Wanted: More Better Grand Ideas

Bob Herbert writes in the NYT about the Great Recession and the predicament millions of unemployed now find themselves.  He rambles on about many things that strike a nerve with me, but one stands out.

Perhaps the most astounding statement Mr. Herbert makes is in the last paragraph.  Herbert says “New ideas on a grand scale are needed. The United States can’t thrive with so many of its citizens condemned to shrunken standards of living because they can’t find adequate employment. Long-term joblessness is a recipe for societal destabilization. It should not be tolerated in a country with as much wealth as the United States. It’s destructive, and it’s wrong.”

I’m puzzled. 

We’ve introduced nothing but BIG ideas lately.  In 2009, we passed an $862 billion stimulus plan that promised to put millions back to work.  Unemployment rose to more than 10%.  After that, we passed Obamacare – a 10-year, $940 billion dollar rearranging of our healthcare system, which promised to extend healthcare to millions of uninsured.  Then we enacted the Dodd-Frank bill, the biggest overhaul of the financial system since the Great Depression.  This bill created the Consumer Protection Agency and a slew of new regulatory powers for the Fed and other federal agencies.  Additionally, we’ve run $1.5 trillion dollar deficits for the past three years in an attempt to spend our way out of this mess.  The Federal Reserve has expanded its balance sheet by something like $2 trillion, commenced on QE2, and kept interest rates at practically zero for two years.  Whew.

Is there a remnant of our life, economy, or existence that isn’t suffocating from Washington’s grip?  Bob, I’m not sure we can afford more grand ideas.

Here's the link to the NTY article:

http://www.nytimes.com/2011/02/08/opinion/08herbert.html

Money is a Social Institution

David Andolfatto brought out the nut-jobs in a recent blog post questioning whether gold is money. His definition  of money is anything that circulates widely as a means of payment and is accepted without discount in the extinguishment (I think I just made up a word) of debts.

David's definition embeds a concept that I want to highlight here: the importance of social institutions. The idea of acceptance has to do with how the receivers of the object of trade view its future tradeability. That was the important feature behind moving from a barter economy to a monetary economy - precious metals were way more tradeable than, say, tons of wool or barrels of fish. Similarly, deposit receipts are more tradeable than precious metals.

Let's say you had a gold-backed dollar economy, such that one "dollar" referred to a specific weight of gold - 5 grains, for example. The exact measure is irrelevant, actually, so long as everyone knows what it is. In a dollar economy, deposit receipts would circulate as currency, so long as people general accept them for trade. I will accept dollar payment for my labor if I know, or reasonable am certain, that I can use the dollars to go trade for goods and services that I want.

In such an economy, gold would probably not be considered "money" because it would not circulate. You wouldn't pay for a fancy coffee with a few grains of gold. If you tried, people would think you're nutty bananas. Even though gold is the asset backing dollars it is not traded and is therefore not money - it's an asset backing money. Thus the value of goods and services can be measured in terms of dollars or gold, this is equivalent, but G&S can only be traded for dollars.

Think of it like this. Let's say you have U.S. dollars in your pocket and you go to Europe, where they trade in Euros (for the most part). Dollars in Europe aren't currency because you will not be able to go to stores and trade them for goods and services. You must first find a money changer (such as Thomas Cook) and exchange your dollars for Euros. This doesn't mean your dollars are valueless but they only have value in Europe because the money changer will give you Euros for them. Dollars are useful to money changers because, say, some Europeans will go to the money changer to get dollars before taking a trip to the U.S.

An object is currency, or money, because of tradeability. Tradeability is a social institution. Which is not to say that I wouldn't accept a few bricks of gold in exchange for my labor right now - but I might discount them a bit.

Obamacare, Strike 2

A federal judge in Florida has ruled that Congress does not possess the power to compel all citizens to purchase health insurance, as mandated under Obamacare.  This is the second ruling by a federal judge invalidating the personal mandate.  Two other judges have ruled it constitutional.  We're heading towards a full count and a trip to the Supreme Court.

This is a positive development, and gives me hope that there are in fact real limits to federal power.

Click here for the story (very brief): http://news.yahoo.com/s/ap/20110131/ap_on_bi_ge/us_health_overhaul_1

Mr. Smith, please....

I love it when CEO’s write op-ed pieces urging our government to do this or that.  It’s as if the only thing standing in the way of (insert CEO’s special interest) is legislation from Washington.  I also love it, after suggesting government intervention, the same CEO swears that “I am not someone who tends to advocate increased government involvement in the private sector. But…”  Really?! 

 

Mr. Smith, CEO of FedEx, is advocating for a transition from petroleum-based vehicles to electric vehicles.  Why, you ask?  Mr. Smith reported that FedEx has experimented with electric delivery vehicles and found them to decrease (operating) costs 70 to 80%.  What Mr. Smith really wants is for government to subsidize and put in place the electric vehicle-charging infrastructure so FedEx can benefit from it.  In fact, the only thing standing in our way according to Mr. Smith is “a bill to promote electric vehicles”.  Sounds benign enough.

 

My suggestion to Mr. Smith is simple and straightforward: if you find electric vehicles to be more economical than their gas counterparts, let FedEx fund the necessary infrastructure.  Please don’t enlist the help of Uncle Sam.  Convincing Washington to pass a bill to solve your problem will only deprive me of a choice. 

 

Mr. Smith (and all other CEOs) – Please don’t advance your firm’s interest in Washington at the expense of my liberty.

To Raise or Call a Bluff

The Treasury is urging (begging) Congress not to toy with our country’s cherished AAA bond rating and to raise the debt limit soon.  Current projections have the Treasury reaching the statutory limit within the next 30-60 days.  Once that point is reached, the Treasury cannot issue new bonds to raise cash.  It would have to cash-flow and prioritize spending, or default.

The debt ceiling is Congress’s check on the executive branch.  The Treasury manages the country’s financial matters, issuing bonds in the capital markets to raise cash to fund operations.  This cash pays federal employees salaries, including Soldiers and Marines; it pays for interest on outstanding debt; and it pays doctors for treating seniors receiving care under Medicare.  Because the government spends more (much more) than it takes in, it issues bonds for cash.  Without this ability, it would have to operate much like we do – within our means.  The nerve!

So, Treasury is up on Capitol Hill, hat in hand, urging congressional leaders not to play politics with the debt level, because Armageddon awaits should Congress not act.  My money says Congress will blink and raise the debt limit, but I wonder what would really happen if they didn’t’.  Would we default or would Treasury make the necessary adjustments?

Two Types of People

Thomas Sowell's column on Monday reminded me of a world view that I find quite useful. I like it because it gives a picture of the type of person one should be, without giving a lot of particulars. There are two types of people in the world: creators and consumers. No one is exclusively one or the other, since everyone creates to some extent, and everyone (must) consume to some extent. So it really is a story of net creating or consuming.

Net creators add more to the world than they take out. There are several obvious examples, like Bill Gates, or Larry Ellison, or the Steves of Apple, or Larry and Sergey of Google. Many examples abound; in fact most people are net creators. If they weren't, the world would not have progressed to the point it has.

But net creators don't always (or only) create new consumer goods or capital goods. Some net creators add to the psychic benefit people derive from certain activities. In a way, this can be considered a consumer good. Football, for example - many people enjoy watching football in its own right. Others enjoy hearing a good sermon at their church, so that the priest provides a psychic benefit.

Net creators put more value into the world than they take out. Net consumers are the opposite: they take without giving. Fortunately such people are the minority. One need not dwell for too long before thinking of a few examples in one's own life. Furthermore, one might suggest football players are net consumers, if you don't enjoy football. I think there's merit there - such that sports stadiums shouldn't be financed by public funds - but that's neither here nor there right now.

My main message here is a moral one. I believe we have a duty to be net creators, to the extent we are mentally and physically capable. My only argument for this, aside for "Protestant ethic" stuff, is the logical opposite: imagine a world of net consumers. Can you?

Nullify Obamacare?

Yep, you read that correctly.  Several states, including my beloved Texas, are proposing to nullify the federal legislation known as Obamacare.  Texas is going a step further and imposing penalties and possible jail time for any individual seeking to enforce any federal, statute, law, or regulation related to the Act.  Wow. 

The big question is: can a state nullify Congressional acts?  Perhaps the answer to this question isn’t so distant.  Should the courts rule Obamacare constitutional, expect Texas and many other states to march ahead with nullification efforts.  These, too, will be tested by the courts, and the outcome could be contentious.

There must be a limit to federal power; the tenth amendment recognizes this fact.  And I don’t trust the federal government to say when that limit has been reached, because the plutocracy in Washington isn’t in the business of relinquishing power.

Here’s the link to the Texas bill on nullification.

http://www.capitol.state.tx.us/BillLookup/Text.aspx?LegSess=82R&Bill=HB297