Saturday, April 30, 2011

Book Review: Good Money by George Selgin

I stopped reading Rothbard in my spare time because I picked up (finally) George Selgin's wonderful 2008 book "Good Money" published by the Independent Institute. By the way, I love II; check out their quarterly journal The Independent Review, or the blog the Beacon. Now I've finished Good Money, so will get back to Rothbard, but I want to first share a couple of thoughts about Good Money.

Good Money is about the shortage of money in England in the 18th and 19th century. It's a story of how commercial "token" makers - claims to money, really - overcame the shortage caused by the Royal Mint's lack of production of sufficient money.

First, from a general readability perspective, it's very enjoyable. You have to have an historical bent to your nature to appreciate it, though. Selgin is an engaging writer, and I think sometimes his research on the topic modified his own prose such that sometimes I wasn't sure if the book was written in 2008 or in the 19th century. I certainly learned more about steam power and numismatics than I ever thought I would.

Second, Prof. Selgin's detailed analysis of the problems arising from insufficient money supply really help one to understand the danger of monetary deflation. Price deflation due to productivity increases is welcome, but price deflation due to monetary deflation is of concern. In monetary deflation, people can't buy the goods they want, business owners can't pay their workers nor can they pay their suppliers, all for want of exchange media. The way this arises in a modern economy is that people's desire to hold money balances increases in excess of the increase in money supply, but I do believe the effects are the same. It's the Friedman and Schwartz point regarding the causes of the Great Depression.

The third point is that Prof. Selgin shows how the market can solve government failure. Normally the discussion goes in the other way, especially from a neoclassical economics perspective. His work shows the importance of local knowledge, a fundamentally Hayekian point. It also shows that money isn't a rarefied commodity that can only be supplied by the state. From the perspective of our current conundrums, I think this is an important discussion economists need to have. The twin assumptions that we need a central bank and a money monopolist must be challenged.

Finally, I'm inspired by Prof. Selgin's work to begin pursuing my own historical analysis. Not of money, since I'm no monetary economist, but of something of great interest to me: spontaneous order in financial reporting. I haven't seen any discussion of this issue and it's high time.

Monday, April 25, 2011

Further Down the Statist Line

From the Washington Examiner:

The evidence that the state is anti-business and is thus causing significant regime uncertainty continues to accrue at an alarming rate. While I'm not really a Randian, I think we are at a turning point similar, in principle, to the Atlas Shrugged point where the capitalists turned inward and left. The U.S. is doing it's very best to discourage investment, and we will all be the worse for it.

Tuesday, April 12, 2011

Another Happy Tax Day

As we approach yet another dreadful April 15th, I thought it would be helpful to assemble some national tax statistics.  Interestingly, this subject attracts no shortage of political fodder from both sides, so I’m here to shed some light on an issue many use for political gain.  The following stats are from the Tax Foundation (2008 tax year).  Most of the statistics I’m quoting here cover federal income tax, and not payroll taxes, such as FICA and Medicare.  Almost everyone drawing a regular paycheck shares in the pleasure of payroll taxes.  BTW: your share of FICA payroll taxes was reduced 2% this year as part of the two year tax extension deal signed into law last fall.  I believe this reduction lasts only one year.  

The top one half of all taxpayers paid 97.3% of all federal income tax.  That means about half of all tax filing Americans paid zero federal tax.   With the Earned Income Tax Credit, many individuals with no tax liability actually receive a federal tax refund.  That’s income redistribution.

The top 10% of all taxpayers paid nearly 70% of all federal income tax.  But these rich, thieving bastards earned all the income, you say.  No, this club earned only 46% of all AGI (adjusted gross income) – not quite half.  These folks contributed $721 billion dollars to Uncle Sam’s coffers.

The top 1% of all taxpayers paid just over 38% of all federal income tax.  And the top one percent’s share keeps increasing.  From 2005 through 2007, the tax burden on the top one percenters rose to a record every year.  In 2007, the top 1% paid more federal income tax than the bottom 95%.  This little fact should put to rest the myth that the “rich” don’t pay taxes.  But, this is income, not wealth.

In all, Uncle Sam looted individual taxpayers for a grand total of just over a trillion dollars in 2008, and nearly all of it was contributed by the top half of taxpayers.  Happy Tax Day! 

Sunday, April 10, 2011

Worker Productivity and Apple Trees

Mark Perry, at his Carpe Diem blog, points out that worker productivity and profits are at record highs, but firms have not been hiring very much.At first blush one might think that this is strange. It is natural to assume that production would be limited at a given level of employment for a given level of capital intensity. This statement is not as correct as one might intuitively assume. Ken Rogoff is quoted near the bottom of the post as saying that productivity increases may be resulting from the laying off of less productive workers. I think this is correct, but allow me to illustrate and expand on his point through metaphor.

I have apple trees, and a variety of much younger fruit trees. The young fruit trees are still in the early stages of growth and don't need my attention just yet - except to keep away the deer and other assorted whatnots that would damage the bark. But the apple trees have been growing for some time now. Only one is really mature, but they are all pretty big. What happens when trees get to a certain size is that some of the new branches interfere with the other branches. If the trees go untended, then the interfering branches become real nuisances to the other branches, and impede further growth. In fact, the interference can become so bad that bark gets rubbed off and exposes the tree to disease and death.

What is a good tree tender to do? Well, you have to cut out the interfering branches. Sometimes these branches are dead, often they are not. But you have to choose - sometimes the interfering branch is an older one that doesn't have as many buds on it as some new branch; sometimes it is the reverse. So every time you cut a branch, you choose the worst ones. The branch may be individually productive - but it is interfering with more productive branches. As a whole, because of one's tending of the tree and removing less productive (not just unproductive) branches, the whole apple tree fares much better.

I believe the metaphor is obvious - the branches are the employees, and the apple tree is the firm. As I keep the apple tree pruned, its productivity goes up. Same with the firm.

Thursday, April 7, 2011

Government shutdown – Who’s to blame?

Democrats are to blame.  We are halfway through the FY 2011 budget year and still have no annual appropriation.  The President has already submitted his FY 2012 budget, which Congress will soon begin debating.  Meanwhile, the government, in all its various forms, including the Defense Department, grapple with the prospect of a shutdown.  This entire fiasco resulted from the failure of last year’s Democratic controlled Congress to pass a single appropriation.

Each year, the Congress debates and eventually passes 12 annual appropriation bills.  Social Security and Medicare don’t require an annual appropriation – they run on auto pilot.  That’s another story.  In February 2010, President Obama submitted his budget for FY 2011 – the period 1-Oct through 31-Sept.  Congress chose to do everything else except pass his budget.  They even failed to pass a budget resolution – a blueprint for spending.  They failed to pass a budget despite controlling the White House, the United States Senate, and the United States House of Representatives.  The blame lay at their feet.  

The last Congress failed to do its most basic duty, and now many seek to affix blame to Speaker Boehner.  Think what you will of the Ohio Republican, but don’t blame him for any government shutdown.  He was in the minority when the Democratic majority chose to ignore their Constitutional duty, and instead meddle in our economy, pass cap-and-trade, ram Obamacare through, etc.  Therefore, I’m setting the record straight.  If fingers are to be pointed, point them at Pelosi, Reid, and Obama.  They’re the ones to blame.

What’s a Recession?

I’ve heard many folks label our current financial mess as the Great Recession, a reference to the Great Depression of the 1930s.  But what exactly is a recession?  Most economists define a recession as two straight quarters of negative GDP.  GDP, or gross domestic product, is the final market value of all goods and services produced in the country in a given year.  So, negative GDP would indicate a contraction in the economy.  But is this definition the most meaningful representation of the events unfolding? 

This blog has talked about the problems with GDP and its inability to capture correctly the internal workings of our economy.  One concern is government or G in the equation GDP ~ C + I + G + Nx.  Our economy can be spiraling downwards but as long as G is large enough, GDP might actually increase.  In the second quarter of 2009, GDP fell 0.7%, while G increased 6.1%.  Had G been even larger, GDP might have sprung positive.  Suppose G increased enough to raise overall GDP positive.  Would this mean our economy was expanding again?  I doubt it.

So, what other indicators might we use to determine a recession?  What about unemployment?  Certainly, this matters most to America’s human resource – people.  The unemployed would probably argue that negative GDP is simply a symptom of unemployment and not necessarily an accurate measure of economic health.

Perhaps tax receipts are a better indicator of the health of an economy.  Falling tax receipts indicate that unemployment is on the rise and the economy is experiencing some contraction.  Rising tax receipts, ceteris paribus, is normally a good economic indicator.   

I’m sure there are many smart people out there who have ideas on how to better measure the health of an economy, one that isn’t subject to heavy influence by the big G.  I’d like to hear some.

Monday, April 4, 2011

Our OCD Government

Obsessive-compulsive disorder is marked by “anxiety in which instrumentalities have unwanted and repeated thoughts, feelings, ideas, sensations (obsessions), or behaviors that make them feel driven to do something (compulsions).”  In our case, the behavior exhibited by the government is regulation.  Those in power are driven by a collective activism and self-righteous indignation endowed by a higher power to coerce a free people into pre-determined choices for the benefit of everyone.   Case in point: new menu regulations.

Tucked away in the health care reform law, Obamacare, is the mandate that certain restaurants begin listing calories on their menu.  The law reaches further still, requiring eating establishments to display the following statement:

“A succinct statement concerning suggested daily caloric intake would be posted prominently on menus and menu boards to help the public understand the significance of the calorie information provided on menus and menu boards. The following statement is proposed: “A 2,000 calorie diet is used as the basis for general nutrition advice; however, individual calorie needs may vary.””

Allow me to translate and explicate the implication here:  America, you’re too stupid to make the right choice when eating out.  You’ve become fat and overweight.  You’re disgusting, and you need help.  We want you to eat the way we think you should eat, and this labeling information is provided to nudge you into compliance.

Caloric content from most restaurants is readily available to all who would inquire.  I once asked for the ingredients list at Panera Bread and was presented with a heavy binder listing nearly every conceivable statistic and ingredient available.   This nanny state behavior is little more than big government attempting to influencing your eating habits.   

The next logical step is federal guidelines forcing restaurants to offer a majority of meals that contain government approved ingredients, grown in America, of course, with the proper caloric content.  It’s OCD – and they just can’t help themselves stop helping you.