Category: Economics

Brexit

The reality of Brexit unleashes a flood of questions, most of which cannot be answer for quite a while. The near term consequences of the UK’s exit from the European Union will depend on the details of the divorce, which will take several years to unfold. Divorces can take place smoothly and amicably or not. The result—the new reality—can be seen as fair (but invariably diminished on both sides, at least economically) or not.

My concern in this note is whether the underlying public sentiments that pushed Brexit over the finish line—the fear of job losses and cultural dilution as a result of excessive immigration—herald a retreat from the globalization that has dramatically raised standards of living and reduced poverty around the world in the last several decades.

As we know from Adam Smith, our ability to increase our output and thus income rests heavily on the productivity gains made possible by specialization. But we can only specialize in our work and output if we are able to trade what we produce for the other things we need and want to consume. The freer and more extensively we can trade, the more we can specialize and prosper. As I never tire of pointing out, the boundaries of trading within the family, the village, the province and the country and beyond are largely arbitrary. However, trade requires shared rules and standards. Within the family these can be more informally developed and understood. Even within villages customary understandings of weights and measures and value may suffice among people who know each other. But as the domain of trade expands and buyers and sellers no longer know each other, such standards and rules need to be formalized into laws and their enforcement supported by courts and impartial judges. Parties to agreements need to be confident that their contract will be enforced as agreed.

The U.S. Constitution gives our federal government the power and responsibility to establish standards of weights and measures and the monetary unit without which trade within the United States would be greatly encumbered. Agreeing on the voltage standard for electrical devises is one of thousands of examples. Businesses themselves recognize the benefits to themselves and their customers of harmonizing many elements of the products they produce and trade. Thus bottom up negotiations over many years have produced the Uniform Commercial Code, which removes many unnecessary costs of trading across different legal jurisdictions through standardization.

Trade across national borders could not exist without international laws and understandings about the nature of contracts and their enforcement, the description and measure of content and statements of value (unit of account), etc. Leaving the EU does not free the UK from the need to conform to such standards if they wish to continue trading with the rest of the world.

In their efforts to facilitate free trade within Europe by harmonizing product standards, the European Commission bureaucrats in Brussels got off to a bad start by failing to distinguish between those standards that facilitated trade from those that unnecessarily limited product diversity and competition. Their definition of the acceptable features of bananas has become the poster child of their misguided and laughable efforts. This does not mean, however, that the facilitation of international (or intra EU) trade does not need harmonized standards (weights and measures of food content, length, volume, etc.) in order to remove unproductive and unnecessary costs of trade.

The huge benefits of trade—global trade—also require that each of us can produce (work at) whatever we do best. The fullest measure of such freedom—free labor mobility—would require the free movement of labor to the best jobs they can find and this is what the EU required of its members within Europe. It is also what has raised fears and reactions within the UK of having, for example, too many Polish plumbers. As the vote for Brexit dramatically demonstrates, we dare not ignore these fears and they are not easily dealt with. See my earlier discussion of this challenge: https://wcoats.wordpress.com/2016/06/11/the-challenges-of-change-globalization-immigration-and-technology/

The growing anti-immigrant sentiments in continental Europe have little to do with free labor mobility within the EU and are more directed to the refugee problem created by the wars in the Middle East. The British vote to leave the EU seems to reflect some mix of a reaction to ill informed harmonization measures taken by the EU (largely some time ago) and a lack of appreciation of the benefits of properly directed harmonization of codes and standards as well as of fears of losing jobs to immigrants (and on the part of some, a natural fear of strangers). The key question for the future of free trade and globalization and the enormous benefits they bring is whether Brexit is the beginning of a closing of that door. We need to make every effort to address and mitigate these fears so that that does not happen.

The establishment of an efficient international trading order (the international establishment of rules and laws and their enforcement) can come about in a variety of ways. The international agreements and organizations established after World War II to perform this role (e.g., UN, WTO, IMF, World Bank) have generally served this international order well though they are not perfect. The statement by Boris Johnson, former mayor of London and possible successor to British Prime Minister David Cameron, that: “I believe we now have a glorious opportunity: We can pass our laws and set our taxes entirely according to the needs of the U.K. economy,” either reflects stunning ignorance of the role of international law in underpinning globalization or blatant dishonesty. The international institutions that oversee our liberal international order need to be preserved and where appropriate strengthened, not destroyed.

The European Union itself was always much more than an economic (free trade) project. Following WWII after centuries of devastating wars, the European project was always more about establishing the mechanisms of political cooperation that would avoid another European war. It has been stunningly successful in this endeavor, but still struggles to find the right balance in the devolution of authority and the best formulation of European wide governments for preserving peace and promoting economic well-being. An excellent discussion of these issues can be found in Dalibor Rohac’s Toward an Imperfect Union: A Conservatives Case for the EU.

The consequences of Brexit for Britain (what ever might be left of it) and for the EU (what ever might be left of it) will not be known for many years. But the risks of an inward looking nationalism and a retreat from a liberal international order that it seems to reflect should be taken seriously and resisted vigorously.

The challenges of change: Globalization, Immigration, and Technology

“Future shock is the shattering stress and disorientation that we induce in individuals by subjecting them to too much change in too short a time.”  Alvin Toffler 1970

Some people welcome change as a challenge and embrace the adventures it provides, while others resist it as threatening and disruptive. In addition to differences in temperament, some people gain from specific changes while others lose. Starting with the industrial revolution in the mid eighteenth century, the worlds’ economic life has undergone dramatic changes that continue to this day. As a result the average family’s material well-being has sky rocketed to unbelievable heights. But in the process equally troublesome changes were imposed on almost everyone. To maintain (or regain) public support for the policies that allow these beneficial but disruptive changes, we need to carefully consider what policies would ease or compensate for the costs that often accompany them.

Across the world the standard of living saw virtually no change for thousands of years. Starting with the industrial revolution 250 years ago incomes and individual welfare have exploded. From $712 in 1820, world annual GDP per person shot up to $7,814 by 2010 (in 1990 dollars). The number of people living in extreme poverty, which peaked at 2.2 billion in 1970, has been cut in half since then. The percent of the world’s population living on less than $2 a day has plunged from 61% in 1980 to 13% in 2012.[1]

These dramatic gains are the result of increases in what each person was able to produce. Individual output has dramatically increased in the last several centuries because trade has allowed more specialized and productive ways of organizing work to serve larger markets (factories, etc) supported by new technologies (including improvements in public health and medicine) and better transportation infrastructure. We might summarize these factors as expansions of product markets because of cheaper and freer trade, improved labor output from freer labor mobility to move to the best paying jobs and better tools from investments in technical innovation. If we extend these factors across national boundaries we call these “globalization,” “immigration” and “technical innovation.”

On average, the world’s population has benefited enormously from each of these, i.e., from “globalization,” “immigration” and “technology.” But each of these has also disrupted the status quo, imposing sometimes-painful adjustments on business owners and workers whose products or skills are no longer wanted or needed, not to mention many misstarts and failure along the way.

Those who have lost jobs to technical innovations, cheaper imports, or immigrants are understandably unhappy at the changes, though in the longer run better, higher paying jobs may have been created in the process. Donald Trump’s promise of a Mexican wall and high tariffs on Chinese imports seem to resonate with many of these people. Given the enormous, widely shared benefits from globalization, immigration and technology, it is very desirable to adopt policies and approaches to promoting these activities that minimize and mitigate their damage to specific individuals. I will lightly touch on this need with regard to globalization and technology as a prelude to the particularly challenging issue of immigration.

Technology: While displaced workers have long complained about the hardships imposed on them by improved technology (though manufacturing output in the U.S. is at an all time high, improved productivity has resulted in a continual decline in manufacturing employment), the benefits to society as a whole are so obvious that few would propose freezing or slowing technological progress in order to protect their jobs. Of course, the adoption of new technologies concerns more than its impact on employment (e.g. public safety) but the case for allowing such progress basically makes itself. Instead we attempt to ease the transition to the skills needed for newer jobs through adapting educational programs and adopting retraining programs to the changing employment needs (though firms tend to do a better job providing such training themselves than does the government) while providing temporary unemployment compensation.

Globalization: The impact of freer and more extensive cross border trade on employment is similar to the impact of technology and the policy approaches are similar. The freer mobility of capital aspect of globalization will not be discussed here while the freer mobility of labor is discussed under the heading of immigration. While the benefits from trade are enormous and those from further liberalization of trade are still worth the effort, these benefits are less obvious to the general public than are the costs to a limited number of individuals. While strengthening those programs that help displaced workers find and qualify for the new jobs created (essentially the same programs needed for adjusting to technical improvements) is desirable, we also need to make a more convincing case for the benefits of trade. All studies of the Trans-Pacific Partnership (TPP) agreement forecast increases in American income from its adoption (and obviously in the incomes of our trading partners as well), but such projections are more abstract and thus carry less emotional and political impact than would examples of the specific industries and firms that would benefit from increased exports (though it is not always possible to anticipate what these will be).

The benefits of trade and globalization are not just economic. Countries that trade with each other and companies that operate around the globe are less likely to go to war with each other. Robert Samuelson noted that “If there was an organizing principle to U.S. foreign policy after the Cold War, it was globalization.” Balancing China’s growing influence in Asia is clearly an important motivation for TPP. /us-presidential-candidates-shouldnt-put-globalization-in-retreat/2016/06/05/

Immigration: The issues raised by immigration are much more complex and challenging. Capital and labor mobility are necessary for maximizing the output of existing labor and capital resources (deploying each where its marginal product is highest). But along with the immigration of hard working people looking for better opportunities and greater freedom, the United States has enjoyed the extra benefit of attracting to its shores the world’s “best and brightest.” This has been true from its founding to this very day. Nonetheless, immigrants sometimes displace existing workers from their jobs, who most often (but not always) move to better ones.

The flaws of the U.S. immigration laws (preference for extended family is crowding out the quotas for badly needed skilled workers, the status of the undocumented MUST be resolved, etc.) are well known. The bill passed by the U.S. Senate in 2013 (S-744), which was drafted by the bipartisan gang of eight (which included Marco Rubio back when he cared about legislating in the American interest) deserves serious consideration.

The economic/jobs aspect of immigration is only part of the challenges it raises, however. Our genetic clannishness, which arouses our fear and hostility toward “others” can be softened and overcome by our genetic curiosity. Exposure to other peoples and cultures can be exciting and enriching. Deriving the economic as well as the cultural benefits of immigration both depend on the success with which immigrants are assimilated into the economy and culture of their new home. The host population needs to be confident that new arrivals embrace its laws and culture. With its more liberal labor laws and active civil society support, the United States has been more successful at assimilating immigrants than have most other countries. British complaints a few years back about a flood of Polish plumbers have largely faded away. In fact, the hard working Polish plumbers proved to be very advantageous for Britain.

The flood of war refugees into Europe and fear of terrorism are adding a new element to the fears of immigrants. The Western world, especially Europe, faces serious challenges to accommodate the rapid inflows of refugees, which we all have a moral and legal obligation to house and protect, and immigrants seeking a better life from the predominantly Muslim Middle East and North Africa at a time when a fringe of the Muslim world (ISIS, Al-Qaeda, Boko Haram, etc.) has declared war on the rest of us. Thus the fear of terrorist attacks, especially following the 9/11 attacks in the U.S., has become a real factor in public attitudes toward immigrants. Donald Trump and right wing nationalist parties across Europe have attracted growing support exploiting these fears.

Western fears of Muslim immigrants are not limited to the fear of admitting terrorist. Donald Trump’s recommendation to stop all Muslim’s at the border “until we figure out what is going on” either reflects ignorance of the exhaustive process such visitors must go through to get visas and the much easier ways for terrorist to enter the country if they are not here already, or deliberate exploitation of public fears. With Trump it is probably both of these. https://wcoats.wordpress.com/2015/11/19/what-to-do-about-syrian-refugees/ These fears also concern whether the prescriptions and doctrine of Islam are compatible with liberal, western, democratic values. /2016/03/24/fighting-terrorists-part-ii/

Some statements in the Koran seem to be incompatible with “Western Values” just as are some statements in the Christian bible. Muslims, like Christians, have developed different interpretations of the meaning and requirements of their faith in today’s world. Some American’s and Europeans worry that the Salafi (Wahhabi), fundamentalist interpretations of Muhammad’s teachings and some of the provisions of one or the other versions of Sharia (Islamic law) that are incompatible with the American constitution, laws and traditions, will come to dominate Muslim beliefs and that they will attempt to impose them on the rest of us. These are serious concerns and are shared by many Muslims as well. Immigrants and residence of any faith should only be welcomed if they accept the laws of their host country. Mainstream Christians are not generally blamed for the fanatical and racist beliefs of the Ku Klux Klan. Quoting from Wikipedia: “Although members of the KKK swear to uphold Christian morality, virtually every Christian denomination has officially denounced the KKK.” The same should be true for Muslims, though they need to make a bigger effort to distance themselves from their minority of radical jihadists than they seem to have so far.

The growing fear of Islam has begun to take on a form and tone reminiscent of the anti-Semitism of Nazi Germany: /trump-like-opposition-to-islam-is-growing-in-europe/2016/06/06/. The key question is what to do about it. Just as the overwhelming benefits of globalization and technical progress were not enough by themselves to win broad public support without addressing the accompanying costs, the benefits of immigration and the moral obligations to house and protect refugees, will not be enough by themselves to over come the growing public fear of immigrants (especially of Muslims). Attempting to push immigration on a reluctant public seems to be creating the backlash that we are now seeing in America and Europe.

The Supreme Court’s Roe vs. Wade abortion decision short-circuited the state-by-state process of liberalization that was already moving in the same direction. Forcing a mother’s legal right to an abortion on states that had not yet come to that view has been counter productive and created a protracted debate that most likely would have faded away long ago. The partisan forcing of Obama Care on Americans without a broad consensus on its new directions provides another example of ill-advised legislation lacking broad support. The Court’s decisions striking down restrictions on interracial marriages (Loving vs. Virginia) and more recently extending equal protection of the law to same sex marriages (United States vs. Windsor and Obergefell vs. Hodges), were only taken after a much wider public acceptance of these freedoms had developed. They have been accepted with far less controversy. What are the lessons for our immigration policies?

The previous waves of immigrants in the U.S., generally concentrated from particular geographical areas, have always complained about the next one, generally concentrated from a different geographical area, and there have often been religious tensions and concerns. What is new this time (in addition to terrorist concerns) is the fear that Muslim immigrants seek to overturn our laws and customs with those of a radical fundamentalist understanding of Islam that is incompatible with liberal Western values. To address these concerns the United States (it will be more difficult in Europe) needs to update its immigration laws (as in the Senate bill already passed) and continue to build on its previous successes in assimilating immigrants, and Muslim communities need to more clearly differentiate and separate themselves and their beliefs from those of the radical jihadist. The U.S. and Europe need to undertake a frank and reasoned discussion of the rules for immigration that best serve the needs and interests of each country. It will not do to force more immigrants on an unwilling public even if it is to their benefit in the long run.

The bottom line here is that the clear benefits to society at large of globalization, immigration and technology are not sufficient to insure their continued support. Though the flow of economic immigrants have been responsive to economic needs, open borders are unfortunately not likely to be acceptable to the general public yet. Despite the racist comments of Donald Trump, between 2009 to 2014, 140,000 more Mexicans left the U.S. than came, largely to reunite with their families in the face of a drop in the demand for their labor in the U.S. There has been no net immigration from Mexico between 2007 and 2014. Most immigration in recent years has been from south of Mexico, East and South Asia and to a lesser extent from Africa and the Middle East. Important public policy decisions should be openly, frankly and thoughtfully discussed with the goal of gaining broad public support. The costs that fall on some in the course of broad gains for the many should be minimized, and fears should be honestly addressed. It is critically important in this regard that mainline Muslims distance themselves from the radical Islamists.

[1] http://humanprogress.org

Operation Choke Point

My letter from the Editorial Board of the Cayman Financial Review addresses the above and other American Government over reaches in the use of U.S. dollars abroad:  Financial Review, April, 2016  

I hope that you enjoy it.

Warren

FreedomFest in Las Vegas

Dear Friends,

Are you attending FreedomFest this year? It claims to be the world’s largest gathering of free minds. At this year’s gathering from July 13 – 16 at Planet Hollywood in Las Vegas I will be debating John Tamny, editor of Real Clear Politics and author of the new book, “Who Needs the Fed?” on Friday morning, July 15. In addition, I will be on a panel discussing the new documentary, “The Moneychangers” on Saturday afternoon July 16.

You can use code SALEM (all upper case) to get $100 off the registration fee.  Go to “register now” at www.freedomfest.com, or call toll-free 1-855-850-3733, ext 202.

Here are some highlights:

Gary Johnson to Address FreedomFest

Now FreedomFest is pleased to announce that Gary Johnson, the former governor of New Mexico and the new presidential candidate for the Libertarian Party, will address FreedomFest at 4 pm Pacific Time, July 15, 2016, in the Celebrity Ballroom at Planet Hollywood, Las Vegas.

Johnson recently polled 10% support in two national polls.  Many pundits consider him a legitimate third party candidate since Ross Perot ran for president in 1992.  As David French wrote for National Review:  “Good news, disgruntled Americans: As you ponder whether to vote for one of the two most-disliked, dishonest, and morally corrupt politicians ever to run for president — Donald Trump and Hillary Clinton — you just might have a third option. His name is Gary Johnson.”

Why FreedomFest?

Steve Forbes, chairman of Forbes Inc., said it best:  “FreedomFest is where the best ideas and policies are flushed out.  I attend all 3 days and wouldn’t miss it for the world.”

What’s FreedomFest all about?  Everything!  Philosophy, history, science & technology, healthy living, politics and your money, and much much more.  It’s a Renaissance gathering in the entertainment capital of the world.

It’s organized by Mark and Jo Ann Skousen.  Mark Skousen is a financial economist, author, and university professor who has taught at Columbia Business School and now Chapman University.  Jo Ann Skousen teaches English literature at Chapman University and Mercy College, and is the director of the Anthem Film Festival.

Once a year in July all the freedom lovers of the world gather in Las Vegas for FreedomFest, what the Washington Post calls “the greatest libertarian show on earth.”   Steve Forbes and John Mackey, CEO of Whole Foods Market, are co-ambassadors and attend all 3 days.   Last July over 2,500 people showed up to learn, network and celebrate liberty–including Donald Trump, Senator Marco Rubio, Steve Wynn, Peter Thiel, and Glenn Beck.  Steve Moore even debated Paul Krugman, the Nobel Prize economist and columnist at the New York Times.  Want a summary?  Watch the 5-minute video at www.freedomfest.com/videos).

Who’s coming this year?  This year’s keynote speakers include Senators Rand Paul and Ben Sasse (who will debate Trump as the Republican candidate), radio hosts Larry Elder and Michael Medved, Judge Andrew Napolitano, TV host Kennedy from Fox Business, Charles Koch’s right-hand man Richard Fink, authors George Gilder and Steve Moore, and the former heavy weight champion of the world, George Foreman, and boxing promoter extraordinaire Don King.

In fact, they are holding a special reception with George Foreman, where attendees will get a chance to meet him, get an photograph taken with him, and have him sign a copy of his book, “Knockout Entrepreneur.”  (He sold his grill business for $138 million.)

This year’s big debate will be “Capitalism vs. Socialism:  Free to Choose or Free to Lose?” between John Mackey, co-founder and co-CEO of Whole Foods Market, and John Roemer, Yale professor at the top Marxist/socialist in the country (supporter of Senator Bernie Sanders).  The debate is set for Thursday morning, July 14, in the Celebrity Ballroom, Planet Hollywood.

Other features:  Watch the mock trial as we put “Global Warming on Trial” (C-SPAN coverage)…. Grover Norquist (CNN considers him “the most powerful man in Washington”) will hold his famous “Wednesday Meeting” at FreedomFest….a special session by the “Women of Liberty”….a debate on voting with actor/activist Ed Asner and political commentator John Fund….a 3-day investment conference with Peter Schiff, Alex Green, Mark Skousen, and Keith Fitz-Gerald….a debate between Dinesh D’Souza and Michael Shermer (Scientific American) on the Bible….and win $25,000 in prizes in the Pitch Tank organized by Shark Tank’s Kevin Harrington.  Join all the freedom organizations and think tanks – Cato, Heritage, Reason, Students for Liberty, Americans for Prosperity, etc.  They are all there in a gigantic exhibit hall, the “Trade Show for Liberty.”

Plus the ever-popular Anthem film festival, run by Jo Ann Skousen.  This year one of the films will be shown by the producer of “Schindler’s List.”

Oscar Goodman, former mayor of Las Vegas, calls it an “intellectual feast” in Las Vegas – one of a kind!

FreedomFest will take place July 13-16, at Planet Hollywood, Las Vegas.  For more details, go to www.freedomfest.com.

In Defense of Vultures

They clean up the mess beside the road that has been left there to rot. It is not a pleasant sight but who can really object to the service these birds perform. Actually, the vultures I want to defend are not the feathered ones but the even uglier, so called, bottom- feeders, who take advantage of asset fire sales.

I am trying to find words to explain the stupidity of the attack on people who swoop in to buy things when their prices are depressed, that will not be insulting to the intelligence of non economist. I think that every one understands that if the demand for something increases its price will go up (or not fall as far). A so-called fire sale is when someone, often a company facing bankruptcy, is forced to liquidate some or all of its assets in order to pay its bills. The forced sale often pushes the price of the asset below its true long run value (to the extent anyone knows what that is). Bottom feeders step in and buy when they think the price has fallen to or below that long run value. If they are right, they will make money in the long run when the price of the asset recovers. Are they doing a bad thing? If we some how could keep them out of the market, what would happen to the price of the asset being sold under duress? It would fall further, of course! If you think that these vultures are exploiting distressed sellers, you are free to offer a higher price.

The attack on Payday lenders, so called because borrowers use an upcoming paycheck as collateral, is a bit more subtle. Interest fees on these emergency loans are very high, as these risky borrowers don’t qualify for normal bank loans. According to the Washington Post “Each loan comes with steep fees. The CFPB found that payday borrowers pay a median $15 in fees for every $100 they borrow, amounting to an annual percentage rate of 391 percent on a median loan of $350.” The new Consumer Financial Protection Bureau (CFPB) has just proposed “sweeping new rules” that will limit their use. As with restrictions on vulture investors (which fortunately have not been proposed by the administration), restricting access to payday loans would force such borrowers to seek out loans with still worse terms or suffer the consequences of no loan. If you think that payday lenders are exploiting their customers, you are free to lend to them at better terms.

However, restrictions on payday loans have a big brother, paternalistic purpose. The argument is that these emergency borrowers can’t be trusted to use the money responsibly. “The agency found that about 80 percent of payday loans are rolled over into a repeat loan, causing fees to pile up for borrowers. Roughly 45 percent of payday customers take out at least four loans in a row.” http://wapo.st/1sPFODl   It is appropriate to take away the freedom of choice from people judged mentally or emotionally incapable of exorcising that judgment in their own best interest. The power to do this is potentially dangerous and should only be used sparingly and with careful judicial guidelines and oversight. Dangerously our government has pushed this boundary far beyond what can be justified in a free society. Big brother has grown fat.

A further step in the direction of ever more intrusive government are the new rules issued by the Obama administration that would require investment advisors to put the interests of their clients above their own. “Trade groups representing businesses, Wall Street firms and other financial professionals joined forces to file a legal challenge against a new rule from the Obama administration that would restrict the advice brokers and advisers can offer to retirement savers…. The groups are attempting to block a rule announced by the Labor Department in April that created a higher standard for the investment advice offered to retirement savers. The new regulations require brokers selling investments for retirement accounts to put their clients’ interest ahead of their own.” http://wapo.st/1TM6gVj

Putting the interests of investors above those of their advisors is a perfectly good standard. It is what I, and most people, expect from their financial advisors. The questionable self-interest of the trade groups opposing it is obvious. It doesn’t follow that every good practice should be made a legal requirement enforced by the government, which is the direction we have been going in recent decades resulting in thousands and thousands of pages of regulations in almost every area of economic activity. Markets tend to adopt good practice on their own.

Investment advisors who give the best advice from their clients point of view (rather than investments that might pay the advisors the highest commissions) are certainly more desirable to investors. The marketing issue is how to know and insure that that is the standard followed by a particular advisor. If such a standard is written into your contract with your investment advisor—something she would surely proudly advertise—you would have the legal basis to sue if that standard were violated.

Private markets don’t have the best solutions to all problems of product quality but they do have the best solutions in an ever-changing technical world for most of them when given the chance.

Remove the Barriers to Work

Most people, and I mean almost everyone, would rather work than receive welfare. Earning your own living is an essential element of happiness and self esteem. These are the well-documented conclusions of Phil Harvey and Lisa Conyers in their new book The Human Cost of Welfare. You can watch their discussion of their book at Cato last month here: http://www.cato.org/events/human-cost-welfare-how-system-hurts-people-its-supposed-help.

Dozens of welfare programs attempt to help the poor and disadvantaged with mixed results. We would do well to replace most of these programs with a guaranteed minimum income (from which the government should deduct funds dedicated to health insurance and old age pensions of the recipients choice) as I proposed several years ago as part of a major tax reform: http://www.compasscayman.com/cfr/2009/07/07/US-federal-tax-policy/

Some of these programs discourage work by imposing financial costs for working as the result of reduced income from lost benefits. These welfare design flaws should be fixed (as the proposed guaranteed minimum income would), but governments have also thrown up many other barriers to getting jobs in the form of regulatory requirements and restrictions. Unnecessary or overly burdensome licensing requirements for many jobs protect incumbents and discourage job seekers.

According to the Washington Post: “Last year, a White House report documented the startling fact that 1 in 4 U.S. workers need a license to do their jobs, a fivefold increase since the 1950s.”

One of thousands of examples is the “license to blow” in Maryland. The state of Maryland has just bravely reduced the amount of training required for a license to wash and dry hair from 1,200 hours to 350 hours. “The new Maryland bill creates a “limited” cosmetology license for workers in blowout salons; it can be obtained after 350 hours of training. Previously, you had to be licensed as a stylist or cosmetologist, which require 1,200 and 1,500 hours of training, respectively” Washington Post May 18, 2016 https://www.washingtonpost.com/opinions/maryland-blows-away-a-hurdle-for-workers/2016/05/17/fc61cb36-1c50-11e6-9c81-4be1c14fb8c8_story.html

Most people want to work and we should make it easier for them to do so.

The Market vs. the State

It is in our natures to serve our personal interests first and those of others second. The interests of others include not only those around us in need but also our children and future generations in general, which are served by far sighted policies that might entail short-run and immediate sacrifices. Communities and societies that have instilled in each generation the values that promote and serve such longer-run interests will flourish relative to those with more narrowly “selfish” values.

Adam Smith famously explained in The Wealth of Nations how an individual’s pursuit of his personal gain benefits society at large. In the marketplace the fruits of our labors enjoy the greatest profit the better they meet the desires and needs of our customers at the lowest possible cost. While we might like to cut corners and raise our prices if we could get away with it, competition in the market prevents us from doing so.

Free trade and the international agreements that promote it is an example of the trade off between personal and community or national interests that I am raising. The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) will further extend the freedom to trade among the countries signing up to them while raising the standards for working conditions, intellectual property protection, and conflict resolution.

I began an article on free trade written a year and a half ago with: “World per capita income didn’t change much from the time of Christ to the founding of the United States ($444 to $650 in 1990 dollars), a period of 1,790 years. But in the following 320 years it jumped to $8,080. And about half of that jump came over the last 50 years. What explains this fairly recent explosion of well being? Many things, of course, but central to this explosion of wealth was trade.” free-markets-uber-alles As the most disheartening and distressing U.S. presidential campaign in my lifetime has made clear, the huge gains from freer trade as with the huge gains from technical advances have not been evenly shared thus highlighting the trade off between personal and community interests I am exploring.

We have long accepted that economic progress should not be stopped because it would make a particular set of skills or tools less valuable. When someone developed cheaper and better ways of providing us with music than the old 78 inch vinyl record—itself an amazing technological feat in its time—those producing the old records were forced to learn new skills. We should debate whether society (family, church, community governments, etc.) should help those adversely affected by technological progress and how best to do it, but few would want to prevent such progress from which almost everyone in the world has eventually benefited enormously.

Government, which represents an exercise of our collective will, is meant in part to give primacy to our concerns for the interests of others and/or the long run over our individual, immediate personal well being. The American constitution was all about trying to do that without the government becoming captive of the self-interest of those running it. Our natures, whether we operate as private individuals constrained by the market place or as public officials constrained by the law and a broadly agreed public purpose, remain a mix of self-interest and public interest. The fundamental difference between our behavior as private citizens or public servants is in the external constraints that impact our behavior. Our natures otherwise remain the same.

The power of government can be exploited to thwart the discipline of competitive markets on the dominance of self-interest over the common interest. Preventing government from being captured by the self-interest of those running it or those who seek special privileges from it is no easy task. To that end our constitution strictly limited what government could do (the enumerated powers) and encumbered it with checks and balances. The dangers of such capture posed by the military industrial complex of which President Eisenhower warned, is well known and real (e.g. $400 billion F-35 Joint Strike Fighter that few believe we need), but the same is true of most other intrusions of government into private affairs, such as all of our many wars (on drugs, terror, poverty, etc.) as well.

Sadly our government has expanded well beyond its necessary functions into every nook and cranny of our personal lives with increasingly pernicious and alarming results. The abuses of its ever-expanding powers for personal and partisan benefits are exemplified by the scandal of asset forfeiture,the-abuse-of-civil-forfeiture/, which alarmingly continues, the long and bipartisan history of political abuse of the IRS, irs-tea-party-political, and most recently the legal attack on companies questioning the climate change forecasts of the Intergovernmental Panel on Climate Change (IPCC) by the AGs United for Clean Power using the Racketeer Influenced and Corrupt Organizations (RICO) Act in an effort to silence criticisms of UN climate studies. prosecuting-climate-chaos-skeptics-with-rico. Such a blatant government attack on free speech is truly shocking. These are but a few examples of growing government tyranny and corruption.

The most effective defenses against such corruption are to limit the scope of government as much as possible (i.e. subject individual actions to the discipline of the market as much as possible) and to strengthen public insistence on adherence to the rule of generally applicable law. As trade has moved beyond the village and nation, so must the rule of law.

Following World War II the United States led the establishment of international arrangements and laws governing trade (WTO) and financial (IMF and WB) and diplomatic (UN, NATO) relations among nations. The U.S. was the natural leader of this globalized world not only because it had the largest economy and the largest military, but because it was generally respected for its commitment to the rule of law. More than any other country the U.S. was seen as committed to the longer run prosperity of the world above short run tactical benefits for itself.

In an April 12, 2016 interview by Steve Clemons in The Atlantic, U.S. Treasury Secretary Jacob Lew observed that “In the 21st century, the world needs the United States to be a North Star. The world wants us to be the North Star. I really do believe that. I am amazed at how other countries want to hear our advice and what we think makes sense. Sometimes we may have the habit of lecturing too much. We have to be careful not to do that.”

In recent years American leadership has been slipping. Rather than draw China more tightly into the global rule based trading system, we have pushed them away. After the United States convinced the IMF’s European members to accept a reduction in their share of votes in the IMF in order to bring the voting shares of China, India, and some other emerging economies more in line with their economic size, it took the U.S. Congress more than five years before it approved the amendments to the IMF Articles of Agreement needed to implement this agreement. In the mean time China set up its own international lending organization. US-leadership-and-the-Asian-Infrastructure-Investment-Bank

Rather than strengthen cooperative, diplomacy based relationships the U.S. has launched a series of generally failed wars to promote “democracy,” (Gulf War 1990-91, Somalia 1992-5, Haiti 1994-5, Bosnia 1994-5, Kosovo 1998-99, Afghanistan 2001 – to date, Iraq 2003-11, Libya 2011). These have weakened respect for American leadership.

On the economic front the United States has imposed hugely costly anti-money laundering (AML) and global tax reporting (FACTA) requirements on the rest of the world without regard for their cost and despite the lack of any evidence of benefits.  Operation Choke Point   These are serious abuses of American leadership that will produce a growing backlash. But it is not just misguided arrogance that is undermining our role in the world, it is the growing perception that our leadership is increasingly motivated by the selfish personal interests of crony capitalists rather than the high principles that have serviced us and world so well in the past.

Consider the example of the FATCA (Foreign Account Tax Compliance Act). Badly designed corporate and income tax laws in the United States have pushed an increasing number of companies and wealthy people out of the U.S. Rather than clean up its tax laws, the U.S. attempts to tax the income of Americans where ever they earn it and where ever they might live. The only escape is to renounce U.S. citizenship. The Obama administration is now proposing an exit wealth tax for American’s giving up their citizenship. It reminds me of the measures the Soviet Union took to prevent its citizens from leaving. Have we really fallen so low?

The use of off shore, tax minimizing structures by American companies and individuals (i.e. legal tax planning measures) as well as illegal efforts to hide income have been met by increasingly intrusive efforts by the U.S. to find and tax such income. Quoting from the introduction of the Wikipedia article on FATCA: “The Foreign Account Tax Compliance Act (FATCA) is a 2010 United States federal law to enforce the requirement for United States persons including those living outside the U.S. to file yearly reports on their non-U.S. financial accounts to the Financial Crimes Enforcement Network (FINCEN). It requires all non-U.S. (foreign) financial institutions (FFI’s) to search their records for indicia indicating U.S. person-status and to report the assets and identities of such persons to the U.S. Department of the Treasury.”

As the world attempts to comply with American extra territorial demands, the United States itself is not. Such reporting requires knowledge of the beneficial owners of companies. Most companies established in the United States, such as those incorporated in Delaware, are not required to provide the identities of beneficial owners. The U.S. seems to have no intention of requiring its companies to comply with what it demands from other countries.

The decline and fall of the “American Empire” seems to be underway. It doesn’t need to be.

Work-Leisure Choice and growth

A recent dinner companion inquired whether an economy that was not growing was necessarily a problem. What she had in mind was whether people choosing more leisure to enjoy their incomes rather than continuing to work the same or longer hours created an economic problem. The short answer is no. I will explore that issue further and then make a point about the propriety of governments making work/leisure choices for us rather than leaving the choice to us.

Our incomes grow when we work longer hours, acquire improved skills, work with more tools, or work with better tools. The economy as a whole grows without individual incomes necessarily increasing when more people work (i.e., when the population grows). Unless you are very pessimistic about the prospects for continued innovation and technical improvements in each worker’s productivity, our incomes will continue to increase even if we don’t work longer hours.

Over the last 65 years the average annual hours worked by employed Americans dropped from 1,910 to 1,710 while real disposable personal income per capita (in 2009 dollars) increased from $10,000 to over $38,000. Over the longer period of a century or two the drop in hours worked and the increase in per capital income have been much more dramatic. This dramatic increase in income reflects better skills, more capital (tools) and better capital. But it is less than in would have been if people had not chosen to enjoy that income by working less and playing more. The over all economy can adjust to any of these – growing, stagnate, or shrinking income.

While Bernie Sanders may think that the best way to increase the standard of living for the poor is to redistribute to them some of the high income of the wealthy, most everyone else would agree that only economic growth has and can continue to lift large numbers of the poor out of poverty. Global poverty (per capita income below $1.25 per day) dropped from 50% in 1980 to 20% in 2011, an astonishing achievement totally beyond what any amount of redistribution could have accomplished. Most of us think that the proper purpose of redistributing income is for the better off to finance a safety net floor for those unable to work. This dramatic increase in income was the result of improvements in worker productivity (i.e., better skills and more and better capital) not working longer hours.

But what about the choices workers have made and are making about the hours they work vs. the hours they play with the proceeds of that work once they are well above poverty? Over time as most people’s incomes have grown they have generally reduced the long hours worked six or more days a week. Employers and workers strike deals that maximize the profits of the firm and the happiness and well-being of employees. Why then do many governments feel that they need to legislate the matter? Why, for example, did French Socialists feel compelled to legislate a 35-hour workweek a few years ago?

In limited cases, a public safety argument might make sense to over ride the preferences of workers and their employers, for example, if truck drivers felt included to push themselves more hours than they could safely stay awake at the wheel. Mr. Hollande’s French government is now proposing to remove the 35-hour limit and relax other labor market restrictions. I hope they succeed, as leaving more of such decisions with the people themselves will result in happier workers and a more productive economy.

This issue came up a few years ago in connection with the Greek financial crisis. Here are two of my blogs written three years apart on the situation in Greece: https://wcoats.wordpress.com/2012/02/26/saving-greece-austerity-andor-growth/,     https://wcoats.wordpress.com/2015/02/08/greece-debt-and-parenting/ To over generalize, it is often the case that people living in temperate climates (such as Greece and the Southern cone of the EU) work less and have lower incomes. If they are freely choosing to enjoy more leisure in the lovely climate in which they live, they are no doubt happier and better off because of it. Greece’s problem was not that its many Zorba’s had a great zest for life and played more than they worked. Its problem was that after getting away with playing on other peoples’ work/money, they thought they should be entitled to continue doing so. The balancing of work and leisure that is optimal is a person-by-person decision. The economy will be fine and will adjust to whatever these preferences are. People at different income levels and/or different preferences within the same economy will likely make different choices. There is no justification for the government to impose its notion of what is optimal uniformly on everyone. This is just another example of government over stepping its proper role.

 

Fairness or Envy?

After many decades of impressive and relatively steady increases in the standard of living (increases in real per capital income) of all quintiles of the American income distribution, since 2000 all quintiles have lost ground. In the run up to 2000 incomes in the top quintile increased more rapidly than those in the lower quintiles resulting in a less equal distribution income.

Mean income

The mean real incomes of each quintile are lower now (2014) than they were in 2000. However, the percentage decline has been larger for the middle and lower income quintiles (see table below) leaving the more unequal income distribution in place. Some of the relative gains of the top quintile are attributed to the growing premium for higher education, but as claimed by the Occupy Wall Street demonstrators, some have not been earned by providing higher valued products.

Income table

Most of us do not resent and in fact are grateful for those whose wealth resulted from inventing and giving us products we greatly enjoy. However, we are rightly angry at both political parties for increasingly supporting crony capitalists—those who benefit from their connection with and influence on the government—who benefit at the expense of the rest of us. They are capturing economic rents at the expense of the rest of us rather than enjoying the fruits of greater productivity.

The broad political consensus in the United States that we are each entitled to the wealth we each create, but must fairly share in the cost of providing our national defense, public goods and a satisfactory safety net for the poor, seems to be falling apart. In the economic sphere, the left increasingly favors one group, the working class represented by labor unions, against the professional and entrepreneurial classes. Classical liberals (i.e., economic conservatives) champion fairness – a level playing field – and the freedom to get rich if you work harder, or create a better product, or a more efficient way of producing what people want. They champion measures that facilitate entrepreneurship and economic growth without much regard for its impact on income distribution. Trade – globalization – is an essential part of promoting economic efficiency and thus growth, allowing, if not forcing, firms to shift resources into goods for export in which they are relatively more efficient in order to pay for the cheaper imports enjoyed by the average middle class consumer.

The Republican Party more so than the Democratic Party, though not by much, has increasingly been failing to preserve a level playing field in various areas (Wall Street, defense industry etc.). But the embrace of protectionism offered by Donald Trump reflects either class warfare or ignorance of globalization’s enormous contribution to our standard of living. The big trade and industrial unions of old—think of the United Auto Workers in Detroit—followed a different drummer. They were not interested in fairness but rather fought to bring economic rents (monopoly returns) to themselves at the expense of other workers via a deal with their employers to create, defend, and share monopoly returns. This worked with the auto industry, where auto workers earned at least double the prevailing wages for nonunion workers with comparable skills as long as GM, Ford and Chrysler could hold off competition from German and Japanese (plus a growing list) auto producers via a combination of tariffs and safety standards. Globalization gradually destroyed this monopoly arrangement and almost killed the American automobile industry until U.S. automakers relocated to southern, non-union states.

While good working conditions are win win for workers and employers, pushing up wages above their competitive level either drives firms to other locations (non union states or abroad) or kills them all together. Voters supporting protectionist policies either don’t understand that they lower the standard of living for most people (here and abroad) by lowering the overall productivity of workers or they seek to exploit monopoly rents for themselves at the expense of other workers.

Such thinking was dramatically illustrated by the recent strike of workers at Tesla Motor’s giga battery factory project in Nevada. As reported in the Washington Post on March 2: “On Monday, hundreds of workers walked off their jobs at the giant battery factory that Tesla Motors is building in the desert outside Reno, Nevada. It wasn’t your typical picket: They weren’t protesting bad working conditions, or making a show of force around contract negotiations. Rather, they were protesting other workers — specifically, the fact that they were from somewhere else.” Their complaint was that workers from out side Nevada were willing to work for less than the $35 per hour that members of the local union were making. These were not “foreign” workers from South of the border. These were workers from Arizona and New Mexico. The out of state workers obviously found their “low” wages with Tesla in Nevada better than the wages they would receive staying at home so they were better off coming to Reno.

The Post further reported: “That dispute explains an important debate underway right now in all sorts of skilled trades: Builders say there’s a labor supply problem, which needs to be fixed by bringing more people into the field from across the country and across the border. Worker groups say there isn’t a supply problem — it’s just that builders aren’t paying enough to make the jobs worth someone’s while.”

Trump’s pledge to protect America workers from cheap Chinese and other imports so they can produce them in the U.S. at a higher cost, is bad economics and bad policy. He is pledging to benefit one group of workers at the expense of other workers and at the expense of the standard of living more generally. This is not what the Republican Party has stood for in the past and not what it should stand for now. It should stand for fairness and equal opportunity for workers and entrepreneurs to benefit from doing things better and thereby raising their incomes and the income of the nation. The principle of fairness is widely held in the United States but has always had to battle for dominance against the temptation of the zero sum claims of special interests for government to serve their interests at the expense of others and at the expense of fairness. Donald Trump and Bernie Sanders are appealing to special rather than general interests at the expense of fairness.

A Modest Proposal—Helicopter Money and Pension Reform

It is possible to fix the bankrupt Social Security System and the Federal Reserve’s failure to achieve its inflation target painlessly. Yes, really.

The Fed has failed to raise inflation to its 2% target because over regulated banks can’t find over regulated firms wanting to borrow and invest. As a result, the increases in the Fed’s base money from its Quantitative Easing and other efforts to stimulate the economy has piled up as bank excess reserve deposits at the Federal Reserve Banks.[1] If the Fed pushes too hard (e.g., by lowering the interest it pays on these bank reserves, potentially even to negative levels) it feeds asset price bubbles (stock and housing prices), which do great damage when they burst.[2] If the Fed just printed more money and sprinkled it around to the general public—what Milton Friedman called helicopter money—there is no doubt that the public would spend more and drive up prices.

Leaving aside whether it is really a good idea to create a steady 2% rate of inflation, there is an easy way of doing it that would also facilitate badly needed reform of the government’s retirement system. Contrary to the myth that our Social Security pensions reflect what we paid in (saved) to the system, Social Security pension payments are now fully pay as you go. This means that the revenue from payroll taxes approximately matches the outflow for current pensions, i.e. nothing is being saved for the future. As our population continues to age and the number of retired pensioners increases relative to the shrinking number of workers paying into the system, the modest amounts that have been accumulated in the Social Security “Trust Fund” will be drawn down to zero in about 15 years at which time the government will not be able to meet existing promises.[3]

The following proposal combines helicopter money sufficient to bring the inflation rate to its target with badly needed reform of our government pension system. Under this proposal all individuals will receive a minimum government guaranteed pension for life whether they paid in anything or not. This might be implemented as part of a Friedman like negative income tax and other badly needed tax reforms,[4] or stand alone. Before retirement, individuals who are working but with incomes below the poverty level (to be politically established) will not pay a wage tax as they do now. The subsequent pensions of such people will be paid with helicopter money (the Federal Reserve will print the money to buy government bonds sufficient to finance these expenditures). All workers with incomes above the poverty level will be required (as they are now) to set aside the amount of income needed to finance their minimum guaranteed pension on a fully funded basis. They are free to save more if they would like a higher pension. The funds set aside must be invested in government licensed and approved private pension funds chosen by each worker rather than in the almost fictitious Social Security Trust Fund.

This would establish the three pillars of good pension policy proposed by the World Bank in 1998: a means tested minimum pension financed by the government’s general revenue, a mandatory minimum pension paid for and privately invested by all working individuals, and additional, optional, supplemental retirement saving privately invested. Such a model was first adopted in Chile over 35 years ago with great success. Central and Eastern European countries have adopted similar models as part of their transition from centrally planned to market based economies. Financing income subsidies to the poor from general revenues (via printing money), and a user fee approach to mandatory saving (mandatory saving matched to the actuarial value of the pension received), conforms more closely to the principles of good tax policy.[5] The alternative sometimes proposed of raising the income cap on the payroll tax is closer to general revenue financing (if the government guaranteed minimum is only paid to the poor), but leaves out non-wage income and thus fails the good tax criteria.

As new workers would be truly saving for retirement, their savings would not be available to finance those currently retired, as is now the case with our pay as you go system. Thus transitional arrangements will be needed (for several decades) to deal with existing unfunded promises. If the promises remain unchanged, the money to pay for them will have to come from somewhere (higher taxes or reduced defense or other expenditures). Usually, in such cases the government spreads the burden around (burden sharing). Two simple and sensible changes to the current promises would absorb the greater part of the shortfall. The first is to adjust the pensionable retirement age to the fact that the average person lives much longer than when the current retirement ages were fixed. People are living longer and can (and most would like to and do) work longer. The other is to change the index to people’s pensions from a wage index (which generally increases pensions in real terms over time) to the cost of living (CPI), which would preserve their real value against any inflation over time.

For today, this means that the wage tax on the poor would be abolished and paid for with new Fed money that would thus be put in the hands of those who would spend it, increasing employment (though we are really at full employment now) and/or wages and prices. It would both raise inflation a bit and launch a genuine, long over due pension reform.

[1] “US Monetary Policy–QE3” Cayman Financial Review, January 2013

[2] “The D E Fs of the Financial Markets Crisis” CATO Institute, September 26, 2008.

[3] https://wcoats.wordpress.com/2008/08/28/saving-social-security/

[4] http://www.compasscayman.com/cfr/2009/07/07/US-federal-tax-policy/

[5] http://www.compasscayman.com/cfr/2013/07/12/The-principles-of-tax-reform/