Drinking the Poisoned Kool-Aid of Keynesian Economics

From today's Open Europe news summary:

Annual inflation in Germany picked up in April but by less than economists had expected, fanning concerns that inflation in the eurozone has fallen dangerously low and putting pressure on the European Central Bank to respond with interest-rate cuts or asset purchases.WSJ

We economists of a certain age remember when low inflation, preferably zero inflation or even falling prices, would be celebrated, as it should be.  Lower prices benefit all citizens, improving their standard of living without the need for a rise in wages.  Inflation benefits only desperate debtors, mainly governments, who desire to pay off debts with debased money.  The public is being bombarded by a sycophantic media that has drunk the poisoned Kool-Aid of Keynesian economics.

Achieving the betterment of labor without government coercion

In Florida Tomato Fields, a Penny Buys Progress

Florida tomato field workers toil under harsh conditions for low pay.  It seemed that the tomato growers could dictate whatever labor terms they chose, yet such was not the case.  It took many years, but these workers managed to convince the large purchasers of tomatoes, such as Walmart and McDonalds, to buy tomatoes only from growers who treated their workers better.  Nowhere in the article is government intervention mentioned.  The agreements between the workers, the growers, and the purchasers were completely voluntary.  If tomato field workers, who probably have less political power than any group of workers, can better their lot without government help, one wonders why government intervention in labor markets is needed at all.

The CSU should take its election manifesto to its logical conclusion

From today's Open Europe news summary:

Die Welt reports that according to a draft copy of the CSU’s European election manifesto, the party wants to establish a new ‘EU competences court’ staffed by national constitutional judges who would ensure that the EU does not legislate in areas which cannot be equally well or better dealt with at the national or local level.
Welt

The CSU should take this manifesto to its logical conclusion and recommend withdrawal from the EU while cooperating with other nations where there is a common interest.  Why give prior authorization to a supra-national body to rule for Germany and then try to limit its scope?  This makes no sense.  Germany is a sovereign country, as are all the other members of the EU.  There is no reason to hand over sovereignty and then beg to get it back.

My letter to the Wall Street Journal re: The US should adopt unilateral free trade

Re: US, Japan Fail to Clinch Trade Deal

Dear Sirs:
One of the great economic fallacies of our time is that free trade is beneficial to a country only if its trading partner also adopts free trade.  Thus we witness the spectacle and bear the expense of watching pompous bureaucrats failing to negotiate a free trade agreement with Japan.  Such negotiations are completely unnecessary.  The US will benefit from freely importing Japanese goods even if Japan fails to freely import ours.  US consumers will have access to the full range of Japanese products at lower prices, increasing our standard of living.  And what will Japan do with the dollars that it accepts in exchange for its products?  Either it must spend them in the US, buy from another country that is willing to accept dollars for its goods, or buy US securities.  In the short run the US has exchanged pieces of paper for valuable goods. In the long run the US must hand over valuable goods to holders of dollars, whoever they may be.  There is nothing here that is disadvantageous to the US; on the contrary, the US consumer's standard of living increases while that of the Japanese consumer suffers.  Therefore, the US should set an example to the world by firing its trade negotiating teams and adopting unilateral free trade.  The example of the benefit to the US consumer and the irrefutable fact that holding massive quantities of dollars indefinitely does not benefit foreigners will result in other countries gradually abandoning their own trade restrictions, making the world more prosperous and more peaceful.

More illegality by the European Central Bank

From today's Open Europe news summary:

Welt: ECB “trick” to help Portugal return to the markets
Die Welt reports that the ECB will use a “trick” to help Portugal to return to the markets, by once again adjusting its collateral rules. The change to the rules, released last month, will mean the ECB will continue to accept bonds with a lower rating from the agency DBRS as collateral for its lending operations. Previously, once Portugal had exited its bailout programme, its bonds would no longer have been eligible as collateral as they have low ratings from all four rating agencies. This would have reduced demand and made a return to the markets more difficult, the article argues.
Welt

The ECB will always find some rationale to justify giving more money to bankrupt members.  We common folk call this committing a crime, but no EU bureaucrat will ever go to jail for misappropriating billions of euros.

A typical EU solution

From today's Open Europe news summary:

Meanwhile, French Prime Minister Manuel Valls yesterday unveiled his plan to cut public deficit by €50bn between 2015 and 2017. The new leader of the party, Jean-Christophe Cambadélis, said this morning, “We need to change the Maastricht criteria [EU deficit and debt rules], which were elaborated before the crisis”, otherwise the French government’s planned budget cuts “will not be sufficient”. Separately, Martin Schulz MEP, President of the European Parliament, told Handelsblatt that, “We set the deficit criteria in the stability pact 22 years ago, and it must now adapt to the political reality.”
Les Echos: Montebourg La Tribune Le Figaro Le Figaro 2 Le Figaro 3 Le Monde Handelsblatt EUobserver EUobserver 2

This is a typical EU solution--if a country can't satisfy the rule, change the rule.  Problem solved.

More Intimations by the European Central Bank of Currency Confiscation

From today's Open Europe news summary:
 

Draghi suggests that the ECB could ease policy further to tackle strong euro
Speaking at the spring meetings of the IMF and World Bank over the weekend, ECB President Mario Draghi said that the further strengthening of the euro “requires further monetary stimulus”, with ECB officials suggesting that a negative deposit rate would be the most likely option if action was taken. Reuters reports that Austrian Central Bank Governor Ewald Nowotny has suggested any action is unlikely before June, when the next round of inflation forecasts will be released.

Separately, in an interview with Le Figaro, French Central Bank Governor Christian Noyer notes that the euro is “abnormally strong”, and argues, “The ECB’s monetary policy does not at all explain the euro’s current level…That said, the stronger the euro, the more accommodating the monetary policy needs to be.”
FT WSJ FT 2 FT 3 FT 4 Reuters Handelsblatt FAZ Le Figaro: Noyer La Tribune

The term "negative interest rates" means that your deposit will be charged rather than earn interest.  The next step will be to restrict the amount of paper notes that people can hold, because that would be one way people could protect their hard-earned savings.  When that doesn't meet the ECB's goals, the notes will be replaced with ones that carry expiration dates.  It has happened elsewhere in the world and it will happen in Europe, if these inflationist policies are not abandoned.

The statement by M. Noyer that the euro is "abnormally strong" is preposterous.  How does he know the proper exchange rate of the euro?  An exchange rate today is a market phenomenon.  In the past it was a legal promise by the central bank to exchange currency for gold at a certain ratio and vice versa.  This made all currencies de facto substitutes for gold, and the world enjoyed FIXED exchange rates.

The Source of Economic Progress--the Primacy of the Individual

Members of an Austrian school of economics forum to which I belong have been discussing the source of economic progress.  It began with the usual elements of capital, technological development, and managerial expertise before getting more philosophical when a member suggested the acceptance of rationality in all things.  I felt this was not a proper answer, because the definition of "rationality" is itself debatable and can be used by political authorities to suppress unpopular ideas.  For example, in the Soviet Union to question the inevitable victory of communism and the ultimate transformation of man's nature to communist man would land one in an insane asylum.  If you didn't believe all that communist propaganda, you must be crazy!  I prefer Murray N. Rothbard's definition of rationality as believing that one's actions will bring about the result desired.  Admittedly this is a narrow definition of the term and more suited to economics rather than psychology, but the Austrians are not big admirers of psychology anyway.  Rothbard's definition of rationality admits the possibility that rational men might disagree on the proper action to take to bring about the same goal, such as whether or not price fixing will bring about universal prosperity.  Men who believe in price fixing are not irrational according to Rothbard; they are simply wrong and must be shown the error of their ways.

In my search for the answer to the question of the foundation of economic progress, I used Mises' regression theory for my thought experiment.  I started with the assumption that a completely unhampered free market produces the most prosperity.  (If you do not agree, then stop right here.)  The primary elements of such an economy would be capital accumulation, defense of property rights, and the rule of law.  It would not include collectivism in an form, which elevates the group--rarely defined and a moving target when it is defined--above the individual.  But collectivism sounds so enticing to many, so something must have happened to elevate the individual over the group.  We are now on the right track, looking for some seminal event or idea that elevated the primacy of the individual, rather than some group, to position numero uno.

Man formed in the image of God

Immanuel Kant said that the recognition of man as an end and not as a means was the categorical imperative and that it could be discovered by reason alone.  But what is the origin of reason?  Enter religion.  Kant claimed that the existence of reason itself is an intimation of the existence of God.  All of ethics and, as it happens, all of economic progress flows from this one maxim.  Christianity teaches that man is formed in the image of God.  The implications of this have proven to be tremendous for economic progress.  It has taken a long time, and the process can be reversed, which it may be doing right now, as Christianity has been abandoned by huge numbers in the West.  Nevertheless, here's the argument: If man is formed in the image of God, then all individual men are equal to one another in their rights, which derive from God and cannot be derived from other men.  In the eyes of God, the lowest person on the social scale is equal in his God-given rights to the highest and most exalted anywhere in the world, whether he be captain of industry, king, or president.  The concept of the rule of law emerged in the West to protect the individual's natural rights by giving him equal protection under the law; i.e., equal with all other men, no matter how exalted.  Other protections of the individual followed, such as the right to government by representatives elected by the people themselves and trial by a jury of one's peers.  Magna Carta is the best known example of this statement, for the king was forced to admit that all men had rights that could not be taken away, regardless of social rank.

The political liberation of man that stems from accepting that he is made in the image of God has gradually been extended to include economic liberation.  In the West it gradually came to be accepted that economic rights were protected under the banner of political rights.  This makes sense, since taking away a man's economic rights cannot be justified without taking away his political rights.  In communist Cuba all legal jobs are owned and controlled by the state.  One of the ways the Cuban tyrants keep people in line is to place them on an economic blacklist, prohibiting their employment anywhere in the country.  Since the state owns all businesses, such a penalty can be a death sentence.  There is no way such an ostracized person can earn a living; he must become either a beggar who lives off the handouts of others or he starves.

It is no wonder that most communist regimes forbid organized religion.  They must deny that man has any God-given rights, only state-given rights, which, of course, may be taken away at any time and for any reason, even for no reason at all but just to terrorize the populace into fearful submission.  Some totalitarian regimes recognize state-controlled or state-authorized religion, in sometimes elevating the tyrant to god-like status.  This is not real religion.  The state uses such religions for purposes of internal control, outlets for their propaganda.  The pharaoh was a god and the people were treated as beasts of burden.  The "official" religions of the Middle Ages come to mind, too, proclaiming that the king was placed on his throne by "divine right" and to oppose him was to oppose God .  In modern times Shinto Japan elevated the emperor to god-like status, which the Allies forced the Japanese to abandon at the end of the war.  Today communist North Korea requires its population to worship the Kim family, and Red China forces Roman Catholics to take orders from its own Chinese Patriotic Catholic Association. These state religions do not elevate man to enjoying equal political and economic rights; they are used as a tool of the state to set up a privileged, parasitic class, whether one calls them aristocracy or vanguards of the proletariat.

Conclusion

In summary, in the West men believed that they were formed in the image of God, that they were equal at all other men as a result, that their rights were "natural rights" and not given to them by a king with divine rights, and that these natural rights included economic rights.  It was an ethic of individual rather than group rights, so man had a right to the product of his labor and did not have to surrender it to a collective.  This gave rise to capital formation by ordinary men, whose property was protected by the rule of law, which also was derived from natural law and was affirmed over the centuries by such documents as Magna Carta.  Immanuel Kant explained in philosophical terms what had been increasingly accepted for fifteen hundred years by all strata of society, including the political elite; i.e., the primacy of the individual, who is formed in the image of God.  This view led eventually to what Ludwig von Mises called modern economics, which led to the industrial revolution in the first country, England, that liberated the individual politically and economically.  Whether the West and the rest of the world can remain economically liberated in the absence of a belief that man is made in God's image remains to be seen.  I have my doubts.

My new get-rich-quick scheme

David Stockman on the Draghi Put

The ECB can paper over the disaster that is the EU only so long.  Eventually there is no hiding the fact that production is down and what is produced is not what is demanded by the market anyway.

My new get rich quick scheme is to form my own country of Barrontonia, apply for membership in the EU, and float a few billion euros worth of Barrontonian bonds, guaranteed by Draghi's ECB.  They will sell...there is no doubt...and at a good price.  Of course, I do not intend to repay the bonds, but Keynesian economics assures us that this is not necessary.  Printing the money and spending it is what is important.  It is a win-win situation.

The real source of our economic problems--government regulation

Re: U.S. Gas Tantalizes Europe, but It's Not a Quick Fix

Multiple approvals from regulatory bodies has U.S. business tied in knots.  This story is typical. The U.S. has natural gas that it wants to sell and that foreign users want to buy, but multiple regulatory bodies have yet to give their approval to build the necessary facilities and environmental groups oppose most projects.  The same is true of American coal.  The U.S. has coal that it wants to sell and that foreign users want to buy. The U.S. has the means to extract the coal and the railroad capacity to get it to the coast.  But environmentalists have stopped all new coal loading facilities and expansions of existing ones.  It is clear that our own government is the cause of our economic problems.  It creates bureaucracies whose only jobs are to find reasons not to do something; it gives veto power to environmental groups with no standing; and it treats the environment as if it were an individual rather than a resource owned by someone with rights to use it.  Our government is destroying our country and our liberty.

My letter to the NY Times re: Ignoring the Elephant in the Room

Re: Cities Advance Their Fight Against Rising Inequality

Dear Sirs:
The latest assault on economic science is led by the usual suspects--politicians, labor unions, intellectuals, and not-for-profit advocacy groups--who clamor for raising Seattle's minimum wage to fifteen dollars an hour.  The irrefutable economic law of the marginal utility of labor explains that no wage can be paid above the value of one's contribution to the business. To do so will destroy capital and lead to business failure.  To avoid this outcome, firms will, to the best of their ability, replace workers with machines.  If they cannot, they will go out of business.  Of course, no where in your report is this elephant in the room even discussed as a possibility.

The Greatest Economic Myth in the World Today

From today's Open Europe news summary:

New French PM calls for greater ECB action and criticises strong euro French Prime Minister Manuel Valls yesterday won a vote of confidence in the lower house of the French parliament by 306 to 239. In his keynote speech, Valls stressed that the exchange rate of the euro is “too high”, and that “the ECB carries out a less expansionary monetary policy than its American, English and Japanese counterparts”. He also announced €50bn of budget savings between 2015 and 2017, and a series of tax cuts aimed at reducing labour costs by €30bn by 2016.
FT WSJ Irish Times Reuters Independent Le Figaro Les Echos Le Monde Le Figaro 2 Libération

Monsieur Valls expresses his belief in the greatest economic myth in the world today--that debasing one's own currency is the path to economic recovery and prosperity.  I cannot say this often enough--no nation can force another, against its will, to pay for its economic recovery. Debasing one's own currency leads to an external transfer of wealth to one's trading partners and to an internal redistribution of wealth from the non-exporting sector of the economy to the exporting sector of the economy.

No criticism of the Fed allowed

Re: Jeremy Stein to Resign From Fed Board to Return to Harvard

Now, no one would ever call Harvard professor Jeremy Stein an Austrian school economist, so it is illuminating how even his modest questioning of Quantitative Easy is not allowed in the hallowed halls of the almighty Federal Reserve.  Consider Stein's inflammatory statement that "Monetary policy should be less accommodative...".  Not much of a criticism, right?  Maybe the Fed should mull that thought over for a moment or two, right?  Not on your life, you free market radical!  Can't you see the smoke coming out of our shrine to John Maynard Keynes?  Our god is angry!  Throw out the heretic before he wreaks vengeance upon us!

My letter to the NY Times re: The EU takes over the internet

Re: E.U. Lawmakers Approve Tough 'Net Neutrality' Rules

Newspeak, the official language of George Orwell's totalitarian nightmare regime in his novel Nineteen Eighty-Four, has come to Europe.  Billed as a law to protect the consumer from high prices and ensure more access by internet content providers, this new "net neutrality" law is nothing more than a backdoor takeover of the internet by the state in order to reward politically connected constituents today at the expense of entrepreneurs who risk their own capital in order to bring us untold wonders in the future.  In all-too-typical fashion, the parasitical state just could not keep its hands off the one engine of economic dynamism in the world--the burgeoning digital economy.  Rather than encourage private companies to invest the billions necessary to bring the common people of Europe the full wonders of the digital economy, this legislation will discourage investment by making future profits problematic.  Who will invest in something that may never return a profit due to government regulations and price fixing?  While so-called consumer groups rejoice that formerly costly services MUST be provided now at no additional cost, Europe will stagnate while the rest of the world leaps ahead in digital services.  Never has the analogy of eating one's seed corn been more apt.

How to prevent another Ukraine

Today all nations treat the people, businesses, and natural resources within their borders as if they were owned by the state.  Some resources, such as oil and minerals, actually are owned by many national governments.  But even in the US, where many natural resources are privately owned, the government controls all important aspects of these industries, very much along the lines described by Gunter Reimann in his 1939 book The Vampire Economy--doing business under fascism.  As a result, when international disputes arise governments employ innocent citizens and their businesses as war assets, even in the absence of a declaration of war.  The US Constitution prohibits "unreasonable seizers" in Amendment IV and deprivation of "property, without due process of law" in Amendment V.  Yet our government routinely prohibits domestic companies from engaging in normal business practices in order to punish other countries, even when Congress has not declared war.  No compensation is offered for lost business.

These actions never bring foreigners to heal, so to speak, but merely aggravate the issue in dispute.  For example, Russia has ridiculed the knee jerk American and Western European reaction to freeze some Russian bank accounts and deny certain Russians travel privileges to the West, following its occupation of Crimea.  I doubt that anyone really believed that that these economic penalties would work as advertised; it was all grandstanding in order to show that the West was "doing something".  On the contrary, these actions merely aggravated the situation.  Now Russia threatens to retaliate by cutting off its natural gas supplies to its Western European customers.  This threat has real teeth, as opposed to the American and Western European weak actions, for, as  German Minister for Economic Affairs and Energy Sigmar Gabriel said recently, there is “no reasonable alternative” to Russian gas imports.

We do not know if the crisis in Ukraine could have been avoided, but let us look at policies that could avert or at least ameliorate another such crisis.

Free Trade

The spark that ignited the Russian annexation of Crimea was the Ukrainian opposition's determination to spurn joining Russia's closed customs union and join that of the European Union instead.  The elected Ukrainian president, Victor Yanukovych, had hinted for months that he was negotiating an agreement with the EU. Then he did an about face and announced that he would join Russia's competing customs union.  The resulting fury of the majority of Ukrainians eventually led to Yanukovych's overthrow, the revolutionaries' determination to join the EU, and Russian seizure of Crimea.  Could all of this have been avoided? 

The European Union does promise free trade WITHIN ITS BORDERS, but it has erected high tariffs and quotas against non-EU goods.  The impact on Russia of Ukraine becoming a member of the EU would be similar to that on the US if Canada were to join the EU and drop out of NAFTA (ignoring for the moment all the problems with that supposedly-free trade agreement among the US, Canada, and Mexico).  Important trade with Canada would fall with all the disastrous consequences to both nations.  Unfortunately there is an additional and dangerous military side to Ukraine joining the EU--most EU members are also members of NATO.  Many former Warsaw Pact nations joined NATO shortly after joining the EU.  Undoubtedly, Russia concluded that Ukraine would follow suit, and Russia would have a NATO member in its backyard.  Doesn't anyone remember the Cuban Missile Crisis?  The US almost went to nuclear war with Russia to prevent Castro's Cuba from joining the Warsaw Pact and hosting Russian nuclear forces in our backyard.

It was the assumption that Ukraine would join one or the other customs union that brought on the crisis.  Eastern Ukraine and the Crimea are pro-Russian and the rest of Ukraine is pro-West.  Public opinion and loyalties in Ukraine are split and seem intractable.  Any action to join one or the other customs union was bound to trigger outrage by the other side.  But an American living in Ukraine, Roman Skaskiw, has written that the Ukrainian people need not be confronted with such a dangerous choice.  He argues that Ukraine should remain free of all economic entanglements and join no customs union.  It should unilaterally declare itself to be a free trade nation and accept foreign imports and foreign investment from whatever source.

The Unhampered Market Economy and the Rule of Law

Russia's response to Western economic sanctions against some of its key citizens has been to threaten the cutoff of vital natural gas supplies.  But what if Russian gas were not owned by the state and the state were not allowed to wield this economic weapon in the absence of a declaration of war?  Would Russia actually declare war?  I think not.  Even if the gas were state owned, as at present, a refusal to honor gas contracts should result in severe economic penalties being imposed on Russian companies for breach of contract.  Since the gas supplies are state owned, foreign customers might seek court approval to attach completely unrelated Russian national assets, such as ships and aircraft.  Just ask Argentines about the consequences of defaulting on their national debt.  Argentina's president always flies internationally on commercial aircraft and not Argentine military aircraft, because an Argentine Air Force jet would be attached by Argentina's creditors almost anywhere in the world.  Furthermore, in the future Russia should be forced to purchase a performance bond that it would surrender in the case of non-fulfillment of its gas contracts.  It should lose some customers regardless of offers to post performance bonds, its reputation having been destroyed.

But the Western European nations themselves have few alternatives to paying Russian blackmail, because they have interfered with the energy markets in their own countries to the extent that they have become completely dependent upon the energy production of capricious dictatorships like Russia.  Had Western Europe's energy companies been free to exploit domestic supplies, they would have rejoiced when one of their biggest competitors shoots itself in the foot by refusing to honor its contracts.  They would have been able to expand production and recapture Russia's Western European market incursions fairly rapidly.  If the US were a free market in energy, its companies would have been quick to sell natural gas to a strapped Europe; however, US law prevents this, another insult to economic and business common sense.

Western Europe and the US have been quick to freeze bank accounts and other Russian owned assets.  But what right do these countries have to force private companies to dishonor their contracts in the absence of a declaration of war?  The investment bankers of New York, London, and Frankfurt will suffer loss of business in the future, as Russian businessmen and businessmen of other nations feuding with the US and Europe take their business elsewhere.  We should never lose sight of Ludwig von Mises' explanation that it is the customer who directs the structure of the economy through his buying and refusal to buy.  So, in the end, it will be ordinary citizens on both sides who will suffer by the arbitrary actions of their governments to employ them and their businesses as weapons in this dispute.

Respecting the rule of law, property rights, and the sanctity of contracts would force disputing nations to resolve their differences peacefully.  A healthy respect for the rule of law and non-interference in economic affairs will prevent many crisis from ever occurring.  Had Ukraine declared itself to be a free trade nation, I am convinced that there would have been no riots, no revolution, and no Russian annexation of Crimea.