Tag: John Tamny

Review of John Tamny’s attack on Jack Kemp Foundation article

By Dr. Warren Coats

Dr. Coats is retired from the International Monetary Fund, where he was Assistant Director of the Monetary and Capital Markets Department.

In an article titled, “When the Ideas of Thinkers and Great Statesmen Are Perverted,” John Tamny offers what he calls “a semi-brief response” to a Wall Street Journal op-ed by Sean Rushton from the Jack Kemp Foundation, “Monetary reform would rebalance trade.”

Mr. Tamny wastes no time in launching his attack with the following: “Worse were the myriad factual inaccuracies, including a Bretton Woods monetary agreement that took place after World War II. Except that it took place in 1944.”  This is his only valid criticism in his not so brief discussion. As we all know, the Bretton Woods conference was in anticipation of the end of WWII and did not actually take place “after” the war.  Devastating, right?

Mr. Tamny launches his more substantive critic by noting that, “To be clear, all trade balances. Always.” Whether that balance is healthy or not, however, depends on its composition. Mr. Rushton’s article is about that composition. He discusses the implications of the fact that one of the ways in which we pay for what we import is by exporting U.S. dollars. The others are exporting U.S. debt (largely government) and the ownership of American firms and other private assets. Many countries wish to hold our dollars (it is the primary international reserve asset held by central banks) because so much of world trade is priced in and paid for with USDs.

Given all the many factors that determine what we import and export, the global demand for USD as a reserve asset makes our trade deficits larger than they would otherwise be in order to supply (export) those dollars. Tamny correctly notes that “the U.S. has run ‘trade deficits’ for longer than it’s been the United States.” Obviously such deficits were not the result of the world’s demand for U.S. currency. “The U.S. always ran trade deficits precisely because it’s long been an attractive destination for investment.”  In other words, other countries sold us more than they purchased in goods and services (our trade deficit) in order to earn the dollars to invest in the U.S.

But times have changed. Today, and since the U.S. left the gold standard in early 1970, most of the dollars earn abroad from our trade deficits (their surpluses) are invested in U.S. treasury securities. In short, dollars earn abroad via our trade deficits (in addition to accumulating dollars in foreign exchange reserves) are now largely invested in financing our government’s deficit spending. Even Mr. Tamny would not argue that this inflow of investment in the U.S. is contributing to our increased growth and productivity.

On the contrary, Tamny seems to be arguing exactly that. He says that: “we have a so-called “trade deficit” as a country precisely because the U.S. is a magnet for investors the world over. When we “export” shares in American companies that are routinely the most valuable in the world.” He seems to applaud selling our firms to foreigners when our government crowds out the domestic financing of our industries in order to finance our irresponsible government deficits.

Mr. Tamny is not content to label Mr. Rushton’s analysis false. He calls it “obnoxiously false” and “comically false.” Unfortunately these labels apply more accurately to Mr. Tamny.

Rushton claims and provides evidence that U.S. fiscal discipline weakened when Nixon closed the gold window. “No longer bound by fixed exchange rates and dollar convertibility, the U.S. government’s fiscal discipline broke down.” Obviously other political and demographic factors have also contributed to the alarming increases in U.S. deficits, but no longer needed to defend the dollars exchange rate removed an important constraint. To rebut Rushton’s claim and data, Tamny notes that our deficits were even higher during WWII. Truly. I am not making this up.

Turning to the dollar’s role as an international reserve asset, Mr. Tamny notes that Mr. Rushton “argues that thanks to ’high global demand,’ the ’dollar’s international position is always stronger and U.S. interest rates are lower than they would be otherwise.’” Added to all of the other factors influencing the composition of our external financial flows (our balance of payments), the world’s demand for dollars in their foreign exchange reserve holdings must increase their trade surplus (our trade deficits) or their investments in the U.S., either of which will appreciate the dollar’s exchange rate and lower interest rates in the U.S. relative to what they would other wise be. Mr. Tamny doesn’t get this. He says that Mr. Rushton “wants us to believe that a devaluation of the income streams paid out by the U.S. Treasury actually made them more attractive to investors.” I don’t really know what he means by that either.

Another of Mr. Tamny’s “obnoxiously and comically false,” or perhaps merely nonsensical statements is that: “if we ignore the obvious, that the sole purpose of production is to import as much as possible….” If he is relating production to imports, he presumably means producing for export. What we import must be paid for one way or another, i. e., by exports of goods and services, U.S. dollars for reserves, U.S. government debt, or ownership of U.S. firms.

I leave it to the reader to sort out what Mr. Tamny might mean by: “the path to a lower ’trade deficit’ is only possible if we’re willing to accept being much poorer.”

As a parting shot, Tamny mischaracterizes the views of the late Jack Kemp. Here’s what Kemp actually said, speaking in 1987:

“Why do we keep having these cycles? I believe it has to do with the burdens and privileges of the dollar’s unique international role. First, the extra demand for dollars puts a premium on their value that makes American exports less competitive. And on world markets, only a few cents means the difference between a sale and a loss. This increases our merchandise trade deficit.

“Second, the dollar’s role helps fuel Congress’s deficit spending. Foreign central banks buy U.S. Treasury securities to hold as reserves and to keep their currencies from rising—almost $100 billion in the last year and a half. This amounts to a special ‘line of credit’ that lets Congress spend resources that would otherwise be used to farm or manufacture for export. President Reagan used to say that to get Congress to spend less you have to reduce its allowance. Well, we may have reduced its allowance but we haven’t taken away its charge card. That’s one reason why every tax dollar is spent without cutting the deficit.

“Trying to compete in world markets under these conditions is like trying to run a race with a ball and chain around your ankle. We face a constant choice between giving in to pressure to let the dollar fall at the risk of inflation, or keeping interest rates high at the expense of a trade deficit and growing pressure for protectionism. This dilemma will continue until we stabilize the dollar, end the inflation/deflation cycle, and bring down interest rates with the right kind of monetary reform.”

###

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.

Economics Lesson: Income Inequality

French economist Thomas Piketty’s bestselling book on wealth inequality, “Capital in the Twenty-First Century,” has become the focus of a debate over increasing income inequality in the US and many other countries. I have not read the book, which apparently presents lots of interesting data, the use and interpretation of which is also being debated. A recent paper on Piketty worth reading is by a young PhD candidate at MIT: http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/19/meet-the-26-year-old-whos-taking-on-thomas-pikettys-ominous-warnings-about-inequality/

The issue that interests me in this note is the great divide in attitudes toward inequality and thus the policies proposed to address it. Some people think income inequality, or at least too much of it, is bad per se. Thus taxing the rich and redistributing the proceeds to middle and lower income families is the solution. For me, and many others, the issue is whether the wealthy (to simplify) earned their income fair and square (to be explained below) and is thus a just reward for their contributions to the economy providing an important incentive for their efforts. To the extent that they have not (monopoly power, government favors, etc.) the solution is to attack and remove the policies and impediments to competitive markets that made their exorbitant incomes possible.

If it is not desirable (fair) for some people to be wealthy when others are not, the collateral damage from income redistribution may be a price worth paying. This collateral damage is well known. If the wealthy cannot keep the income they get from their efforts and/or from their investments in innovative technology, miracle drugs, or the companies that produce what we want and provide our jobs, they will reduce their efforts and investments, thus reducing the income available to us all and available to redistribute. At the other end—recipient—of the redistribution, if the programs through which middle and lower income families receive such income are not well designed they will reduce incentives to work and or misallocate resources further reducing the income available to redistribute. The policy issues become how to design such programs and what is the optimal balance between the “good” effect of more equal income distribution and the bad effects of lower income.

In my book of moral principles, disapproval of the higher incomes of others per se is due to envy, and envy is not a virtue and should be resisted. There is some evidence that many people care both about their absolute income and their income relative to others. Such envy should be discouraged in my view. My standard of morality in this area is that people deserve what they fairly earn but this requires an understanding and agreement on what income is fair. Economists have a straightforward definition of “fair” income. Profits (revenue in excess of costs) earned without artificial government help (subsidies, regulations that keep out or discourage competitors, or state sanctioned monopolies) are fair because they are the (ultimately) competitive return on providing something people value. With competition, profits will be normal, what economists call a normal rate of return on investment.

Unless the government interferes, excessive profits (those above a normal rate of return) will ultimately be competed away as others enter the field to grab some of the high return. While the inventor and developer of a new technology or product may enjoy a quasi monopoly return initially, as long as there are no artificial impediments to competition, i.e. as long as the monopoly is contestable, returns will ultimately become normal. George Will provides some relevant and interesting cases drawn from a new book by John Tamny. “With the iPod, iPhone and iPad, unique products when introduced, Jobs’ Apple created monopolies. But instead of raising their prices, Apple has cut them because ‘profits attract imitators and innovators.’ Which is one reason why monopolies come and go.” “Since 2000, the price of a 50-inch plasma TV has fallen from $20,000 to $550.” “Henry Ford doubled his employees’ basic wage in 1914, supposedly to enable them to buy Fords. Actually, he did it because in 1913 annual worker turnover was 370 percent. He lowered labor costs by reducing turnover and the expense of constantly training new hires.” http://www.washingtonpost.com/opinions/how-income-inequality-benefits-everybody/2015/03/25/1122ee02-d255-11e4-a62f-ee745911a4ff_story.html

There are many examples of profits that are not normal or contestable, which by definition are unfair. Those on my side of this issue would look for the government favors or interferences that made them possible and seek to remove them. There is no doubt, for example, that US monetary and regulatory policies have made possible lopsided returns from one-sided risk taking by Wall Street (the moral hazard of tax payer bail outs when excessive bank risk taking goes wrong). These policies need to be reformed in order to make the economy fairer and more efficient. See my Letter from the Editorial Board in the next issue of the Cayman Financial Review.

A very large political/policy battlefield in America today is between those who wish to redistribute income to make it more equal and those who want to make income distribution more equal by reducing or removing the economic rents generated by excessive and inappropriate government regulations and subsidies. They are each motivated by dramatically different philosophies and conceptions of what is fair and what is good. We might call these positions “egalitarianism” and “capitalism.” The motivation of an egalitarian to redistribute income from the rich to the poor is dramatically different than the desire of virtually all American’s to provide what Ronald Reagan called an adequate social safety net for the truly disadvantaged and those who have fallen off the ladder. I am on the side of capitalism.