The sound of panic drums has been heard loud and wide around the financial world since the collapse of Silicon Valley Bank, and the near collapse of Credit Suisse. The failure of a well-capitalized institution has been an enigma to some: how could a publicly recognized banking company suddenly go bankrupt and close its doors within 48 hours? To another lot, the collapse demonstrates the utter irrationality of markets. However, both of these views are misguided as a result of their biased theory of homogenous capital with no difference in quality, and their cognitive dissonance about the role that the exchange and asset functions of money play for its holders.   Money and the market The concept of “money” is a great reminder of the general state of ignorance of human beings. For example, the use of language is much older than our theoretical investigations into it, and much, much older than modern linguists investigating universal languages. For human beings, most actions precede correct comprehension of actions. Early humans used fire without necessarily having the need to understand its atomic, chemical nature. People’s awareness of money is similar to that of fire, except that we now understand fire better. This ignorance was shed to some extent with Carl Menger’s explanation of the emergence of money out of exchange. His core insight was that the emergence of the phenomenon, where a commodity comes into use as a general medium of exchange, is a natural culmination arising out differing salability of goods, and the freedom to accumulate and exchange that good. But understanding that money is a product of voluntary exchange and accumulation does not mean that we must then necessarily create and use political fiat currency as the sole medium of exchange; the simple possession of commodity money is enough to engage in exchange. The use of a commodity as a common medium of exchange probably arose with the first cities in ancient Mesopotamia, where a whole bunch of commodities traded against other non-money goods as common media of exchange in the market, as well as against each other at market-determined exchange rates. Mesopotamian monies are distinguished from ordinary commodities by being exchanged, sometimes for one another, but more often as payment for either tangible commodities or for less tangible goods, such as freedom from obligations of various sorts (taxes, loans with interest, etc.). Materials that functioned as money could be arranged then in ascending order of their value: barley, lead, copper or bronze, tin, silver, and gold. Of these, barley, lead, and copper or bronze functioned as cheaper monies; tin was mid-range, and silver and the much rarer gold were high-range monies. The existence of multiple monies circulating together in the market is a natural expression of economic calculation. Each of the various circulating monies had certain qualities which made them favorable for its holders, who in turn used them for particular forms of exchange. All of them together satisfied their respective holders more than any one of them could alone. The demand to hold each of the respective categories of money depended on the relative competence of monies in acting as a medium of exchange and a store of value. For example, gold was best for acting as a store of value or as a medium of exchange in high-value transactions, but wasn’t a good common medium of exchange due to its high relative value, which made holding it by everyone an impossibility. Silver and barley, however, were able to become the common medium with prices being quoted in both of them because barley gave direct utility as a primary food source and would thus be in high demand amongst commoners. Silver on the other hand, being a good store of value and having a lower relative value, served the needs of mass trade more successfully than other easily corroded metals such as tin and bronze. Monies that have been primarily used as a store of value have been selected due to their market-based ability to accumulate value as a store of purchasing power commanded by an individual, which tends to keep and grow in its relative value or purchasing power. This form of behavior has been documented as early as 1200 BC, but is much, much older. For example, an Egyptian woman cross-examined by a court scribe concerning gold found in her home explained: we got it by selling barley during the year of the hyenas when people went hungry. It illustrates the importance of a store of value that can hold its value even during times of great trouble, as a means of security for the masses. Pricing, or the act of economic calculation in an economy, is impossible without money, Prices reflect the relative valuation of goods via the demanded money. The money acts as the common yardstick that informs both parts of all prices, bid, and ask by buyer and seller. However, money is different from a physical yardstick in that its own value changes over time. When people are not in held bondage, they tend to trade away the bad yardsticks whose value either fluctuates violently or tends to lose its value quickly, for better yardsticks that are more stable and thus lend themselves towards a more rationally calculated economic order. As far back as the second millennium BC, Assyria, which was situated in northern Mesopotamia, provides ample evidence. The southern part of Mesopotamia, its center of influence, had adequate waters for barley cultivation, which in turn produced stable values for grain such as barley. Assyria, in the north, depended heavily on rainfall for its cultivation. This meant violently fluctuating values of grain, as opposed to its more stable value in the irrigation agriculture of Babylonia (southern Mesopotamia), which led to a situation where cheap metals such as lead, copper, and bronze circulated as the common medium of exchange in Assyria. Prices of goods have historically been posted in the common medium of exchange of the place. Wherever a seller, a buyer, and the broader market all valued, for example, silver, and were ready to hold it as a store of value, this allowed any other person to use it for purchases without any loss in its value. This allows the buyer to demand payments for his labor services in silver, and to carry silver with the expectation of it being accepted by others. The seller accepts the silver knowing that he can exchange it for other many other goods produced by others in the market. The modern arrangement of the monetary system through legislative means has prohibited the development of alternative measures of holding different kinds of money as legal tender in any practical way. The absence of any systemic changes in terms of the demand to hold fiat money by market participants, in spite of major gradual devaluations, is a testament to the coercive power of taxation. Money’s purchasing power depends on paper money being legal tender and being accepted by the government for the payment of taxes and duties. By giving its paper money legal privileges, the government subsidizes its demand by increasing its use in exchanges, therefore preventing it from becoming economically uncompetitive versus other monies such as gold, silver, bitcoin or certificates for them. This however is not odd, but another example of the harmful effects on consumers, and the beneficial effects on politically connected producers, namely banks, in the modern monetary system. When a government subsidizes domestic enterprises by tariffs, the public might be better off using cheaper foreign goods, but are forced to use possibly sub-standard and costly domestic products. The analogous costly nature of fiat monies is less acknowledged than that of tariffs before the failure of the fiat currency, but is ever present, particularly in its spectacular ability to reduce the ability of its holders to accumulate value. The decline in the purchasing power of the US dollar since 1913, when the dollar certificate which represented certain amounts of gold was reduced to only certificates made out of paper, is another illustration of the same.   Effects of monopoly on the money issue The perverse effects of having a single fiat money are only acknowledged once hyperinflation has set in, when the value of a currency falls much quicker than it changes hands. The most informed and connected market participants are the first ones to substitute the widely fluctuating domestic currency with a more stable currency, like the US dollar. Later, governments acknowledge the failure of its money, and the entire country’s monetary regime is changed. This was evident in the dollarization of currencies in countries such as Ecuador, El Salvador, and Zimbabwe. Fiat money systems with single paper money, as is the case with most nation-states today, can be contrasted with systems of paper money where other commodities such as gold and silver also function as legal tender and thus have the same playing field as the fiat money, which improves the long-run stability of the latter. The sudden downfall of fiat monetary systems as the monetary crisis of hyperinflation takes place is due to the absence of the development of a natural adjustment process in markets, where the overissue of one money is signaled as its devaluation in other monies. These devaluations can serve as signals to entrepreneurs, investors, and consumers to adjust their own money holdings. The absence of other monies serves as the root cause in creating and propagating fragile banking systems. This is similar to a market structure where the foundational primary industries such as iron, coal, etc. were to be nationalized, while producers of steel and coal products were left in private hands. It is the private production of iron, coal, and market-determined prices that allows for efficiency and creativity in long-term planning by multiple steel companies and other producers of iron products. The combination of governments restricting money to a single legal tender, and a central bank acting as the sole issuer of base money creates inefficiency and fragility throughout the banking system. The creation of a more anti-fragile system requires essential learning from the failures of individual banks. The supply of any given commodity or service which comes on the market is a function of its demand, of the purpose it serves for its demanders. Learning from failures is related to the need for survival in the marketplace, The market where the government is not actively subsidizing producers is not a place that is sympathetic to long-term, drawn-out failures; this can hardly be a disputable statement. The market becomes anti-fragile through successive failures and rooting out of firms, with the successful firms inheriting informational learning about what to do and what not to do in the market environment. Successful firms become efficient not because they can perfectly plan everything from the beginning but through learning not to make the same mistakes while surviving. This for practical purposes means firms investing in what makes them successful, and abstaining from the devotion of any resources toward identified failures. The “too big to fail” doctrine stops the filtering process by building up and creating more defects by saving failed banks and keeping the value of failed securities such as mortgage-backed securities afloat, making the entire system more fragile, leading only to bigger failures. The correction of these macroeconomic failures, however, is not to be found in macroeconomic but rather in microeconomic solutions. The reason often advanced for the legitimacy of governments power in private matters is its protection of the private property function, This claim is similar in some aspects to  government’s demand of a monopoly in violence over a geographical space in order to limit violence in private matters. So the central bank demands a monopoly of the issuance of money in order to stabilize the value of ordinary people’s money holdings. However, in light of the extraordinary amount of both theoretical and empirical evidence of the failure of central banks in maintaining a stable value of their money, the cheapest, easiest, and most just solution would be to accord to gold and silver the status of legal tender in tax payment. This is a modest solution in light of the successive inflationary episodes that impact the less well-off more seriously due to their binding budget constraints. The impact of suddenly higher prices has a disproportionate effect on people with less money stock than on people with more. It also has a larger impact on their ability to accumulate money than those who receive successive inflationary bouts of money. The effect of a sudden increase in prices on an individual during the last two years who had kept his money balance in liquid savings as bank deposits is more problematic than if he had kept it in the form of digital gold or silver bitcoin which could be quickly converted to dollars. This is because the gold, bitcoin and silver would have provided a premium for holding it, which is washed away quickly in fiat money balances during a general rise in the price level. Restoring the ability to pay taxes in gold and silver for everyone would put gold and silver at a more competitive level with the dollar, would stabilize our currencies, and raise the standard of living of the poorest among us.     Vibhu Vikramaidtya is a scholar with research interests in capital theory, monetary theory, and business cycles writing about events in the economy from a legal and economic standpoint. His other works can be found at the Austrian Economics Center, the Libertarian Institute, and beinglibetarian.com.  (0 COMMENTS)

An objection to libertarianism and classical liberalism is that total individual autonomy does not exist: even on the market, I cannot do anything I want. So what’s all the fuss about individual liberty? This is an important question about liberal political economy. The short answer is that in a regime of equal individual liberty, you are constrained by the equal liberty of all other sovereign individuals, while in a regime of non-liberty, you are constrained by the will of some individuals (or by stifling tribal customs). To obtain this result, one needs first to recognize scarcity: resources, if only time, are limited and not everybody can have or do everything he wants. The simplest microeconomic model, which you will find in any good microeconomics textbook, embodies these ideas. In order to maximize your utility (that is, improve your situation), you choose among all bundles of goods and services on the basis of both your preferences (tastes) and your budget constraint. Your budget constraint is composed of two things: the relative prices of all goods (and services) and your income; you can’t have everything. Your income is determined by how useful your productive capacities, yourself or your capital, are to others. Whatever his ultimate purpose (except negating your equal liberty), anybody may bid for what you directly or indirectly produce. Prices themselves are determined by everybody bidding on the goods he is pursuing. A free market is a continuous and silent auction, an important idea to understand. The analysis is basically the same for all, or nearly all, kinds of social interaction. In order to obtain what you consider to be your preferred situation, you constantly choose among available social interactions on the basis of your preferences and what is possible for you to do. What is possible for you to do—your “feasible set”—is determined by what you must sacrifice to pursue some means of happiness instead of some others, and by your abilities and capacities (which are likely partly innate, partly acquired, pace Adam Smith). You can’t do everything. Your feasible set is determined by your contribution to the happiness of others, the latter’s cooperation, and of course by the person you are. The relative terms at which you can pursue social opportunities are determined by the social consequences of what all others do with the same liberty as you have to pursue their individual happiness. These choices or decisions about your life as an adult can be made either by somebody for you (imposed on you), which, at least at a certain level, is called despotism or tyranny, or by yourself, which is called individual liberty. Among the objections to this economic way of looking at the social world, one claims that the simple model described above does not work: it is impossible or “inefficient” for all individuals to have their individual liberty limited only by the equal liberty of all others. The response to this objection is that the possibility and efficiency of an autoregulated economic and social order has been a major 18th-century discovery, notably by Adam Smith. James Buchanan, the 1986 laureate of the Nobel Prize in economics, similarly explained that “we can all be free” (his emphasis). Economics demonstrates that the economy and society generally work better without commands from a coercive authority. What the “generally” exactly covers is a controversial matter, but it is difficult to rationally discuss it without some knowledge of economics. “Market failures” exist, of course, but they are generally much less constraining than the failures of government coercion. An illustration a contrario was given by the Russian official who, after the breakup of the Soviet Union, asked British economist Paul Seabright: “Who is in charge of the supply of bread to the population of London?” A bread czar is not necessary. Historically and theoretically, there is more bread without one. Other objections are more ethical, which means that they more explicitly require a value judgment. Instead of plunging into that rabbit hole, let me quote Anthony de Jasay, which raises the right questions (from “Before Resorting to Politics,” in de Jasay’s Against Politics: On Government, Anarchy, and Order [Routledge, 1997], p. 152): If consequentialism is circular, depending in all cases involving harm or interpersonal comparisons on a value judgement about its own validity, the standard argument  for letting the state to do all the good we can find for it to do, and accordingly allowing politics to have unrestricted scope, falls to the ground. Its collapse releases and activates and activates the basic presumption against coercion, a presumption that can be derived either from an axiom about the practice of choice, or from a social convention of “live and let live,” of letting each do what it will if doing so involves, roughly speaking, no harm to others. Accepting, and acting on, this presumption also presupposes a value judgement, but it is one that demands far less of our moral credulity than any consequentialist alternative I can think of. This would take us much farther. There are many other objections and further explanations, but I could only promise, at most, half a lesson. (0 COMMENTS)

The following letter was published in today’s Carmel Pine Cone. The Monterey city government is walking its citizens into a horrible mess. When I attended the May 30 meeting in which we discussed its proposed compulsory rent registry, I talked briefly to Mayor Tyller Williamson. I told him that economists are almost unanimous in their view that rent controls cause shortages of housing, cause landlords to cut down on maintenance, and discourage new construction. He replied that he doesn’t advocate rent control but, instead, favors what he called “rent stabilization.” It’s a distinction without a difference. Rent stabilization is simply a form of rent control because it’s a government limit on rents. The compulsory rent registry that the Monterey city council is about to vote for will be the first step to rent control. I don’t know if the mayor will regret it but a lot of people in Monterey will. David R. Henderson Research Fellow Hoover Institution Here’s the 7 hour meeting at which the rental registry was discussed and voted for. One of the city council members, Alan Haffa, with whom I had carried on a civil email discussion early in the week, voted for the registry after admitting a lot of the problems. Notice what he says at about the 5:22:43 point: Those of you who are professionals know what the prices are, you know what rents are, but your clients, your tenants may not. So you have the information but they don’t. I wrote him this morning and asked him how the tenants manage to fill out their monthly rent check without knowing the rents. He has not got back to me. The pic above shows the effects of long-term rent control in the South Bronx. It began as a temporary measure during World War II. (0 COMMENTS)

I’m a big fan of Matt Yglesias, but I found this off hand remark to be both inaccurate and in poor taste: Analysts now think China’s GDP may not overtake America’s after all, good news for the world, albeit slightly bad news for “One Billion Americans” book sales.  The only meaningful way of comparing countries is on a PPP basis.  And on that basis, China’s total GDP is larger than that of the US.  The media only uses current exchange rate GDP measures when they wish to belittle China.  Nowhere in the media will you find stories reporting the “Japanese Great Depression of 2012-22”, even though in US dollar terms Japan’s GDP has plummeted in recent years.  The media instinctively knows that a dollar measure of Japan’s GDP is meaningless.  If you don’t believe me, I’d suggest visiting Beijing and staying in a 4-star modern hotel, for $48/night.  Or ride the Beijing subway, which is light years better than the NYC subway, and costs about 50 cents for a ride.  Even real estate is cheap in China, if priced in rental equivalent terms (as we do when constructing our GDP data in the US.) But let’s say I’m wrong and market exchange rates are the correct way to make comparisons.  In that case, China’s GDP/person would be roughly 1/6th the level in the US.  In other words, China would be a very poor country.  Then Yglesias would essentially be saying, “Good news, the 1.4 billion Chinese people are likely to stay very poor.” The US government is now actively trying to sabotage the Chinese economy.  We gloat every time they fail, and wring our hands when they achieve a limited success, such as producing their own smart phone chips.  And then our media wonders why the Chinese consumers are moving away from Apple iPhones for “nationalistic” reasons.  I guess nationalism is a disease that only affects the Chinese, not us Americans: But the biggest potential threat to Apple may be something more nebulous: a resurgence in Chinese nationalism that spurs everyday consumers to shun the iPhone and other foreign-branded devices. Governments that do great harm to other countries can always find an ethical fig leaf to justify their actions.  I suppose one could argue that a richer China is a threat to world peace.  But where are the academic studies that suggest that economic growth increases warfare?  Doesn’t the correlation usually go in the opposite direction?  Don’t rich people have more to lose from nuclear war?  Social science research has recently received a great deal of criticism, and rightly so.  The replication crisis suggests that very little published research is of any value.  But let’s say I’m wrong.  Is there any reliable research supporting nationalism?  Tyler Cowen recently asked AI doomsters to show him the mathematical model that demonstrates the existential risk resulting from of future gains in AI. I’m asking someone to show me the model that demonstrates how nationalistic policies aimed at hurting the welfare of a nation of 1.4 billion people and causing bitter resentment in that country is likely to make the world a better place.  Heck, I’d even be happy if someone could show me a model where gloating over economic distress that we caused in China will make the world a safer place. If you could push a button and make China much poorer, causing unimaginable harm to 1.4 billion people, would you have enough confidence in the social science model in your head to push that button?  Should we be rooting for mass poverty? (1 COMMENTS)

Argentina has yet to elect a new president, but based on the leading candidates, economic liberalization is inevitable.  On August 11, when a national primary election was held, the pro-government coalition led by current Minister of Economy Sergio Massa received a meager 27% of the total vote, behind two opposition leaders: Javier Milei (30%) and Patricia Bullrich (28%). Heading into the general election in October, both Milei and Bullrich promise strong liberalizing reforms for Argentina’s repressed economy. Though their proposals might look opposed at first glance, what separates Milei’s and Bullrich’s approaches is a question of how fast this liberalization should take place. Milei’s approach resembles shock therapy, while Bullrich’s is more moderate. Their economic teams, which are full of former officials from previous administrations, reflect this view. Milei is supported by Austrian-school economists, Bullrich by the classical liberal mainstream. Javier Milei, a libertarian, self-described ‘anarcho-capitalist,’ and an outsider who only started his political career in 2021, has a radical platform to restructure Argentina’s economy. He plans to adopt the American dollar, do away with the Argentine peso, and close Argentina’s Central Bank –– which he blames for the country’s catastrophic inflation history. He has also called for tax cuts, sweeping public spending reductions, the privatization of some state-owned companies, and the elimination of over half of the country’s ministries. That’s a lot of big changes to propose.  Former Minister of Security Patricia Bullrich agrees that the country needs to liberalize, but takes a more restrained approach. Instead of dollarizing the economy, she says Argentina should allow pesos and dollars to compete, which implies getting rid of currency controls by the Central Bank but not its elimination. Like Milei, she is a proponent of tax cuts, but only insofar as they are compatible with a balanced budget. Though privatizations are absent from her platform, she stresses the need to improve the operations and profitability of state-owned companies. The debate between Milei and Bullrich –– on how to end Argentina’s seemingly permanent fiscal crises –– resembles that of 2015, when then-candidate Mauricio Macri debated whether he should take a ‘gradualist’ or a ‘shocking’ course of action. In the end, President Macri’s administration decided on the gradualist approach, which resulted in a notorious failure that neither Milei and Bullrich want to repeat. Indeed, nobody wants another liberalizing attempt in Argentina to end in an IMF bailout, particularly as the consequences of failure grow more acute. In a closed, heavily regulated economy with over 40% the population living under the poverty line, an ever-increasing debt and 120% annual inflation, liberalization cannot be avoided. Undoubtedly, the costs of liberalization will be high. Lifting barriers to trade could threaten businesses which have grown accustomed to protectionism. Reducing government handouts would hurt the poor. Modernizing labor legislation and privatizing state companies would almost certainly result in laying off unproductive workers. Any major reform––even a necessary one––produces undesirable outcomes. But reforming Argentina’s economy is worth these downsides. And despite the known differences in their approaches, there is much agreement between the two main contenders to Argentina’s presidency. Since becoming the front-runner, Milei has begun lowering expectations for immediate change, saying that dollarization, for example, could take years. He says the conditions for implementing reform include a balanced budget and significant changes in tax legislation. Bullrich, in turn, is becoming more hawkish. She hopes to attract voters who are considering Milei but doubt his ability to implement reform, given his lack of experience in office and that his coalition will not hold a majority in Congress after the election. She says that only her administration could actually implement change in Argentina. Thus, Milei and Bullrich have different platforms but are increasingly converging. One thing is certain: Liberalization is coming to Argentina. The only question is how fast.   Marcos Falcone is the Project Manager of Fundación Libertad and a regular contributor to Forbes Argentina. His writing has also appeared in The Washington Post, National Review, and Reason, among others. He is based in Buenos Aires, Argentina. (0 COMMENTS)

The recent Supreme Court ruling condemning Harvard and UNC’s race-based admissions policies has re-ignited the conversation about how to improve opportunities for bright minority students. In this week’s episode, economist Roland Fryer has a proposal to improve the pipeline of minority applicants, but he doesn’t think the Ivy League universities will go for it. He also explains how to tell if a racial disparity is discrimination, and describes how he advises companies that are trying to address racial disparities. We’d like to hear your thoughts on this episode. What most surprised you? What changed your mind? Use the prompts below and share your thoughts in the comments, or drop us a line anytime at econlib@liberytfund.org.     1 – Fryer begins the episode by describing three explanations for racial disparities. Becker‘s theory of tastes, Arrow‘s theory of stereotypes, and sociologists’ theory of structural-based discrimination. Which of those (or what combination) seem(s) like the most plausible explanation of racial disparities to you?   2 – Why would seeing the same piece of evidence cause two people with opposite views to both become more confident of their polarized perspective? Can you think of a circumstance when you have observed this effect?   3 – Is the presence of statistical disparities between members of different racial groups evidence of discrimination? What methods does Fryer recommend for identifying the difference, and how compelling does that seem to you?   4 – Companies that Fryer has advised seem clueless about aligning their hiring criteria with the characteristics that make employees successful in their roles. Is this true, in your experience? If so, why is this a problem that companies are ignoring?   5 – Fryer heavily emphasizes paths or pipelines as contributors to racial disparities, meaning that the path that leads to a particular job or admission to university might not have as many minority individuals on it leading to a disparity. Fryer suggests elite universities start feeder middle and high schools to improve college-readiness for promising underprivileged students. Pick a career or opportunity and explain how the pipeline problem could be addressed in that situation. Katie Flavin was the “original intern” at Liberty Fund in 2012, and has since been on the EconTalk team for almost a decade. She is excited to be the new Community Coordinator at Liberty Fund. (1 COMMENTS)

I was at a Labor Day  barbecue last Monday at a friend’s house. There was an interesting mix of people. My best conversation was with a woman who had immigrated from the Philippines as a teenager in 1976 and had grown up in poverty. She, like me, had a real appreciation of her adopted country. She had immediately noticed the higher standard of living here. How could she not? But she was surprised to learn that when I immigrated to the United States from Canada on a student visa in 1972, I immediately noticed the higher standard of living also; I estimated it as being 15 to 20 percent higher. Later, she and I were in a discussion with a woman (I’ll call her L since I don’t have her permission to quote her) who gets much of her news from MSNBC and likes both Robert Reich and Jared Bernstein, who is the chairman of President Biden’s Council of Economic Advisers. The discussion was quite amicable. (L seemed impressed by the fact that I had debated both Reich and Bernstein, the former on KQED-FM and the latter at a Mercatus event in Annapolis in the 1990s.) L commented matter of factly that the vast majority of Americans couldn’t save money. Both J (the woman from the Philippines) and I disagreed strongly. I think it was for the same reason. We both had come from places that were poorer than the United States, extremely poorer in J’s case, and it was easy to see how people could save if they cut back on their luxuries that they have come to regard as necessities. For example, my wife and I often order take out food on Saturday for lunch and the bill is usually over $40. But we could make sandwiches at home for a cost of a a few bucks and do it in less time than it takes me to go pick up the food. Or we could get takeout from Carl’s Jr. for a total of about $15. One of the best parts of Dwight Lee’s and Richard McKenzie’s book Getting Rich in American: 8 Simple Rules for Building a Fortune and a Satisfying Life is the chapter on resisting temptation. I have found that easy to do in my life. I think a big part of the reason was that I got an allowance of 10 cents a week when I was in single digits, 25 cents a week when I was a tweener, and one dollar a week when I was a teenager in the mid-1960s. To do things that cost money, I needed to figure out ways to make money. Because I had to work hard for that money, I learned not to waste it. Most people I run into have more trouble than I had in saving money. It’s not easy for many of them. But that doesn’t mean they can’t do it. Relatedly, I was watching Laura Ingraham earlier this week and she quoted, the way people on the right, left, and middle often do, a study that said that most people who had an unexpected expense of $400 couldn’t pay it. The study didn’t say that at all, as I discussed here. That then led to her saying that most people live paycheck to paycheck. That last one may be true, but what it leaves out is that they are making choices and could make different choices. Easy? Not necessarily. But doable? Absolutely.   (1 COMMENTS)

Should the Supreme Court have term limits as opposed to lifetime appointments? A version of this idea has been floating around lately, so I decided to give it a look. Let me say upfront that I don’t actually have a very strong opinion on whether set terms for Supreme Court Justices would be better than a lifetime appointment, mostly because I haven’t thought about it for very long. But for now, I’ll try to review the idea positively.  From what I understand, the main reason for Supreme Court Justices to have a lifetime appointment is to make them less subject to political influence. The President can remove members of his cabinet at any time for any reason, which gives the President a great deal of influence over them. Other important federal positions can be removed by Congress, or at the very least maintaining a position depends on continued re-confirmation by Congress. If Supreme Court Justices could be removed from office by either the President or Congress, this could have the effect of putting members of the Supreme Court under the thumb of the President or Congress. This could inhibit their ability to issue rulings that are correct but unpopular, as well as undercut the ability of the Supreme Court to serve as a check on the other two branches.  But if this was the case, insulating Supreme Court Justices from influence from the other two branches would only require that those branches not be able to fire a Justice for voting the “wrong” way – and that doesn’t require a lifetime appointment. With the term limit system under proposal, a Justice would serve for 18 years – and during that time they would be just as protected from removal for unpopular rulings as they are currently. Once their term has completed, according to this proposal, they would be designated as “senior Justices” and continue to receive their full salary for the remainder of their life and could serve in an assisting capacity to the active justices on the Supreme Court. In instances where a sitting Justice recuses themselves from a case, one of these “senior Justices” can return to the bench to rule in their place, ensuring the case is still argued before nine justices. The same could be done in the case of an early retirement or if a sitting Justice dies – their spot could be temporarily filled by one of these senior Justices until a proper replacement is appointed. Justice terms would be timed so that each presidential administration appoints two Justices, one in the first year of the administration and the other in the third year.  A move like this wouldn’t be without some precedent, of course. The legislative branch of government has already imposed term limits on the executive branch. On the topic of executive term limits, Thomas Jefferson once said: If some termination to the services of the chief magistrate be not fixed by the Constitution, or supplied by practice, his office, nominally for years, will in fact, become for life; and history shows how easily that degenerates into an inheritance. In the beginning, limitations on Presidential terms were, in Jefferson’s phrasing, “supplied by practice” with most Presidents deferring to the so-called “two-term precedent” established by George Washington and Jefferson himself. Of course, this was simply a tradition, not a legal restriction, and it depended on Presidents willingly engaging in obedience to the unenforceable. After this precedent was broken by FDR, Congress moved from having this limitation “supplied by practice” and made it “fixed by the Constitution” with the 22nd Amendment.  I don’t think the odds of the Supreme Court term limit proposal actually passing are very good, but it does raise an interesting question. Let’s just imagine for a moment that it did pass. It would mean that we’d be in a situation where the legislative branch of government had imposed term limits on both the executive and judicial branches of government. This raises an obvious question – if term limits are good for the executive and judicial branches of government, might term limits also be good for the legislative branch? Such limits could only be created by the legislative branch itself. If the legislative branch put term limits on the other two branches of government, would they apply similar limitations to themselves, or ensure they continue to face no such limitations? And what are the implications of that?  Discuss!   (0 COMMENTS)

I won’t confess everything but I will admit that I was once a great fan of Murray Rothbard (1926-1995), the economist who was nicknamed “Mr. Libertarian.” I was reminded of that when I saw him mentioned in a Financial Times column a few days ago: Jonathan Derbyshire, “Libertarianism Is Having a Moment With Argentina’s Milei,” August 31, 2023. The column focuses on Javier Milei, who is the favorite to win the upcoming presidential election in Argentina (see also “Argentina Could Get Its First Libertarian President,” The Economist, January 14, 2023). Milei, who defines himself as an anarcho-capitalist à la Rothbard, is a fan of the latter and named one of his dogs after him. The fact that Milei is apparently also a fan of Donald Trump does not bode well for the future. The Financial Times columnist does get Trump’s anti-libertarianism right, albeit not to all its extent. But he is wrong in suggesting that Republican primaries candidate Vivek Ramaswamy could (or, at any rate, should) be embraced by the libertarian movement. Anti-libertarians have been elected before Trump, but this is not an excuse for libertarians to compete down to the bottom of the barrel.  If we are to believe The Economist, many of Mr. Milei’s political allies are not exactly paragons of libertarianism either. I do think that libertarianism and classical liberalism should be a big tent, but there is a limit somewhere. Rothbard’s system had an apparent advantage, which was also its big defect: it had an obvious, definitive, nearly religious answer to any and all questions. I was bothered by some of his claims, like the right of a child to run away from home whenever he wants to because he is thereby asserting his right of self-ownership (The Ethics of Liberty, p. 102). I also had doubts about his economics, although it took me some time to recognize their significance. He had a deep distaste for, or fear of, anything that looked like mathematics. He did not realize that, as J. Williard Gibbs said, mathematics is a language. He did not see the relationship between mathematics and logic. For instance, he could not understand that “marginal utility” cannot be ordinal (that is, just a ranking as opposed to a cardinal measure) if total utility is ordinal, for it is mathematically impossible to cut an ordinal value into identifiable marginal pieces. What Rothbard was missing had been recognized by John Hicks (a future Nobel economics laureate) and Roy Allen in two famous 1934 Economica articles, “A Reconsideration of the Theory of Value.” Hicks and Allen formalized an ordinal theory of utility, which Irving Fisher, Vilfredo Pareto, and perhaps other economists had already postulated but not exactly specified. Lionel Robbins, who represented a mix of the Austrian and neoclassical schools of economics, mentioned the Hicks and Allen formalization in the 1935 edition of his An Essay on the Nature of Significance of Economic Science. Changing one’s opinion for good reasons is not a cardinal sin. Sometime around the turn of the millennium, I asked Anthony de Jasay, who described himself as a liberal and an anarchist, why he did not use the anarcho-capitalist label. He answered, “I do not wish to be counted as one of that company,” or perhaps simply “I don’t like the company.” (Although I quoted the first sentence elsewhere, the latter also hangs in my memory. I should have written it down at the time.) I think Tony’s statement was meant as a criticism of the Rothbardian sort of anarcho-capitalism. Let’s hope Mr. Milei wins the election in October and does not oblige libertarians all over the world to walk back their support or, worse, to Trumpianize the libertarian movement. (0 COMMENTS)

Bloomberg recently discussed a new working paper out of the SF Fed, co-authored by Òscar Jordà, Sanjay R. Singh, and Alan M. Taylor (JST). They argued that monetary policy has long lasting effects on productivity and output.  The following graph is from the SF Fed letter that summarizes a longer JST research paper, which examines data from 1900 to 2015, excluding the two World Wars: Here’s the abstract: Monetary policy is often regarded as having only temporary effects on the economy, moderating the expansions and contractions that make up the business cycle. However, it is possible for monetary policy to affect an economy’s long-run trajectory. Analyzing cross-country data for a set of large national economies since 1900 suggests that tight monetary policy can reduce potential output even after a decade. By contrast, loose monetary policy does not appear to raise long-run potential. Such effects may be important for assessing the preferred stance of monetary policy. Unfortunately, JST use interest rates as an indicator of the stance of monetary policy.  Long-time readers know that I view interest rates as being among the worst of all possible policy indicators.  Even JST recognize the problem: A key challenge for analyzing data on the macroeconomy is isolating the relationships between economic variables that represent causation rather than correlation. If interest rates are raised when the economy is buoyant and inflation is rising, a simple correlation analysis could mistakenly suggest that high interest rates cause high inflation. In reality, interest rates are typically high because the central bank is trying to bring inflation down. Accounting for such reverse causality in macroeconomic data is crucial for understanding business cycle dynamics and the influence of monetary policy. It’s actually much worse than that.  Rates are not high during periods of high inflation “because the central bank is trying to bring inflation down”, they are high because inflation discourages saving and encourages investment for any given nominal interest rate.  High inflation would cause high interest rates even in an economy with no central bank, and thus no monetary policy.  I’m glad JST recognize the problem with using interest rates, but it’s even worse than they assume.  Here’s how they address the problem: The approach we use to separate causation from correlation is based on a simple idea from international economics. Over the past century or more, smaller economies have sometimes pegged their exchange rate to the currency of a bigger economy, usually referred to as the base. In that scenario, the returns on assets with similar risk characteristics will move at a similar pace between the pegging and the base economies. . . .  Thus, when the base economy changes interest rates in response to domestic economic conditions, interest rates in the pegging economy will move in tandem, even if that economy’s domestic conditions do not require such an adjustment to interest rates. We use these externally driven interest rate movements as a source of random variation in monetary policy for the pegging economy. Because the change in financial conditions is independent of economic conditions in the pegging country, the resulting impacts are more likely to reflect causation rather than correlation. That’s a nice idea, but does it really solve the problem?  Suppose that the Canadian dollar is pegged to the US dollar (as in the 1920s.)  Is the claim that the fed funds rate is not a useful indicator of the impact of monetary policy on Seattle’s economy, but is a useful indicator of the impact of monetary policy on Vancouver’s economy?  I suppose you could argue that Seattle’s interest rate is in some sense endogenous—linked to the performance of the US economy—and Vancouver’s interest interest rate movements are independent of the US economy, and thus reflect “monetary policy”.  But in practice the global business cycle is fairly strongly correlated, especially when there are major slumps such as 1921, 1930, 1974 and 2009. The first part of the study examines monetary shocks under the classical gold standard (1900-14).  At that time, the US had no central bank, so it would seem that we had no “monetary policy”.  But in their longer paper, Great Britain is assumed to be the global monetary policymaker during this period—setting interest rates for all countries on the gold standard.  That’s actually a fairly widely held view (Keynes called the BoE the conductor of the international orchestra), but I think it’s wrong.   Under a gold standard regime, the world price level (and NGDP) is determined by the global supply and demand for gold.  The BoE had no direct impact on global gold supply and very little impact on global gold demand.  I suspect it was like the little boy that ran out in front of the parade, and then took credit for the parade’s path through the city.  Britain had little impact on global interest rates; rather the BoE (mostly) moved their policy rate in tandem with changes in the global natural interest rate.  (Here the “natural rate” refers to the rate that stabilizes nominal gold prices, not the rate that stabilizes the global price level for goods and services.) Even during the interwar years, the gold standard continued to exert an effect on global monetary conditions.  There were two tight money policies that brought the price level back close to the pre-war level.  The first (in late 1920) led to a severe recession in 1921, followed by the roaring 20s.  The second (in late 1929) led to a depressed economy throughout the 1930s.  In the latter case, however, other policies such as the NIRA played a major role in lengthening the Depression.  Even so, one can plausibly argue that the monetary policy mistakes of 1929-33 led to the bad supply side policies of 1930-39. Another period of high interest rates occurred in the late 1960s.  This was followed by slower growth in real GDP and productivity during the 1970s and early 1980s.  This slowdown was not caused by the tight money policy of the late 1960s, however, because monetary policy was not in fact contractionary according to any reasonable definition.  During the 1960s and 1970s, money growth, inflation and NGDP growth all accelerated sharply.  This is about as perfect an example of the Fisher effect as one could find.  High interest rates reflected easy money.  And this pattern was not limited to the US, similar outcomes occurred in a wide range of countries. In recent decades, trend RGDP growth has been slowing.  The high interest rates of 2000 were followed by somewhat slower growth in the early 2000s, and the rising rates of 2005-06 were followed by slower growth over the following decade.  I doubt whether monetary policy had any significant impact on slowing growth during 2000-2007, but it probably played a role in slower growth during 2008-15.  In the longer paper JST try to control for real factors that impact long run productivity growth trends, but that’s not easy to do.  And equilibrium interest rates are certainly linked to the factors driving changes in long run growth. To summarize, I have some sympathy for the claim that monetary contraction can have surprisingly long-lived effects, although the 12-year impact seems a bit implausible.  Even the Great Depression doesn’t seem to have permanently impacted US real output or productivity.  Indeed productivity rose at an unusually rapid rate during the 1930s, a period dominated by the most contractionary monetary shock in US history.    More importantly, I’d like to see economists move away from using interest rates as an indicator of monetary shocks. In a now classic paper, Barsky and Summers found that higher interest rates had an inflationary effect under the classical gold stand.  Higher rates led to a higher opportunity cost of holding (zero interest) gold, and this reduced gold demand.  Under the gold standard, lower gold demand is inflationary, as it reduces the purchasing power of the medium of account.  This explains the so-called “Gibson Paradox”, the positive correlation between interest rates and the global price level under the classical gold standard.  And in this case the explanation is not “long and variable lags”; the relationship between interest rates and prices is causal—higher rates cause higher prices for goods and services.  Their paper only makes sense if one assumes that the BoE did not control global monetary conditions.   (1 COMMENTS)