Recent Articles
- How To End The Fed November 15, 2024
- Economic Nationalism: The Current Account Deficit #3: Complete Nonsense November 10, 2024
- Economic Nationalism: The Current Account Deficit #2: Savings and Investment November 3, 2024
- Economic Nationalism: The Current Account Deficit October 27, 2024
- Now Let’s Get Rid Of The Income Tax October 16, 2024
- Trump’s Tax Plan Will Be Fine October 8, 2024
- Monetary Economic Nationalism October 6, 2024
- Good Reasons For Tariffs #2: Foreign Exchange October 1, 2024
- Good Reasons For Tariffs September 22, 2024
- Economic Nationalism #3: Bad Economic Nationalism September 8, 2024
Categories
How To End The Fed
(This item originally appeared at Forbes.com on November 15, 2024.) President Wilson enacted the Federal Reserve Act in 1913. This allowed a consortium of private bankers to establish what amounted to a central bank monopoly currency issuer in the United States — although they took great pains to deny that was the goal. The Federal Reserve was never part of the government. It was the fourth attempt by private bankers to establish a monopoly currency issuer in the United States. The third attempt was the Second Bank of the United States. It began in 1819 and became the dominant currency issuer in the US. In 1841, president Andrew Jackson led the effort to decharter the Second Bank. The incipient central bank was shut down, and the United States returned to its previous monetary arrangement, of hundreds of small currency issuers whose banknotes were redeemable in gold coin. This worked well enough; and in the years between 1841 and 1913, even despite a terrible Civil War, the United States became the wealthiest country in the world, with one of the world’s most reliable currencies. President-Elect Donald Trump recently floated the idea of eliminating the Income Tax, perhaps in favor of a better alternative like a Value Added Tax. Before the Sixteenth Amendment was passed (by Wilson) in 1913, the United States had no income tax. It was actually banned by the Constitution. In 1895, the Supreme Court struck down the US’s first peacetime income tax, passed in 1894. Recently, Trump also floated the idea of ending the Federal Reserve, even asking Mr. End The Fed himself, retired Congressman Ron Paul, to help advise on the issue. After more than a century of experience, can we now say that the “progressive” changes of the Wilson era were a mistake? I think we
Economic Nationalism: The Current Account Deficit #3: Complete Nonsense
Now I think we have a pretty good mental picture of what the “Balance of Payments” really is; and its components the Current Account, Capital Account and Financial Account. Economic Nationalism series Today we will contrast with what you often hear from other economists. It is complete gobbledygook. Here’s Wikipedia, always a good summary of conventional wisdom: Wikipedia on the Balance of Payments What is this? It is nonsense. You should be able to see that clearly now. When I see this nonsense, I think that it must arise from two sources: Error and Stupidity. Most economists, I have decided, are not very smart. They are smart enough to be taught something like you read above — in fact quite abstract — and recite it on demand at appropriate times. They are smarter than the population average. But, they are not smart enough to see that it is nonsense. The smart people went into engineering and computer science, or private equity. For one thing, the tendency of universities toward internal dogma naturally ejects the kind of smart young person who can see that this is nonsense. Such a smart young person becomes an immediate threat to the older professors who have based their careers on the propagation of dogmatic error. The fact of the matter is, the older professors can’t even understand the smart young person’s correct observations. Pretty soon this smart young person, becoming aware that the economics department is in fact composed of people less smart than they are, and that their natural mental superiority is an organizational liability, gets a job at Bain Capital. The Structure of Scientific Revolutions, by Thomas Kuhn The Curse of the High IQ, by Aaron Clarey Intentional Obfuscation. I think that a number of these issues have been intentionally obfuscated, to put
Economic Nationalism: The Current Account Deficit #2: Savings and Investment
We have been discussing the Balance of Payments, or one aspect of it, the Current Account deficit (or surplus), in the context of Economic Nationalism. Economic Nationalism series The easiest way to understand the Balance of Payments is to look at the Balance of Payments of an individual, or an individual household. October 27, 2024: Economic Nationalism: The Current Account Deficit It might seem at first that this is a sort of analogy, or metaphor. But, it is not. This is the actual Balance of Payments of an actual economic entity, in this case an individual or household. There are other kinds of economic entities, primarily businesses or government entities, whether the Federal Government or the local public library. Basically an “economic entity” has a bank account, buys and sells, makes and receives payments, holds assets or engages in liabilities. The Balance of Payments on the “national” level is actually the aggregate of these individual entities. There is no “national balance of payments,” except perhaps in the case of the Soviet Union where it really was the central government that engaged in all external trade. The “national balance of payments” is simply the aggregate of the individuals that are categorized as having that “nationality.” The “United States” does not sell automobiles. The Ford Motor Company sells automobiles. “China” does not buy US Treasury bonds (except perhaps the central bank). Chinese entities buy US Treasury bonds. So it is perfectly normal to use the example of a household, because this is the reality of trade, rather than the abstraction of statistical aggregates. You could create another statistical aggregate, of blue-eyed left-handed Catholics; and they would also have an aggregate Balance of Payments, equally legitimate (although less useful) than the official statistics for the national level. We saw that the Current Accounts
Economic Nationalism: The Current Account Deficit
Unfortunately, legitimate issues regarding foreign trade often become mixed up with talk about the “current account deficit,” which is mostly fallacious and erroneous, and which has served as a do-anything catchall over the decades (actually centuries) for whatever it is that you want to do. Trade is always balanced. There is no “trade imbalance.” Never has been, never will be. “Unbalanced trade” is a gift — which is also perfectly fine, and bigger than you might think, in the form of official foreign aid and also overseas remittances. But these gifts too are “balanced” in the sense that there is no particular problem with it, or some residual issue that needs to be resolved in the future. However, as is the case with many economic statistics, the Balance of Payments may reflect some other problem. This other problem’s effects show up in the Balance of Payments. To understand what the Balance of Payments actually is, let’s imagine an individual. This individual (or family) is engaged in “trade” with the “rest of the world,” i.e, the economy. We will imagine that this individual primarily “exports” employment labor, for which they are paid. Then, the individual “imports” whatever they spend their money on, at Walmart or Amazon for example. Even in this case, there is quite a bit of a “domestic economy,” or productive activity within the household. This might include making dinner, raking leaves and cleaning the toilet. So, there is both “domestic” and “foreign” trade in our example. Let’s say that this individual runs a “current account surplus.” They receive money from their employer, but they do not spend all of it on current consumption. There is something left over. This is “savings.” This “savings,” from the start, takes the form of some kind of financial asset. It might be
Now Let’s Get Rid Of The Income Tax
(This item originally appeared at Forbes.com on October 16, 2024.) Presidential Candidate Donald Trump recently floated the idea of getting rid of the Income Tax completely. I think this is a great idea — and so did the Founders themselves, who effectively barred Direct Taxes in the Constitution, including the Income Tax, until it was legalized in the Sixteenth Amendment of 1913. Before 1913, there was no Income Tax in the United States. Now you know why it was called the “Land of Freedom and Opportunity.” Trump mentioned that the Federal Government could raise revenue via tariffs instead, as it did before 1913. But, the Federal Government is much larger today, and also, we really don’t want to go back to the horribly contentious and overcomplicated system of individual item-by-item and country-by-country tariffs that people were eager to get rid of in 1913. Trump’s recent proposals are along the lines of uniform flat-rate tariffs, perhaps 10% or 20%. But, I think that Trump is intentionally stirring the pot for a much more important discussion, which is to eliminate the Income Tax entirely in favor of a Value Added Tax, or VAT. For decades, conservatives have avoided the VAT in the US because of the danger of ending up with both a VAT and Income Tax, the common situation in high-tax socialist Europe — the same high-tax socialist Europe that is now having a discussion about why their economy is so bad. However, the idea of replacing the Income Tax with the VAT — including a full repeal of the Sixteenth Amendment, and probably a new Amendment overtly banning a Federal Income Tax and maybe State income taxes too — has been popular among conservative economic experts for some time. President George W. Bush’s economic advisor Lawrence Lindsey recommended it in
Trump’s Tax Plan Will Be Fine
(This item originally appeared at Forbes.com on October 8, 2024.) The Great Depression got started with the passage of the Smoot Hawley Tariff in the United States, by the Republican Party, which immediately set off a cascade of retaliatory tariffs worldwide. This alone did not cause the Great Depression, but it did cause the initial downturn. This was followed by a long string of bad decisions in reaction to that downturn, such as Republican Herbert Hoover’s 1932 tax increase which took the top income tax rate from 25% to 63%. After World War Two, the whole world came to recognize that the Trade War of 1930 was a major contributor to the Great Depression. At the 1944 meeting in Bretton Woods, New Hampshire, they began a long postwar movement toward Free Trade, with a proposal for an International Trade Organization, to go along with the International Monetary Fund and World Bank also established at the same time. The ITO was not passed, but evolved into the General Agreement on Tariffs and Trade, which then became the World Trade Organization in 1995. Conservatives thus have some trepidation when they see presidential candidate Donald Trump, representing the Economic Nationalist wing that includes Patrick Buchanan, move again toward tariffs and restrictions on trade. The reasons for this are well known, and include the corrosive effects on the US’s middle class since China entered the WTO in 2001; or arguments that the US, as a continental superpower, needs to retain a large measure of self-sufficiency in key industries including electronics. Tariffs are taxes; basically, they are a variant of sales taxes. Trump’s proposals, mirroring those of Patrick Buchanan, are for a single-rate across-the-board universal tariff of 10% or perhaps later 20%, instead of the troublesome item-by-item and country-by-country approach of the past. This is
Monetary Economic Nationalism
In the past, “Economic Nationalism” sometimes had a monetary component. Basically, this was a currency devaluation. “Easy money” and devaluation has been part of the Keynesian macro-manipulator handbook since the Ancient era, and more recently, since the Great Depression significantly undermined the Stable Money consensus of the 19th century. In the 1930s, devaluations were undertaken basically to “relieve debtors,” and also, reduce effective wages through the devaluation of the currency in which wages are paid. This would presumably allow greater employment. Also, exporters would get a direct advantage. Domestic industries would get an effective advantage since, from their perspectives, products from foreign competitors would become “more expensive” in terms of the devalued currency. October 2, 2016: The Interwar Period, 1914-1944 (contains extensive forex information) “You can’t devalue yourself to prosperity” has been a timeless adage in economics. It makes sense that you don’t make people wealthier by devaluing their wages. But, during a time of recession or crisis, it has been a stopgap that governments have grasped for over and over again, over the centuries. These effects seem to provide an “advantage” to the “nation” (illusory of course), while also creating an artificial “disadvantage” to the rest of the world, who has to deal with artificial competitive issues, plus huge losses on investments in the devalued currency. “Relieving debt loads” just means a partial default to creditors, and this is particularly apparent to foreign creditors, who take immediate losses on their devalued assets. People today don’t sense what a catastrophe the devaluations of Britain (and many others) in 1931, and the US in 1933, were to the rest of the world. The Rest of the World (which included the US in 1931), took mammoth losses on what was then considered the “risk free asset,” British and US government bonds. This
Good Reasons For Tariffs #2: Foreign Exchange
We were listing some good reasons for significant tariffs. September 22, 2024: Good Reasons for Tariffs Mostly, this was on the topic of a certain amount of Economic Independence, often agricultural, but for the US perhaps chip manufacturing is at the top of the list today. Also, we discussed the difference between moving an auto factory from Detroit to Georgia, and moving it from Detroit to Mexico. Today, we will talk about the fact that we live in an environment of floating fiat currencies, where “unfair advantages” and “unfair disadvantages” can easily come about due to foreign exchange swings. On January 1, 1994, the North American Free Trade Agreement came into effect, dramatically liberalizing trade between the US and Mexico. Wikipedia on NAFTA. In the 1980s, Mexico had hyperinflation. Like other Latin American countries, this settled down in the early 1990s, and in 1993 Mexico had what appeared to be a reliable dollar peg, at 3.1 pesos per dollar. NAFTA was signed. In the middle of 1994, this peg broke and the peso began to slide lower. At the end of 1994, there was a collapse, which ended up taking the peso to about 7.5/dollar in 1996. What a coincidence! Many think it was not such a coincidence, but planned. Many US businesses were demolished by the combination of free trade with low-labor-cost Mexico, and also, the unexpected devaluation of the peso (and, in effect, Mexican wages). In the 1992 election, in opposition to NAFTA, independent candidate Ross Perot called this the “giant sucking sound” of capital moving to Mexico to take advantage of low-cost labor. So imagine the sucking when the peso’s value was cut in half. This was, I think, a major episode in the long deindustrialization of America, and the decline of the lower middle class. The
Good Reasons For Tariffs
We’ve been talking about Economic Nationalism; in particular, tariffs. July 27, 2024: Economic Nationalism #2: Good and Bad Economic NationalismSeptember 8, 2024: Economic Nationalism #3: Bad Economic Nationalism The basic concept of Economic Nationalism is that a policy is good if it benefits members of the Nation, which basically means the members of commonwealth, or State. If it doesn’t benefit the members of the Nation, then what makes it good? For example: Let’s say that there’s an automobile factory in Detroit. But, Ford decides that it would like to build its newest factory in Georgia, not Detroit, for whatever reason. This might be bad for workers in Detroit. But, it would be good for workers in Georgia. We calculate that, since both Georgia and Detroit are part of the Nation, then it is something of a zero-sum, at worst. Workers in Detroit can even just move to Georgia and work in the new factory. But, competition between Michigan and Georgia is also good, because it tends to lead to better outcomes overall. More factories is good, overall, because it means more productive workers, and more employment, at better wages. The Capital/Labor ratio improves. In terms of Economic Nationalism, it is a positive. But, let’s say that Ford wants to build a factory in Mexico. Now Mexicans benefit, from more good-paying jobs, and Americans do not benefit, although you could argue that they benefit a little bit from perhaps lower selling prices of Ford automobiles. Unemployed factory workers in Michigan cannot easily migrate to Mexico; nor would they want to, given the low wages in Mexico. However, all economists agree that wealth comes from Production and Productivity, and we have just made Americans less productive, because they no longer have a factory to make cars, and are instead standing around unemployed.
Economic Nationalism #3: Bad Economic Nationalism
We’ve been talking about Economic Nationalism. July 27, 2024: Economic Nationalism #2: Good and Bad Economic Nationalism Let’s get into some aspects of Bad Economic Nationalism. Mostly, this has to do with Tariffs. Tariffs were a core component of tax systems in the past, whether the Federal Government of the 19th century, or the British government of centuries prior to that. Their important revenue role was largely surpassed by the development of alternative taxes, in particular the Income Tax (1842 in Britain), the Retail Sales Tax, and the VAT. You might also include the Payroll Tax, although that is typically conceived as a direct funding mechanism for socialistic programs such as Social Security, rather than as some funding alternative to Tariffs. June 16, 2020: The Evolution of Tax Technology Tariffs have been part of some pretty big disasters over the years, so let’s look at what they were. In US History, the biggest disasters were the Civil War and Great Depression, both of which had Tariffs as a core component. These days, there is a certain group of Southern intellectuals that perhaps want to overstate the importance of Tariffs in the outbreak of the Civil War. Let’s be clear: I think the main reason for the Secession of the Southern States, and consequently the Civil War, was not Tariffs, but of course Slavery, in particular the question of the expansion of slavery in new States beyond the original 13 Colonies, that took place in 1789-1860. In the original Constitution, a compromise was enacted where importation of new slaves would be eliminated in twenty years, or 1808. At the time of the signing of the Constitution, it was thought that this would lead to the eventual elimination of slavery entirely. However, it didn’t work out that way. Slavery continued after 1808,