Power & Market
According to multiple reports, Donald Trump is preparing to nominate Herman Cain to fill one of the two vacant positions on the Federal Reserve’s Board of Governors.
Cain, the former CEO of Godfathers Pizza and a meme-friendly 2012 presidential candidate, shares several similarities to Stephen Moore, who was also nominated last month. To their credit, neither man comes from the arena of economic groupthink that persists among many central bankers. Both also owe their nomination to the strong personal relationship they both have with Trump, which is why the administration isn’t worried about their past superficial criticism of the low interest rate policy the president has made clear he desires.
While Moore has been criticized strongly within beltway circles since his nomination, it will be interesting to see how Trump critics handle Mr. Cain. After all, he has the one quality Elizabeth Warren and other Democrats have chosen to focus on when it comes to a Federal Reserve nominee: he isn’t a white guy.
For several years now, Warren and other Democrats have been pounding the table for greater diversity at the Fed. As a letter from 2016 states:
Given the critical linkage between monetary policy and the experiences of hardworking Americans, the importance of ensuring that such positions are filled by persons that reflect and represent the interests of our diverse country, cannot be understated. When the voices of women, African-Americans, Latinos, and representatives of consumers and labor are excluded from key discussions, their interests are too often neglected.
If the view point of Warren and her colleagues truly is that simply skin color and experience are important to the Federal Reserve considering the interests of Americans broadly, it would make sense for them to celebrate this nomination. Here we would have the first African American Fed governor in several decades, who rose up from a working class background to become an American success story.
Should Cain be nominated, anything short of grand applause from Democrats will only highlight how shallow the emphasis on superficial “diversity” truly is.
The additional irony here is that Trump’s desire to stack the deck with his own allies actually serves the policy goals of progressive groups. For example, Fed Up, a left-populist organization policy that has been part of the larger push to emphasize “Fed diversity,” has been pounding the table against interest rate increases for years. In theory, a Governor Herman Cain that is loyal to Trump’s vision should check the two largest boxes the organization has been promoting.
Of course, there is a real tragedy connected to this superficial push for “diversity,” as it is precisely the interventionist monetary policy advocated by politicians like Warren and groups like Fed Up that do real damage to minority communities. While Fed Chair Jerome Powell took time to visit the historically black college of Mississippi Valley State this February, his speech failed to highlight how the Fed’s post-2008 monetary policy has disproportionally hurt black communities due to the fact African Americans are less likely to be invested in a juiced up stock market. Or how the Fed-fueled housing bubble was particularly damaging to black communities.
So while Herman Cain does check a diversity box for the Federal Reserve, he is unlikely to bring the far more important ideological diversity to America’s central bank that is desperately needed. On the bright side though, at least he isn’t Marvin Goodfriend.
The timing of Jerome Powell’s appearance on “60 Minutes,” along with Janet Yellen and Ben Bernanke, is curious. Scott Pelley asked no penetrating questions, so nothing was learned. Fed Chairs aren’t known to hit the interview circuit. Bernanke appeared during the crisis to reassure the nation that the central bank can and will fix anything and everything.
Donald Trump (aka "Individual 1") tweeted in January:
The economy is doing great. More people working in U.S.A. today than at any time in our HISTORY. Media barely covers! @foxandfriends— Donald J. Trump (@realDonaldTrump) January 24, 2019
The folks at GNS Economics, in their Q-Review 1/2019 report, contend, contrary to the president, “the global economic recovery since 2009 has not been real. It has been achieved with massive debt and monetary stimulus, which has created an economy where normal rules of the market economy do not apply.”
The emphasis of the GNS report is the economy’s fragility. The economy “is unable to stand on its own without ongoing massive debt and monetary stimulus.”
Powell and the ECB’s Draghi recent U-turns back to monetary stimulus support this notion. If central banks exist for anything it’s to keep commercial banks in business. Forget about full employment and a strong currency, the Fed’s job is to keep the banks open. And, when rates were normalizing or heading upward last year, what was it doing to U.S. bank balance sheets?
Wolf Richter at WolfStreet.com provides the highlights from the FDIC’s Quarterly report, and mentions a doozy of a detail—”US Banks Report $251 billion of ‘Unrealized Losses’ on Securities Investments in 2018, the Most Since 2008: FDIC”
These are “paper losses” so far and, as Richter explains, don’t impact bank bottom lines. Richter writes,
“Unrealized losses” are losses on securities that dropped in value but that the banks have not yet sold. In other words, they’re “paper losses.” Every quarter in 2018 brought steep unrealized losses: Q1: $55 billion; Q2: $66 billion; Q3: $84 billion; and Q4: $46 billion.
When interest rates go up, bond prices fall. Everything will be oakey-dokey if banks can hold the securities until maturity and are repaid in full. However,
if banks are forced to sell those bonds during a liquidity crunch, as happened during the Financial Crisis, the “unrealized losses” become real losses.
Richter points out that America’s banks hold nearly half a trillion in US Treasuries. That’s quite a concentration of debt extended to a borrower that on its books is $22 trillion in debt. Off balance sheet liabilities are multiples of that amount and the country’s budget deficit is running over a trillion a year. Government debt can never be repaid, only refinanced. This is referred to as Ponzi finance.
Mr. Wolf concludes,
So, it’s still a good time to be a bank – especially since $251 billion “paper losses” don’t need to be included in net income. But loan-loss provisions are starting to indicate that the credit cycle has turned, and that banks are preparing little by little for the next phase in the cycle.
The next phase may turn those paper losses into real ones. Powell’s TV appearance and sudden change of policy signals the turn is near.
[formatted from this twitter thread- ed.]
I present two conflicting theories of how the standard of living of the average wage earner rises: the prevailing, anti-capitalist theory, and my own, pro-capitalist theory.
Keep in mind that every law ultimately rests on the threat to kill violators. That is the threat made against all who forcibly resist lesser punishment, such as paying a fine or going to prison.
Thus, the prevailing theory of how wages rise is essentially that the government tells businessmen and capitalists, raise wages or we’ll kill you.
The prevailing theory of how the work week shortens is that the government tells businessmen and capitalists, shorten the work week or we’ll kill you.
The prevailing theory of how child labor is eliminated is that the government tells businessmen and capitalists, stop employing children or we’ll kill you.
The prevailing theory of how working conditions improve is that the government tells businessmen and capitalists, improve working conditions or we’ll kill you.
Now here’s my theory:
Businessmen and capitalists are continuously striving to introduce new and improved products and more efficient methods of production. They are impelled to do this by virtue of the profit motive.
To the extent that the businessmen and capitalists succeed, the supply of products is increased relative to the supply of labor, which causes the prices of products to fall relative to wage rates. This means a rise in the buying power of wages, i. e., a rise in “real wages.”
As real wages rise, more and more workers are put in a position in which they can afford to work in jobs that pay less but offer shorter hours. In fact, they become able to afford to take reductions in pay in greater proportion than the reduction in hours. Wage cuts in greater proportion than the reduction in hours make it positively profitable for employers to offer shorter hours. E.g., instead of two 12-hour shifts, it becomes more profitable to have three 8-hour shifts at lower hourly wages.
As the real wages of workers rise, not only do their hours shorten, but also the need for a financial contribution from their children diminishes. Thus, as capitalism progresses, the age at which children go to work rises. Since 1780, it’s gone from 4 to over 24 in many cases.
Furthermore, as the real wages of workers rise, they are more and more put in a position in which they can afford to take jobs that pay less but offer better working conditions, and, by the same token, refuse to take jobs that offer poor conditions.
Because of the height of real wages in capitalist countries, wage earners are routinely able to refuse to take jobs with poor conditions, except at such a premium in wage rates that it is usually much cheaper for employers to pay the cost of improving the conditions.
In sum, without government intervention, capitalism operates to raise wages, shorten hours, end child labor, and improve working conditions.
I turn now to a brief account of the effects of imposing the prevailing, anti-capitalist, gun-slinger, we’ll-kill-you theory of how the standard of living of the average wage earner rises.
Imposing wage rates above the free-market level causes unemployment. Insofar as those forced into unemployment in one field then add to the supply of labor in other fields, wage rates in those fields drop. An arbitrary inequality in wages is created. And skills are wasted.
Forcibly raising wage rates at the bottom of the skill-ladder, as do minimum-wage laws, forces the displaced workers into unemployment. These workers were already earning a wage below the now prescribed minimum and being employed elsewhere would require a yet-lower, illegal wage.
Forcibly reducing hours reduces production and causes higher prices. Even if the average worker’s hourly wage is increased to the point of leaving his weekly wage unchanged, the rise in prices reduces his real wages. Poor people are gunned into being poorer than they need to be.
Denying parents the ability to obtain a financial contribution from their children makes desperately poor families poorer still.
Forcibly improving working conditions diverts take-home pay into paying for the improvements and thus can literally take food off the table of poor workers’ families.
In sum, the so-called do-gooders are not at all do-gooders. They are EVIL-doers. They have an imperious mentality as far removed from reality as Marie-Antoinette’s and go about like drunken fools urging the government to brandish its weapons, not knowing who or what might be hit.
To learn about every aspect of the case for capitalism, read my Capitalism: A Treatise on Economics.
Formatted from Twitter: @GGReisman
In the 1940s, economist Friedrich Hayek said in his book, "The Road to Serfdom," that the road to serfdom was socialism. Economist Joseph Schumpeter, in "Capitalism, Socialism, and Democracy," feared that socialism would displace capitalism even though capitalism was a better system.
In the 21st century, self-proclaimed socialists like Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) are keeping the fears of Hayek and Schumpeter alive. Those fears are misplaced. The biggest threats to capitalism aren’t socialists, they are capitalists.
While socialists float aspirational ideas for a better society, capitalists conspire with the political class to enact policies that benefit the political and economic elite at the expense of the masses.
The result is that business profitability increasingly comes from political connections rather than by satisfying the demands of consumers, undermining free markets and the capitalist system.
This is widely recognized, if not widely understood. People talk about cronyism, corporatism, the division between the 1 percent and the 99 percent and the threats of the military-industrial complex. In my recent book, I call this phenomenon "political capitalism" and explain how it undermines the market system and threatens capitalism.
When capitalists tout pro-business policies, they inevitably are talking about policies that use trade barriers and regulatory impediments to give themselves advantages over competitors.
Read the full article at The Hill
Watch Dr. Holcombe's talk on Political Capitalism from this year's AERC:
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The Mises Institute is notable for publishing articles supporting a number of radical views, including, among other positions:
- Abolition of the central bank.
- Radical reductions in military spending and military action overseas.
- Radical decentralization of political power through secession, nullification, or robust federalism.
- Adoption of untrammeled free trade.
These positions all reflect positions held by liberal schools of though in the past, whether the Manchester School, the American Anti-Federalists, or the French Liberal School . In various times and places, these views have even met with varying degrees of success.
Nevertheless, to the modern ear, these views sound incredibly radical, and the end goals generally sound exceedingly unlikely to be realized in the near future.
And yet, this is where advocates for freedom and free markets usually take a wrong turn.
For some reason, many non-leftists, whether libertarians, conservatives, or milquetoast centrists, embrace the notion that a position on public policy ought not be expressed unless there is chance that it can be realized in the very near future.
I hear this often from critics, and see it often in the comments section on mises.org, or in social media. The routine is usually the same:
- The author expresses support for a change in public policy that would significantly change the status quo.
- A reader expresses agreement with the sentiment.
- The same reader than contends that achieving this goal is unlikely in the short term.
- The same reader then asserts one shouldn't even bother expressing support for this position because it's unlikely to be realized in the short term.
The final sentiment usually looks something like this: "That's a fine idea, but it's not gonna happen, so just forget it!" Another variation is "people don't agree with you right now, and it's hopeless to try to convince people otherwise, so just give up."
Rothbard: What We Can Learn from the Abolitionists
Note that in this way of thinking, the attitude is to immediately declare defeat and to abandon the goal because achieving this goal looks to be difficult. As far as I can tell, this is a very common attitude.
This sort of knee-jerk defeatism helps offer a clue as to why enemies of the left tend to adopt a pessimistic and paranoid point of view. They have trouble even imagining success, let alone attempting to achieve it.
This attitude, of course, is the opposite of that used by a variety of successful political movements — including that of the abolitionists.
In an article for the Libertarian Review in 1968, Murray Rothbard looked at the methods of the abolitionists for insights on how to pursue policy goals that appear seemingly impossible at first.
Rothbard noted that from the early days of the abolition movement, the end goal appeared far-fetched and extremely unlikely. Thus, the only immediate victories to be hard were small and piecemeal.
A gradualist method was forced on the abolitionists. But, as Rothbard noted, the goal was never gradualist. It was always for immediate and total abolition:
William Lloyd Garrison was not being “unrealistic” when, in the 1830s, he raised the glorious standard of immediate emancipation of the slaves. His goal was the proper one, and his strategic realism came in the fact that he did not expect his goal to be quickly reached. Or, as Garrison himself distinguished,
Urge immediate abolition as earnestly as we may, it will, alas! be gradual abolition in the end. We have never said that slavery would be overthrown by a single blow; that it ought to be, we shall always contend. (The Liberator, August 13, 1831)
Similarly, for those who want a radical reduction in state power today, they must adopt a similar posture: always maintain the explicit and public goal of radical change, while accepting small and gradual victories.
Rothbard quotes Aileen Kraditor who writes:
It follows, from the abolitionist’s conception of his role in society, that the goal for which he agitated was not likely to be immediately realizable. Its realization must follow conversion of an enormous number of people, and the struggle must take place in the face of the hostility that inevitably met the agitator for an unpopular cause. ... The abolitionists knew as well as their later scholarly critics that immediate and unconditional emancipation could not occur for a long time. But unlike those critics they were sure it would never come unless it were agitated for during the long period in which it was impracticable. ...
To have dropped the demand for immediate emancipation because it was unrealizable at the time would have been to alter the nature of the change for which the abolitionists were agitating. That is, even those who would have gladly accepted gradual and conditional emancipation had to agitate for immediate and unconditional abolition of slavery because that demand was required by their goal of demonstrating to white Americans that Negroes were their brothers. Once the nation had been converted on that point, conditions and plans might have been made. ...
Their refusal to water down their “visionary” slogan was, in their eyes, eminently practical, much more so than the course of the antislavery senators and congressmen who often wrote letters to abolitionist leaders justifying their adaptation of antislavery demands to what was attainable. ...
This position then has the added benefit of — as small gradual victories are achieved — constantly pressuring the "moderates" and pushing their "middle" ever more in the desired direction. Rothbard continues:
From a strictly strategic point of view, it is also true that if the adherents of the “pure” goal do not state that goal and hold it aloft, no one will do so, and the goal therefore will never be attained. Furthermore, since most people and most politicians will hold to the “middle” of whatever “road” may be offered them, the “extremist,” by constantly raising the ante, and by holding the pure or “extreme” goal aloft, will move the extremes further over, and will therefore pull the “middle” further over in his extreme direction. Hence, raising the ante by pulling the middle further in his direction will, in the ordinary pulling and hauling of the political process, accomplish more for that goal, even in the day-by-day short run, than any opportunistic surrender of the ultimate principle.
It is important to accept partial victories, however, without sending the message that a partial victory is sufficient:
In our view, the proper solution to this problem is a “centrist” or “movement-building” solution: namely, that it is legitimate and proper to advocate transition demands as way stations along the road to victory, provided that the ultimate goal of victory is always kept in mind and held aloft. In this way, the ultimate goal is clear and not lost sight of, and the pressure is kept on so that transitional or partial victories will feed on themselves rather than appease or weaken the ultimate drive of the movement.
Thus, suppose that the libertarian movement adopts, as a transitional demand, an across-the-board 50 percent cut in taxation. This must be done in such a way as not to imply that a 51 percent cut would somehow be immoral or improper. In that way, the 50 percent cut would simply be an initial demand rather than an ultimate goal in itself, which would only undercut the libertarian goal of total abolition of taxation.
Note also that the abolitionists recognized the importance of "demonstrating" the rightness of their position, and in that the public needed to be "converted." Unlike modern conservatives and a great many libertarians, the abolitionists did not assume that those who disagreed with them would always disagree with them. It is not uncommon to hear, however, the assumption among many conservatives and libertarians that trying to explain to people the rightness of the pro-freedom position is a lost cause. For people who think like this, the only hope is to preserve the status quo for as long as possible — although this is obviously a losing battle. The mere thought of expanding the popularity and prominence of their position is assumed to be outlandish. Needless to say, an ideological group that thinks like this will always be a group of losers.
Unfortunately, many on the side of freedom and free markets have completely lost sight of the value of the abolitionist way of doing things. This leads to any number of self-defeating views. Some maintain that one must remain totally agnostic about all policy changes unless that change brings about total and immediate victory in all respects. Thus we hear about some libertarians who refuse to support any tax cut, so long as the tax cut is not a 100% tax cut. Another unfortunate result might be quietism in which some assert it's pointless to say anything at all because short term victory appears unlikely — so better to just give up now. Still others won't bother with any sort of activistm if victory will require more than a few months of effort.
Note, of course, that the modern left doesn't think this way.
Consider the matter of health care, for example. For years, leftists advocated for ever-greater government intervention in healthcare. Indeed, Obamacare had originally been put forward in the form of Hillarycare back in the early 1990s. This itself came after many years of activism in favor of government-controlled healthcare.
Hillarycare was defeated, but the left continued to agitate endlessly for "universal healthcare" of one type or another. Nor did this effort even stop when Obamacare was adopted. For many on the left, Obamacare wasn't universal enough. So, five minutes after Obamacare was signed into law, the next step for the left was devised: "Obamacare is a step in the right direction," they said, "but the next step is now single-payer healthcare!"
Advocates for ever-greater government control of the healthcare system didn't even skip a beat. Immediately after achieving a partial victory, the drive toward the next goal continued unabated.
It's not hard to see why the left is regarded my many of optimistic and visionary while the right as seen as adrift and lacking any discernable goals whatsoever. Meanwhile, many conservatives and libertarians search constantly for a reason to give up and quit — and to encourage others to do the same.
Keynote AERC lectures and selected panels can be watched live at mises.org/live
Our online schedule includes (Central Time Zone):
9:15-10:15 A.M. | The F.A. Hayek Memorial Lecture (Sponsored by Greg and Joy Morin)
Randall Holcombe (Florida State University) | Political Capitalism: How Economic and Political Power Is Made and Maintained
10:30 A.M. – Noon | Panel on Remembering the Interwar Right
David Gordon (Mises Institute), Brion Mcclanahan (Abbeville Institute), Paul Gottfried (Elizabethtown College)
1:30 – 2:30 P.M | The Henry Hazlitt Memorial Lecture (Sponsored by Hunter Lewis)
Robert Luddy (Captiveaire) Henry Hazlitt’s Long-Term Economic | Thinking: Foundation of Entrepreneurial Excellence
2:45 – 4:15 P.M. | Panel: 100th Anniversary of Nation, State, and Economy
Thomas Dilorenzo (Loyola University Maryland), Joseph Salerno (Mises Institute, Auburn University, and Pace University), Nikolay Gertchev (Ichec Brussels Management School), Jörg Guido Hülsmann (University of Angers)
4:30 – 5:30 P.M. | The Ludwig Von Mises Memorial Lecture (Sponsored by Yousif Almoayyed)
Michael Rectenwald (New York University, Retired) Libertarianism(s) Versus Postmodernism and ‘Social Justice’ Ideology
9:00 – 10:00 A.M. | the Lou Church Memorial Lecture (Sponsored by the Lou Church Foundation)
Daniel Ajamian (San Diego, California) The Cost of Enlightenment
1:00 – 2:30 P.M. | Paper Panel: Socialism
Rafael Acevedo (Texas Tech University), Yuri Maltsev (Carthage College), Edward Fuller (Palo Alto, California
2:45 – 3:45 P.M. | the Murray N. Rothbard Memorial Lecture (Sponsored by Don Printz)
David Dürr (University of Zurich) The Inescapability of Law: and of Mises, Rothbard, and Hoppe
4:00 – 5:30 P.M. | Panel: The Significance of Hans-Hermann Hoppe (Sponsored by Steve and Cassandra Torello)
David Gordon (Mises Institute), Mark Thornton (Mises Institute and Auburn University), N. Stephan Kinsella (Kinsella Law Group, Property and Freedom Society), Thomas Dilorenzo (Loyola University Maryland), Jörg Guido Hülsmann (University of Angers), Joseph Salerno (Mises Institute, Auburn University, Pace University)
Response: Hans-Hermann Hoppe (Property and Freedom Society, Mises Institute)
A Blockchain Study Finds 0.00% Blockchain Success Rate . The study reported also reported 0 vendor call backs when asked for evidence of implementation.
Though Blockchain has been touted as the answer to everything, a study of 43 solutions advanced in the international development sector has found exactly no evidence of success.
Three practitioners including erstwhile blockchain enthusiast John Burg, a Fellow at the US Agency for International Development (USAID), looked at instances of the distributed crypto ledger being used in a wide range of situations by NGOs, contractors and agencies. But they drew a complete blank.
"We found a proliferation of press releases, white papers, and persuasively written articles," Burg et al wrote on Thursday. "However, we found no documentation or evidence of the results blockchain was purported to have achieved in these claims. We also did not find lessons learned or practical insights, as are available for other technologies in development."
Let's talk about Econ 101, scientism and modern economics.
At Bloomberg, Noah Smith argues that Greg Mankiw's Principles of Economics textbook is out of date because academic economists are more concerned with empirics and wealth inequality.
Furthermore, Smith pushes the view that economic theory itself is outdated. Not only because academic economists no longer study it or care about it, but supposedly because empirics have proven the laws of economics to be out of touch with reality.
He purports that Mankiw proposes theoretical insights that are skewed against redistribution because of his "libertarian political slant." This just seems to be another way of saying that it avoided most Keynesian mathematics and empiricism and focused on the foundational theory.
Many libertarians derive their views on economics from the Austrians. It's worth noting that Mankiw admittedly never read any Austrian economists in undergrad or grad school and only first read Hayek and added a note on Hayek to the 4th edition of his text in the mid-to-late 2000's. If you're conflating politics with economics, Mankiw is far from an Austrian or Austro-libertarian.
Smith neither addresses Mises' a priori defense of economic theory, or praxeology, nor Hayek's criticism of the scientism of the social sciences.
Smith also doesn't address the obvious: economic incentives explain the rise in empiricism in academia. And the politicization of the economy and growth in government explains why the economics professions have shifted politically left and focused their efforts on income distribution.
Smith states that new empirical methods prove that the assumption that economic actors are perfectly rational is false and uses this insight to disparage economists and libertarians relying on insights derived from the foundations of economics.
Disparaging Mankiw's lessons as skewed by libertarian thought ignores the fundamentals of Austro-libertarian economics. Mises did not rely on a view of perfect rationality to arrive at economic conclusions or to confirm the laws of economics. As Mises stated in Theory and History:
The sciences of human action starts from the fact that man purposefully aims at ends he has chosen. It is precisely this that all brands of positivism, behaviorism, and panphysicalism want either to deny altogether or to pass over in silence.
I will conclude with Mises' address to this very debate:
Economic statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification and falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events.
While Mankiw is no Austrian, we should not let Smith dictate the discussion or get away with wrongly conflating various economic and political views given that he's completely ignoring long-standing economic explanations that address his criticism of foundational economic insights.