of the penny may have been a long time coming, but let it not be in vain. Send a signal to the Bank of Canada that we don’t want to see the same fate befall other denominations. The penny is dead. Long live the nickel!

Bruce Stahl on Urban Land Banks

Bruce Stahl, a Grove City College economics graduate, has an op-ed co-authored with Audrey Spalding published on Philly.com. In "Land Bank Is Built to Fail," Stahl and Spalding compare Philadelphia's newly proposed land bank to St. Louis' 40 year old bank and finds many distressing similarities. The authors conclude as follows:

St. Louis was fortunate in that these poor practices were not written into the land bank law and could be easily changed; indeed, the bank has cut its rejection rate nearly in half in the wake of Show-Me Institute research on the subject. In Philadelphia, however, some of these poor policies are written into the legislation, which would make the city's land bank not only likely to fail, but also very difficult to reform.

It is gratifying to see one's students producing good and helpful economic analysis.

James Grant on The Endless Spending Spree

Everything written by James Grant is worth reading. Therefore I direct your attention to his review of White House Burning that appeared in this past weekend's Wall Street Journal. His object of review is a book by Simon Johnson and James Kwak, who, in Grant's words, "are the resume champions of the world." They argue that our economy is in trouble because the government neither regulates nor taxes enough.

Grant demurs. He rightly traces our troubles in large part to our leaving the last semblance of the international gold standard in 1971. Grant likens this move to giving the state a "magic credit card," because it removed virtually all constraint upon government spending, because no more did the state have to rely on taxes and private lending. It could rest on borrowing funded by the Federal Reserve.

That is exactly what it did. Grant notes that

In the 10 years before 1971, the "gross" public debt (counting even those obligations held by the government itself) had climbed to $408 billion from $293 billion. This increase amounted to a compound annual rate of only 3.4%, the Great Society and the Vietnam War notwithstanding. In the next 10 years, till 1981, the gross debt jumped to $995 billion from $408 billion—a compound annual rate of 9.3%, the close of the Great Society and the end of the Vietnam War notwithstanding. Not until fiscal 2001 did the debt reach $5.8 trillion. Yet it expanded by an identical $5.8 trillion in the four short years between 2007 and 2011. Now the grand total stands at $15.6 trillion.

While Grant is not pleased with Johnson and Kwak's "wonky" policy prescriptions, it is their overall view of American economic history that really bothers him.

Some will chafe at the authors' proposals for raising the gasoline tax or reducing the mortgage-interest deduction or increasing the Medicare Part B premium. Myself, I take umbrage at their interpretation of the American past. In money and banking, and therefore in debts and deficits, the way forward is through the constructive adaptation of a history they never quite acknowledge. Here's an idea: Let's try capitalism for a change.

Grant is such a good writer and he is sound on so many things. He is right on the gold standard, correctly distinguishing between the real thing and the relatively weak gold exchange standard put in place after World War I and the even weaker Bretton Woods system which followed World War II. He is right on financial liability issues. He is right on the depression of 1920-21. As always with Grant, the entire piece is worth reading and I highly recommend it.