Discussion of John Tamny’s: Who Needs the Fed?

John concludes that we do not need the Fed because the Fed has become irrelevant. He argues that the interest rate “set” by the Fed is not relevant for the rest of the economy and that the Fed’s influence on bank credit is unimportant because not much credit comes from banks anymore, and that in any event the Fed can’t really control money and credit. While I think that John and I agree on many of the basic propositions that he sets out in his book, I disagree with many of his specific statements and with all of the propositions in my opening two sentences above.  To be blunt, John reveals a shocking lack of understanding of how the Fed and monetary policy more broadly work. The book has three Parts: Credit; Banking; and The Fed. I will set out my agreement with John on some important broad principles and then quote only a few of the many statements I disagree with.

For starters, John, Dan [Dan Mitchel, the moderator of this debate between John Tamny and myself at FreedomFest] and I all agree that it is what government spends that determines the resources it has taken from us and thus limiting that spending to the essentials is more important than cutting taxes. Of course how the government takes our incomes to finance its activities is also important. Some taxes are worse than others. On the other hand, it is surely not true that anything the government spends reduces the economy’s output. Government provided public safety, national security, and contract enforcement increase private economic output.

We agree that bailing out banks is bad for the health and efficiency of the banking sector.

We agree that failure of private sector firms that can’t make a profit and the market’s reallocation of those resources to better uses is good for economic efficiency and growth and rarely happens in government.

We agree that the market should determine the supply of money whose value is fixed to something tangible. But many of John’s statements suggest that he does not understand what the Feds does and what it is mandated to do. I will have a lot to say about this shortly.

Credit

The first of the books three parts is about Credit. When I get past some unusual usage of the word Credit to what I think is John’s fundamental point, I agree with him that those borrowing to invest in the real economy can only acquire and invest real resources. They cannot build factories, buy equipment, hire and organize workers with money created by the Fed, though a sound currency and efficient payment system lowers to the cost of connecting savers and investors. At the end of the day, real investment requires the saving and provision of real resources. This is what economists call the “neutrality of money, the idea that in the long run a change in the stock of money affects only nominal variables in the economy such as prices, wages, and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption.” [Wikipedia] Unfortunately, throughout his book John fails to distinguish between real and nominal magnitudes.

John states this in several ways: “The Fed can’t create credit” [p. 4] However, it is not helpful when John defines credit as real resources when he means wealth or capital. Quoting him again: “Never forget that credit is the resources created in the actual economy.” [p. 26] And again: “Credit is just the name for real economic resources.” [p. 87] But near the end of his book he reverts to a more traditional definition of credit as a loan: “Credit is access to real economic resources.” [p. 178] There is a big difference between saying that credit “is real resources” and saying that it is “access to real resources.”

John talks a lot about what it takes for firms to attract funding of their activities. He provides many interesting examples of shifting credit risks in the economy and the credit market’s response in shifting resources away from higher risks to more promising uses, but these examples have nothing to do with monetary policy or the Fed. The Fed is not a credit institution. It does not allocate credit in the economy. The Fed is a monetary institution, whose job is to provide our currency and regulate its market value. John does not seem to understand the difference.

Banking

“It will never be a lack of money that fells Amazon [or any other company]. Only a lousy strategy will take it down.” [page 98] I sort of agree, but John then mistakenly applies this thinking to banks, which have a legal and business obligation to back all of their deposit and other liabilities with assets of equal or greater value, i.e. they must have positive capital. They must be solvent. John is mistaken to say that: “Because banks never simply run out of money, lack of investor patience is what causes them to file for bankruptcy.” [page 98] While banks can borrow when they are short of funds (credit in the usual sense of the word) as long as lenders and depositor think they are solvent, deposit and interbank funding runs can occur when depositors think the bank is not solvent. Solvency means having positive capital. Bank capital is difficult to assess because many of its assets are loans and it is not possible to know for sure how may of these loans will be repaid in the future. The real world, practical challenge with banks is to determine when they become insolvent as promptly as possible to prevent their continued borrowing and deposit taking as their capital hole grows so that most depositors and other creditors can be repaid when the bank is liquidated. A bank that continues to operate when insolvent is a ponzi scheme.

John correctly attack’s Murray Rothbard’s claim that fractional reserve banking is fraudulent. When banks lend out some or most of what we deposit with them—so called fractional reserve banking—they are doing exactly what they say they will. There is nothing fraudulent about it. It does make banks vulnerable to runs, however, which is why central banks are empowered to be lenders of last resort. John focuses his discussion on whether banks hold enough reserves (liquid deposits with the central bank and cash in their vaults) for unexpected deposit withdrawals and notes that any credit worthy bank can borrow what ever it need for this purpose from other banks. He says little about bank capital, however, which is the basis of whether a bank is credit worthy in the first place. If the market suspects that the bank has little or no capital, it will not lend to the bank.

John’s rejection of the broadly accepted proposition that banks multiple the money created by the central bank into a much larger quantity of bank deposits is completely wrong, as is his implicit rejection of the Chicago Plan of 100% reserve requirements by saying that “Banks can’t pay to stare at or warehouse dollars—they would quickly go out of business or be acquired—so logically they lend them.” [page 87]. Of course they can. If they are providing a valuable safekeeping and payment function, they can charge for it. Who remembers to old days when banks levied a service charge on demand deposits? Rather than focus exclusively on reserve requirements John should focus on the role of capital requirements for protecting depositor money. Positive capital means that the value of a bank’s assets exceeds its deposit and other liabilities.

John’s attempt to disprove the money multiplier fails to reflect or understand the intermediary nature of banks. They sit between the savers and the investors; between depositors and borrowers. He illustrates his claim with four friends at a table, one with a $100 who lends 90 to the next friend who lends ten percent of that to the next one and so on mimicking the standard text book explanation of the creation of money by banks. The correct game would have the friend with the $100 depositing it with the imaginary banker in the center of the table. The banker then lends $90 to the next friend by recording a deposit liability to the second friend of $90. The two friends between them now have $190 in deposits with the bank, which now lends $81 to the third friend by creating a $81 deposit for the third friend, etc. The example reflects a 10% reserve requirement. For some reason John doesn’t get this very real world phenomenon. The creation of deposit money by banks is only inflationary if their growth exceeds the growth of the public’s demand for them. It is forgivable if Joe six pack doesn’t understand the money multiplier by banks, but it is shocking for someone writing about the subject to failure so completely to understand it.

Banks are one of many financial intermediaries lending other peoples’ money, but they are the foundation of the payment system. Capital protects depositors’ money from the occasional non-performing loan made with those deposits. Historically virtually every country in the world bailed out insolvent banks rather than let depositors lose money. This created terrible moral hazard as John notes. Deposit insurance has improved the picture and the US has closed thousand of banks without serious disruption, but not the biggest ones viewed as too big to fail.

My recommendation is to separate the payment from the lending functions of banks, requiring 100 % reserves on demand and savings deposits, and requiring equity (capital) to finance bank lending and its other investments. Thus deposits and the payment system would be risk free and require very little further regulation.[1] The intermediated lending would be all equity financed, like a mutual fund investment, and require very little further regulation as well, as its investors would have total skin in the game and could take whatever amount of risk they wanted as they would reap the rewards or suffer the losses. Losses of loans and investments would no longer threaten bank deposits and the payment system. There would no longer be a need for the Lender of Last Resort function of the Fed or other central banks. This is the Chicago Plan put forth during the great depression by such notable economists as Irving Fisher, Frank H. Knight, Lloyd W. Mints, Henry Schultz, Henry C. Simons, Garfield V. Cox, Aaron Director, Paul H. Douglas, and Albert G. Hart.

The Fed

Most central banks these days have the legal mandate to regulate the supply of their currencies so as to keep its value stable— the so-called price stability mandate. The Fed has a problematic “dual mandate” of maximizing employment and stabilizing prices, which I will not discuss further here. There are several basic approaches to fulfilling this price stability mandate, ranging from fixing the price of the dollar to gold at one end of the spectrum to targeting inflation with market determined, i.e. freely floating, exchange rates at the other end. The policy debate is or should be about which of the rules for managing the money supply would be best for the U.S.

John says that “Friedman was the modern father of monetarism, a theory of money that says the central bank should closely regulate its supply.” [p 136] Friedman said no such thing.

Monetarism says that, like every other good, the value of money is determined by its supply and demand. The demand for money comes from the public and has been empirically related to their incomes. The supply is determined by the central bank in accordance with the policy rule it adopts. The gold standard was one such rule. A fixed monetary growth rate rule, once advocated by Friedman, is another. Inflation targeting, now in vogue, is yet another.

John makes a number of statements that suggest that he understands none of this. He says that: “Production is the source of money.” [p 136] We can make sense out of this strange statement if we change it to say that production is the source of the demand for money. Given that demand, monetarism says that the price or value of money (its purchasing power) will be determined by its supply and its supply will depend on the policy rule the central bank follows. If the Fed creates more money than the public wants to hold, people will spend the extra money. But as John and I agree, spending such money doesn’t create the goods people want to buy. Thus a money supply that exceeds its demand will drive up the prices of goods and services. That is the monetarist story of inflation.

John goes on to say that: “Friedman viewed inflation solely as a money-supply phenomenon. Inflation was a function of too much money, as opposed to a decline in the value of money.” [p 136] I can’t make sense of this strange statement. The statement that “inflation was a function of too much money” is a statement about the cause of inflation. The final clause of John’s statement says that: “inflation was a function of…a decline in the value of money.” But inflation is a decline in the value of money by definition. So what does John mean? His effort to explain why these are difference seems to concern the allocation of money around the country. He says: “money migrates to where production is.” Yes it goes to where it is demanded. John confuses the markets role in allocating credit around the country with the Fed’s role in controlling the aggregate supply of money. It is shocking that someone who writes regularly on this subject fails completely to understand its basics. I cannot find any evidence that John understands the basics of monetary theory of the supply and demand for money and its price, i.e., its value.

Another indicator of John’s confusion comes from the first Part of the book when he compares the Fed’s lowering the fed funds rate to Nixon fixing gasoline prices below the market price. Fixing the price of gas lower than the market price reduces its supply and increases its demand and produced long lines at gas stations in the hope of tanking up before the station runs out. But the Fed does not fix the fed funds rate; it sets a target for it. The difference is profound. The Federal funds rate is determined in the market by banks. When the Fed reduces its target for the Fed funds rate it increases its supply of liquidity to banks so that supply and demand force the interbank rate down. John repeats this fundamental misunderstanding throughout the book. In order to emphasize the importance of the distinction between fixing the Fed funds rate and targeting it, let me in Donald Trump fashion, repeat the point. The Fed does not fix the Fed funds rate. It enters the market as a buyer or seller of t-bills in order to increase or reduce the supply of bank reserves in order to stimulate the market to move the rate to the Fed’s target value.

John repeatedly describes the folly of the Fed trying to increase the money supply in Baltimore or Cincinnati to stimulate growth there, as markets will attract it away to healthier areas that demand it. He repeatedly discusses money as if it is credit. The Fed does almost no lending and then only to banks temporarily short of liquidity. When the Fed wants to lower the Fed funds rate in the market, it buys U.S. treasury bills from the market. The transactions (so called open market transactions) take place in New York but the sellers of these t-bills to the Fed are scattered all over the country and the newly created money is deposited in the sellers banks all around the country. John failures to reflect a basic understanding of how monetary policy works.

John’s misunderstanding of how the Fed operations is further illustrated in his following statements: “The Federal Reserve… proceeded to borrow reserves from the banking system so that it could buy trillions worth of U.S. Treasuries and mortgage back securities…. The Fed has credit to allocate only insofar as it extracts it from the real economy.” [p 149] This is completely wrong. The Fed supplied reserves to the banking system by buying Treasuries with money it created. Understanding this is absolutely fundamental to understanding what central banks do. John documents over and over again that he does not understand these basics.

John and I are both skeptical of the Fed’s ability to managing its monetary policy (the fed funds rate and/or the money supply) so as to smooth out business fluctuations while maintaining a stable value of the dollar. We both think that keeping short-term rates near zero for so long has been a mistake. In the long run, monetary policy determines the price level and its rate of inflation, not full employment and real income. John and I agree that the health of the economy, or its lack of it, is much more the result of stifling regulations, not monetary policy.

These suggest that the Fed would do better to adopt a different policy strategy or rule. John suggests that we can do away with banks and the Fed altogether, but says almost nothing about their replacements. I favor a supply of money determined by market demand whose value is fixed to a basket of goods. The Fed would supply currency under currency board rules whenever people wanted it and paid its official price and could redeem it at its official price, i.e. the market value of its valuation basket, if they had too much of it. In the case of the gold standard the only good in the valuation basket was gold, whose price is not as stable as would be a basket of goods. This proposal is discussed in my Real SDR Currency Board and other articles. Unfortunately you will not find John’s proposal for determining the money supply in his book.

John’s arguments that we do not need the Fed because it has no (or only negligible) affect on market interest rates and credit and because the Fed and banks cannot create money, are wrong. While interbank interest rates (the Fed funds rate) are a tiny fraction of all interest rates, market arbitrage insures that all interest rates are related to each other given the unique risks and characteristics of individual borrowers and classes of borrowers and of the appetites for risk of lenders. The Fed can and does “print money” expanding the currency held by the public and bank reserve deposits with the Fed (so called base money) and banks can and do multiply this base money into a much larger supply of money (currency and bank deposits) by lending it. While in the long run these activities of the Fed and banks only affect the value of money (inflation) with no affect on the real economy, they can and do have important real economy affects for good or ill in the short run. The question we need to answer is what monetary policy rules should the Fed adopt and follow in order to best fulfill its price stability and full employment mandate.

[1] “Changing direction on bank regulation” Cayman Financial Review, April 2015

Postscript

A few Booboos

“Housing is not investment…. Housing is consumption” [p 113]   Buying a house is an investment (it is a capital good). Living in or renting it is consumption.

“The Fed can’t create the credit that is economic resources” [p. 159] No but it can create money.

The Fed believes “that economic growth is the cause of inflation” [p. 159] Throughout John fails to distinguish real and nominal magnitudes (real exchange rate vs. nominal exchange rate; real interest rate vs. nominal interest rate; real income vs. Nominal income; real quantity of money vs. nominal quantity of money, etc.). Real economic growth with a constant money supply will cause deflation. Nominal economic growth when real income is constant is all inflation, etc.

“For those who still believe we need the Fed to keep a lid on the ‘money supply,’ what can’t be stressed enough is that our central bank cannot control that supply.” [p. 161] Not true.

References

Coats, Warren, 1982   “The SDR as a Means of Payment,” IMF Staff Papers, Vol. 29, No. 3 (September 1982) (reprinted in Spanish in Centro de Estudios Monetarios Latinoamericanos Boletin, Vol. XXIX, Numero 4, Julio–Agosto de 1983).

1983, “The SDR as a Means of Payment, Response to Colin, van den Boogaerde, and Kennen,” IMF Staff Papers, Vol. 30, No. 3 (September 1983).

2009, “Time for a New Global Currency?” New Global Studies: Vol. 3: Issue.1, Article 5. (2009).

2011, “Real SDR Currency Board”, Central Banking Journal XXII.2 (2011), also available at http://works.bepress.com/warren_coats/25

2014, “Implementing a Real SDR Currency Board”

_____. Dongsheng Di, and Yuxaun Zhao, 2016, Why the World needs a Reserve Asset with a Hard Anchor, http://works.bepress.com/warren_coats/34/

 

 

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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.

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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

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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: Cayman Financial Review, April, 2016

I hope that you enjoy it.

Warren

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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 BeckSteve 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.

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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.

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On being Adults

I have always opposed hate crime laws on the grounds that the law should generally deal with our actions rather than our more difficult to determine motives. I am also saddened by the growing tendency of college students to turn to their in loco parentis administrators to protect them from the verbal challenges that should be part of their growing up experience. These two are related.

The ongoing discussion of transgenders’ use of bathrooms, locker rooms, and other public facilities has raised all kinds of issues. What if a “real” man pretends to be a woman and comes into the Lady’s room and molests some poor girl? Won’t laws allowing people to use the restroom that fits their sexual identity encourage such behavior, or at least open the door to it? No. Such behavior has been illegal forever without having to ask what reason or excuse was given for being in the Lady’s room. Comments from a reader of my “Public Bathrooms” blog earlier this week illustrates this sort of misguided thinking:

John Rohan: “The fear is not just transgender people attacking anyone…. The real fear is ordinary males taking advantage of the policy, which has happened on many occasions, so it’s not a “non issue”.

“This isn’t just about bathrooms with private individual stalls. It’s about locker rooms and showers, like in our schools. If the Obama administration had it’s way, biological males, with no surgery, hormone treatments, and without necessarily even informing their parents, should be allowed to use the girls locker rooms and showers.

“McCloskey goes on to ask: “How is it to be enforced? DNA testing by the TSA at every bathroom door?” Well, let’s flip that around. If you allow trans people to use their preferred facilities, how is that to be enforced? Asking for proof of hormone medication? A doctor’s note? Then what?”

It is the transgenders who have the difficult and sometimes wrenching decisions to make about what facilities to use at each stage of their transition. Common sense will and normally has prevailed on everyone’s part. When truly offensive behavior occurs (e.g., an assault) for what ever reason, the laws already exist to punish it.

There are times when we need the state to punish unacceptable behavior and to protect the weak, but the trend toward reliance on Big Brother to deal with more and more of the things we don’t like bods ill for our liberties and our society. Big Brother has a habit of having a mind of his own (or of his best placed buddies) the imposition of which we don’t always like. Of equal importance is the weakening of our personal strength to deal with the real world from turning too often to the state to deal with what we should be able to deal with ourselves.

This leads to my second concern, which is the subject of an excellent op-ed by Catherine Rampell in this morning’s Washington Post: “College Students run crying to Daddy Administrator” https://www.washingtonpost.com/opinions/college-students-run-crying-to-daddy-administrator/2016/05/19/61b53f54-1deb-11e6-9c81-4be1c14fb8c8_story.html

In her column Ms. Rampell says: “I applaud students who want to create a diverse, welcoming atmosphere on campus. I admire their drive to make the world around them a better, more inclusive place. What puzzles me, though, is this instinct to appeal to administrators to adjudicate any conflict.

“Rather than confronting, debating and trying to persuade those whose words or actions offend them, students demand that a paternalistic figure step in and punish offenders.

“Adult students, in other words, are demanding more of an in loco parentis role from their schools. And administrators appear ready and willing to parent.”

Political correctness, as opposed to good manners, reflects a worrying propensity to turn to and give over to authorities things we should develop the capacity to deal with ourselves. I have written about this several times before but the disease is still with us: https://wcoats.wordpress.com/2015/11/11/what-is-wrong-with-pc/

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