Category Archives: Economics

The Myth of Free Trade

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Fred_Z Writes:

Even so, Trump’s anti-global, anti-trade protectionist rhetoric is quite mad. I like his anti-illegal immigration stance, but that is the only thing that makes sense to economically protect Americans. The American middle and lower classes are not being ravaged by globalism and free trade, they are being ravaged by wage competition from illegals and insane government environmental, regulatory, tax and subsidy policies.

How does Trump expect us to buy your exports if you refuse to buy our exports? David Ricard showed nearly 200 years ago that free trade benefits both sides, even if the other party is dumping below costs, and there is literally no credible counter-argument. Besides, you Yanks are utterly notorious for distorting dozens of markets, from sugar to corn, with ludicrous tax and subsidy policies.

Ah well, may we live in interesting times.

If I were going to list the things that have unraveled conservatism over the last thirty years, the embrace of libertarian trade myths would be high on the list. Trade has become a sacred item in the commentariat that can never be questioned and never be worshiped too much. Even the Left has found it impossible to make arguments against trade deals, instead embracing the globalism of their donors. It’s part of what has motivated Progressive support for Sanders over Clinton.

As is the case with so much of our current politics, trade is no longer a policy to be debated. You either fully support “free trade” or you are dismissed from the conversation. A similar thing happened with immigration over the years. All of the immigration skeptics were purged from the public square, leaving two types of immigration enthusiasts. You either hate white people or you are a shill for the cheap labor lobbies. Trade has followed the same path.

Despite the moralizing, trade is like any other policy. It is about trade-offs. There are benefits from lowering trade barriers, thus increasing trade between countries. There are liabilities that come from liberalized trade too. A good trade policy minimizes these costs so that the result is a net benefit. Bad trade policy fails to address the cost side and is a net negative. There is no free lunch, even with trade. There is always a cost side to every public policy.

Opening up trade with Canada, for example, hurts the America beaver pelt industry. Putting American beaver trappers out of work has consequences. Low cost Canadian beaver hunters will take market share from the Americans. Those workers will be let go, thus adding a cost to America. If those workers can be soaked up by a business that booms due to trade to Canada, then we very well may have a net benefit to America. If not, then not.

Trade with countries like Canada makes a lot of sense because Canada has things we want and we have things they want. Canada is culturally very similar to America, speaks the same language and maintains the same legal traditions. Trade between the two countries will require little additional policing as businesses on both sides have similar expectations of conduct. A Canadian firm that violates US law will show up in the US court to answer for it. Additionally, businesses on both sides know the governments of both sides will enforce the law equally.

On the other hand, trade with Mexico is a different animal entirely. Mexico is much poorer, lacks our cultural traditions and has a highly corrupt government. The reason American firms setup shop in Mexico is to avoid US labor and environmental laws. Carrier is not moving to Mexico because it is better. They are moving there because it is worse, thus allowing them to get away with things that would never be allowed to do in the Anglosphere. If the Mexican government complains, a small bribe solves the problem.

That’s the reality of trade with Mexico. It’s not the indigenous tortilla maker selling us tortillas so he can buy software and legal services from the US. “Trade” with Mexico is a variation of the sort of slavery that unraveled the Roman Republic. Instead of rich businesses bringing slaves in to work, they take the work to the slaves, all for the purpose of undermining their smaller competitors in the domestic market, who cannot afford to exploit the same rules.

Trade with Mexico has largely been a game of cost shifting. Other than weed and meth, Mexico is incapable of producing much of anything other than excess people. Trade deals with Mexico, however, have allowed global enterprise to shift their cost of doing business onto the American middle-class through declining wages, higher taxes and social instability. “Free trade” with Mexico has some real benefits to Americans, but it brings real costs too, costs that outweigh the benefits.

When you look at trade with China, the cost side starts to fill up with all sorts of indirect items. How much has Chinese hacking, theft and piracy cost America? I know a firm that has spent millions to keep China from pirating their product. A trick China uses is to flood the market with a sub-standard version of an American product, thus damaging the reputation of the American firm. How many dogs and cats were killed by Chinese pet food additives? How much will it cost us to defend Japan and Taiwan from Chinese aggression?

The point here is that trade is a good thing, but only when it is a net positive to the American people as a whole. Deals that allow plutocrats to shift their costs to the public so they can privatize profits are not good deals. Trump pointing that out does not make him a protectionist. It makes him a realist. It’s the innumerate phonies, clutching their copies of Atlas Shrugged, desperately trying to shut off these debates, who are divorced from reality. Trade, like all pubic policy, is about trade-offs. Those trade-offs are debated in a healthy society.

Unimaginable Math Problems

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In 1980, the US government owed, in one fashion or another, $909 Billion, which was about 35% of GDP. Federal spending that year was $591 Billion. If you adjust these numbers for inflation, the 1980 spending was $1,700 Billion and the debt was $2,615 Billion. Today the government spends over $3,000 Billion and the national debt is $19,000 Billion. The current estimates say the debt-to-GDP ratio will be close to 90% this year and will break 100% sometime in the next administration.

I use 1980 as a benchmark because Reagan ran on the debt issue, making it a popular topic in politics ever since. In that time, Republicans have controlled the White House for 20 of those 36 years. They have controlled the House for 18 of those years. The point here is both parties have had chances to arrest the growth of spending and debt accumulation, but neither team has bothered. As long as the Fed can monetize the debt, the politicians keep spending.

Another reason to think back to 1980 is that no one thought the current debt levels were possible. The NYTimes first used the word “trillion” in the 1970’s. The rationale behind Reagan’s tax plan was that making high taxes politically impossible meant spending would have to decline. After all, who in their right mind would keep buying bonds, even at the elevated rate of 10% for the 10-Year Treasury?

The future turned out to be a very different place than the planners of the 1980’s imagined. That’s important to keep in mind when you see stories like this regarding the nation’s public pension systems.

The US public pension system has developed a $3.4tn funding hole that will pile pressure on cities and states to cut spending or raise taxes to avoid Detroit-style bankruptcies.

According to academic research shared exclusively with FTfm, the collective funding shortfall of US public pension funds is three times larger than official figures showed, and is getting bigger.

Devin Nunes, a US Republican congressman, said: “It has been clear for years that many cities and states are critically underfunding their pension programmes and hiding the fiscal holes with accounting tricks.”

Mr Nunes, who put forward a bill to the House of Representatives last month to overhaul how public pension plans report their figures, added: “When these pension funds go insolvent, they will create problems so disastrous that the fund officials assume the federal government will have to bail them out.”

Large pension shortfalls have already played a role in driving several US cities, including Detroit in Michigan and San Bernardino in California, to file for bankruptcy. The fear is other cities will soon become insolvent due to the size of their pension deficits.

Joshua Rauh, a senior fellow at the Hoover Institution, a think-tank, and professor of finance at the Stanford Graduate School of Business, who carried out the study, said: “The pension problems are threatening to consume state and local budgets in the absence of some major changes.

“It is quite likely that over a five to 10-year horizon we are going to see more bankruptcies of cities where the unfunded pension liabilities will play a large role.”

The Stanford study found that the states of Illinois, Arizona, Ohio and Nevada, and the cities of Chicago, Dallas, Houston and El Paso have the largest pension holes compared with their own revenues.

In order to deal with the large funding shortfall, many cities and states will have to increase their contributions to their pension funds, either by raising taxes or cutting spending on vital services.

That’s one possible future. The important thing to remember is the US government has no money of its own. It either taxes, borrows from foreign sources or creates credit money through the machinations of the Federal Reserve. Given the state of the federal budget and projected debt, it’s unlikely the Feds could bailout the state pension systems completely. The CBO says the total debt could hit $30,000 Billion in ten years.

The other possible future is the pensioners don’t get paid. When a company goes bankrupt, the creditors don’t get paid. At least they don’t get paid in full. When cities and towns can no longer make their pension payments, they will stop making those payments. The old retired employees will sue and petition their legislatures, but you can’t get blood from a stone. The best case is the pensioners take a hefty cut in benefits.

The thing no one discusses is why these funds are in trouble. The reason for the trouble is the artificially low bond rates we have seen for two decades. In order to finance Federal spending, borrowing rates have been driven down to near zero. The biggest buyers of treasuries used to be pension funds. They could expect a return exceeding their target of 7.5% and not carry much in the way of risk. Being a pension fund manager used to be the easiest job in finance.

Olivia Mitchell, a professor at the Wharton School at the University of Pennsylvania, told FTfm last month that US public pension plans face “grave difficulties”.

“I do believe that US cities and towns will continue to suffer, and there will be additional bankruptcies following the examples of Detroit,” she said.

Currently, states and local governments contribute 7.3 per cent of revenues to public pension plans, but this would need to increase to an average of 17.5 per cent of revenues to stop any further rises in the funding gap, the research said.

Several cities and states, including California, Illinois, New Jersey, Chicago and Austin, would need to put at least 20 per cent of their revenues into their pension plans to prevent a rise in their deficits, while Nevada would have to contribute almost 40 per cent.

Mr Rauh’s study claims the “true extent” of funding problems in US public pension system has been obscured because plans calculate both their costs and liabilities on the assumption they will achieve returns of between 7 and 8 per cent a year. The academic believes this rate is “wildly optimistic and unlikely to be achieved”.

Mr Rauh said a more realistic return rate, based on US Treasury bond yields, was around 2-3 per cent a year.

Ultra-low bond rates have forced pension funds into higher risk investments as they try to hit their target of 7% per year. This is fine when the market is performing at or near its historic averages and the fund managers are smart enough to bet the broader market. It also assumes that cities and states pay their pension obligations, without actually borrowing from those same pension funds. Now we know why the pension system is in trouble.

This is just one small aspect of the daunting math facing the United States over the next decade. Again, no one imagined the current math was even possible 35 years ago. If you told 1980 people that the Federal debt would be $19 Trillion, they would have laughed in your face. Maybe ten years from now $50 Trillion is no big thing. The math is unimaginable, but today’s math was once unimaginable. Alternatively, perhaps what’s coming is unimaginably awful. I don’t know, but the math problem facing America beggars the imagination.

Reverse Engineering A Belief

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I was watching a documentary on the remains of the ice man from the Æneolithic period, found in the Alps 25 years ago. Ötzi is a big deal for anthropologists, historians, geneticists, biologists etc. The ability to get genetic material for analysis offers up enormous research opportunities. For hobbyists with an interest in these subjects, it is always fun to listen to experts discuss their interests in such a rare discovery.

One of the things they have been puzzling over are the weird tattoos on the man’s body. Initially, they assumed they were for decoration, but further research suggested that was unlikely. The markings were not very decorative, but they did correspond to areas that either had prior injuries or signs of disease. In other words, the tattoos were medical treatments of some sort.

This sounds rather loopy to modern people, but it is not hard to see how people could come to believe such things. Grog gets the evil spirits and is close to death. The local Shaman gives him a tattoo so he is properly marked up for the afterlife and Grog suddenly rallies and recovers from the evil spirits. Everyone assumes it was the tattoo. Before long, tattooing the sick is what everyone does.

Belief is a funny thing in that it is self-reinforcing. The people of Ötzi’s time probably understood that tattoos did not always work, but when they got a good result, they just assumed it was the tattoo. What else could it be? Not doing the tattoo treatment, quite logically, became a high risk choice.

Understanding this dynamic is useful when looking at modern times. For example, we believe smoking tobacco causes lung cancer. At some point in the future, when the alien anthropologists are digging through the remains of our age, they will puzzle over “No Smoking” signs in the same way, wondering why they never found “No Child Molesting” signs in the rubble.

The point here is that you can tease out some things about what people believe based on what they do, even in the modern age where we pretend to be irreligious logic machines. That came to mind reading this rather entertaining comment thread on a Marginal Review post. As is often the case, Steve Sailer was making heads explode by noticing things that are on the prohibited list.

The question Steve kept asking in various ways is why economists have never bothered to study, much less calculate, the value of citizenship. If a citizenship card for Somalia and one for Canada were put up for bid, which would fetch more? How much would each get at auction? Who would do the bidding?

These are very interesting and reasonable questions that should be natural areas of interest for modern economists. After all, immigration is the dominant topic of our age and economists are the shaman class, asked to weigh in on every topic. It follows that the “markets in everything” crowd would have come up with a model for the market for citizenship.

As Steve correctly observes, the better question may be why they refuse to even consider it. Read the comments in that post and you see a lot of undefined panic. They don’t know why they should not be talking about this, but they sense it is a taboo subject so they keep trying to change the subject. In a sense, Steve was asking, “why are we tattooing Grog?”

I’m not much for reductionism so I don’t think there’s a conspiracy. What I see is that these people believe all of the things people in the managerial class believe. One of those beliefs is that citizenship is an artifact of a prior age. They dream of being citizens of the world, hopping from Washington to New York to London to Davos. Being an “American” is, if anything, a little embarrassing for them.

It’s why they are puzzled by the resistance to open borders. They live in these wonderful, bunkered communities that are surrounded by ethnic restaurants and shops. When they meet friends at the Ethiopian place in Fairfax to reminisce about their trip there in grad school, they wonder how anyone would not want this life. For them, open borders are the paradise of their daily life.

The answer to Steve’s query, it turns out, is a question. Why study something that has no value? From the point of view of economics, citizenship is as valuable as unicorn insurance or stock in the flying carpet company. The market for their skills is in climate magic and monetary policy so that’s why we have a million papers on those topics.

There’s another thing to tease out here, returning to the image of the Cloud People gnoshing on fit-fit at the Ethiopian place. To these people, the horny-handed sons of toil are failures. They have failed to reach the managerial class. Therefore, their habits are the habits of failure. Their shouting about patriotism, the dignity of work and joys of family are just confirmation to the Cloud People that they are the elect.

In a world where one is measured by how many of the correct boxes he ticks, there’s no value in even thinking about the wrong boxes. The neo-mandarin system of the modern managerial class rewards recitation, not inspiration. Why puzzle over the plight of the Dirt People when the people grading the exams don’t care about it? It’s simply easier to believe it does not matter than to wonder why.

After years of examining Ötzi, researchers have determined that he did not freeze to death in the snow. That was the working assumption for years. Everyone assumed he got trapped in bad weather on a hunt or a trip. It turns out that he died from an arrow wound. Ötzi was murdered. While those tattoos may have worked against evil spirits, they were not much use against an arrow in the back.

Insurance Versus Taxes

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You can make the argument that insurance made the modern world possible, because it made risk quantifiable. The insurer is making a bet that the return on his investment of your premiums will exceed the claims on those premiums. In order to make that bet, he has to have some way to calculate the amount he can reasonably expect to payout in claims.

That’s one half of the equation. The other half is the investment. In order to run a profitable insurance company, you have to invest conservatively. The same guys figuring out the probability of your death this year are using the same mathematical skills to find the safest investments. The result is large pools of premiums moving into the safe investments like bonds. [1]

Niall Ferguson in the Ascent of Money gives a great history of the first modern insurance company, the Scottish Ministers Widow’s Fund. Robert Wallace and Alexander Webster figured out a few things that revolutionized capital. One of the consequences of this innovation was that large pools of capital were created from thousands of small premiums. That capital could then be put to work in new businesses, new industries and new technology.

The interesting thing about the birth of modern insurance is even after centuries of experience, we still can’t understand the difference between insurance and taxation. Social welfare programs, for example, work on the principle of pay-as-you go where current taxpayers cover the expenses of current beneficiaries. Back when the Scots were inventing modern actuarial tables, they knew pay-as-you-go could never work in the long run. Yet, here we are.

It’s also why the public sector pension systems are teetering on collapse. The Scotts figured out that a fixed benefit system had to lock in the benefit side by pegging it to the amount of premiums paid into the system. Once you uncouple the premium from the benefit, the system will collapse. The only question is how long it will take, but the boundary always seems to be one working life, as we are seeing in America.

Similarly, insurance only works when it is voluntary. When the state comes in, points a gun at your head and says you have to buy an insurance policy from the companies they choose or from the state, that’s not insurance. That’s extortion. If you want to be kind, it is a tax. When the state takes money from citizens against their will, that’s a tax, regardless of the intentions.

It’s why American health insurance is collapsing. It has none of the features one must have for a successful insurance system. The insurers are forced to take all customers, regardless of risk. They are not allowed to dump reckless customers or even ask about risky behavior. At the same time, the customers are forced to buy insurance. In many areas, there’s only one or two companies and the rates are set by the state.

Of course, what makes health insurance an impossibility is we will all get sick and die eventually. You cannot insure against certainty. A true health insurance system would combine the logic of whole life insurance to cover the inevitable with the logic of term life insurance to address surprises, like getting hit by a bus. Again, these are things we have known for centuries.

Progressives are now talking about using the same nutty ideas to “remedy” gun violence in America. They want gun owners to carry liability insurance that would pay victims in the event the insured’s gun is used in a crime. No insurance company would sell a policy to a gun owner to cover the cost of them shooting someone. There’s simply no way to shoot someone without being negligent (criminally or civilly) or justified. In both cases, insurance has no role.

The point of this, of course, is to drive up the cost of gun ownership and create a gun registry, but even if it was an honest effort, the gun owner is being held liable for the actions of others. That’s just a click away from collective punishment and contrary to a couple thousand years of western civilization. More important, it is confusing insurance with taxation. In this case, taxing millions of gun owners so politicians can hand out tax dollars to the victims of gangbangers.

All of this brings me to something Steve Sailer has been pushing with regards to immigration and that is forcing immigrants to carry liability insurance. Unlike compulsory gun insurance, the attempt here is not to infringe on a natural right. Steve is cleverly trying to introduce the idea in order to help immigration opponents. In that regard, it is clever and I hope it catches on with the chattering skulls.

The problem here is similar to the other examples of compulsory insurance. It’s really just a tax. We already have a sponsor system where people can bring over relatives and employees, as long as they meet certain financial terms. Sponsors cannot be on welfare, for example. They have to have an income higher than the current poverty line.

Where the insurance should come into play is on the sponsor and employer. If Jose wants to bring his family over, he has to either get a liability policy with a million dollar combined single limit or post assets of the equivalent. Employers seeking H1 visas would do something similar. If Jose gets rich and wants to sponsor his relatives, Jose has to carry enough insurance to cover it. Similarly, the employer will have to factor insurance costs into their indentured servant costs.

[1] I know. I know.

The Economics of Unreality

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One of the stranger things about modern life is the rise of economics as a quasi-religion in the West. In another age, the rulers would run to the local witch doctor or oracle before making a big decision. Closer to our age, leaders would pray for guidance, maybe talk with a holy man. Today, the pols run to economists for advice on everything.

What makes it particularly humorous is the shamans of economics are more wrong than the old witch doctors. The reason is the modern economist really thinks he is a man of science, while the old witch doctor knew he was a fraud. Of course, the witch doctor also knew he faced the sword if he went too far out on a limb, so he was careful to never get carried away.

Economists have no such fear of being wrong as being wrong is good for the guild. The more things get screwed up due to their bad advice, the better the employment prospects for the profession. Lucky for them, they get most everything wrong, so the racket is a serpent eating its tail.  A good example is here in this Wall Street Journal article.

Federal Reserve officials this week are expected to raise interest rates for the first time in nine years on the expectation that employment and inflation will hit targets reflecting a healthy U.S. economy.

But Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, a figure close to estimates of full employment, while inflation remains stuck at less than 1%, well below the Fed’s 2% target.

Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

Low inflation—and low prices—sound beneficial but can stall growth in wages and profits. Debts are harder to pay off without inflation shrinking their burden. For central banks, when inflation is very low, so are interest rates, leaving little room to cut rates to spur the economy during downturns.

Full employment? No one walking around America thinks we are anywhere near full employment. Anyone older than 40 should remember the booms of the 80’s and 90’s when employers were offering bonuses to new hires and employing headhunters to poach workers from other firms. That has not happened in a long time.

Of course, the labor force participation rate is at a 38-year low. Some of it is certainly due to demographics. We have more old farts on the dole due to the boomers hitting retirement, but that’s just starting as the first boomers hit retirement. The stunning truth is there’s an employment boom among the geezers. It is the young struggling with the stagnant job market.

That’s one bit of unreality. The other bit is the zero inflation stuff. I’ve gone around and around with economists about chain weighted inflation and the logic applies here. Granny may have substituted dog food for ground beef, but that does not mean inflation is flat. Similarly, every retail container has shrunk over the last decade, even though the prices are generally stable. Shrinkflation is a real thing we all see every day of our lives.

Putting aside those two complaints, which are always dismissed by economists as ridiculously based in observable reality, there is the confidence they have even in the face of being wrong. Exactly no one in the economics profession saw the crash coming and now they can’t figure out why they can’t re-inflate the world economy. But being wrong is juts proof we need more economists!

The site where I saw this story linked had a comment from someone mentioning The Modigliani–Miller theorem in rebuttal to some other comment. For those unfamiliar with that particular tarot card, here’s the definition:

“The basic theorem states that under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed.”

Therein lies the fundamental problem with economics and why it is not a STEM field. The entire profession is based on “all things being equal” or “in the absence of observable reality” statements that would get you laughed out of an empirical field. The only field that is close in the use of hothouse logic is climate science.

None of this is to say we should dismiss economics out of hand. In fact, the statistical study of human behavior should be a part of public policy debates. Where every economist goes wrong is in thinking he has found the philosopher’s stone once he finishes his first statistics course. As a result, the field never gets better. But when there is good money in being wrong, why be less wrong?

It is a pity because we will probably have to go through a near death experience before we figure out the mistakes. The Great Depression finally taught the West that the money supply also includes outstanding credit. The modern economic profession is not learning anything new, despite the fact we have experienced the greatest technological leap forward since the wheel on top of a revolution in credit.

The Myth of Growth

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An expression I’m fond of using is “no tree grows to the sky.” I don’t know where I picked it up, but like most of my pithy expressions, it appeals to be sense of the natural order. Everything begins, evolves, changes, adapts, but eventually ends. It strikes me that most of the periods of tumult were the result of people just assuming the trend lines would never change. Everything would stay the same forever.

The one area where this always jumps out to me is the cult of economics. If you scrape away the posing and posturing, this strange modern religion is built on the absolute belief that economies can and must grow forever. The “economy” has been turned into a thing with agency that punishes and rewards the people, based on their treatment of the economy.

Nowhere in modern economics do you find people talking about steady low growth or even static economies, other than as cautionary tales. In the word of modern economics, the economy of a country is the plant from Little Shop of Horrors. It must be fed so it can grow and nothing must be permitted to get in the way of feeding the thing. In the moral hierarchy of modern economics, everything comes second to the economy, even human life.

To some degree, this is what drives the open borders fanaticism among the ruling classes. The shamans of the cult of economics tell these simple minds in politics that the economy must grow or we all die. Further, they tell them that the only way to grow it is to grow the population. Since the locals refuse to have ten kids per woman, the only solution is to import millions of peasants from the fringes of civilization.

In fact, growing the economy is so important to the health of the people that it trumps the life of the people. Mark Dayton comes pretty close here to saying that opponents of mass immigration don’t deserve to live, that they can be fed to the economy like the murder victims are fed to the plant in the above musical. To Mark Dayton, his statement is noble because he is saying he is willing to sacrifice his kin to please the god of modern economics.

Harsh words and heartfelt sentiment were exchanged by community members and local officials on racial issues in Central Minnesota at the St. Cloud NAACP Community Conversation with Gov. Mark Dayton.

Hosted Tuesday at St. Cloud Public Library, about 100 people from diverse backgrounds gathered to ask questions of St. Cloud Mayor Dave Kleis, St. Cloud Police Chief Blair Anderson, State Rep. Jim Knoblach, Minnesota Human Rights Commissioner Kevin Lindsey, Council on Black Minnesotans Community Program Specialist Kolloh Nimley and St. Cloud AFYA Pharmacy co-owner Dr. Edris Kosar.

From the start of the event, Dayton bluntly stated his opinions on the racial tension in St. Cloud and across the state in regards to immigration.

“Look around you. This is Minnesota,” Dayton said. “Minnesota is not like it was 30, 50 years ago. … This is Minnesota and you have every right to be here. And anybody who cannot accept your right to be here, and this is Minnesota, should find another state.”

Dayton is defining citizenship here based on your acceptance of the New Religion. Much as libertarians think the unproductive should be turned into fertilizer, the man of the New Religion thinks the infidel is no longer his fellow citizen, maybe not even his fellow human being. The Bantu tribesman on the other side of the planet wishing to settle in your neighborhood means more to Mark Dayton than you, if you are not sufficiently enthusiastic for the new faith.

The bit of reality the shamans cannot contemplate is that the economy will not grow forever. Much of what is called growth is just currency manipulation. Another part is gaffing the numbers so the spreadsheets look pleasing. Automation, of course, is going to eliminate most work in the next generation. Growth as currently understood will come to an end by the middle of this century, no matter how many Bantus are imported to Minnesota.

The trouble is, everything in the West is based on the assumption that the economy will grow forever. That’s not irrational. For most of human history, scarcity has been the great challenge. The great minds were all put to the task of figuring out how society can allocate scare resources to support the maximum number of people. In a world with shortages of food, water, housing, shelter and safety, growing the supply of those stocks is paramount. It trumps everything.

That’s not the modern West. It’s barely the case in the savage areas. The population explosion in Africa is due to more food, medicine, shelter and security. We live in an age where poor people are obese because they sit around all day eating massive calories, taking massive amounts of intoxicants while watching television. Mexico is the most obese country on earth and they are allegedly waddling north in search of more stuff, like grazing animals.

A post-scarcity world should be a world of steady populations, with periods of modest growth and decline, based on fashion. It is a simple math problem. Instead, our rulers are convinced that we must have more and more people in order to feed the economy. Whether or not they really believe it is hotly debated on the Right, but clearly it is baked into their world view. The modern politician talks about nothing other than economics and economic growth.

I think it goes deeper than just a current fad. Everything is based on growth, real or imagined. Our institutions and culture are based on growth. We deliberately debase the value of labor through currency manipulation, for example, in order to encourage productivity and economic activity. The explosion of debt is so the welfare state can keep growing. Those massive credit markets everyone now fears is to keep the economy growing.

Generations of ruling classes have been trained on the core belief of never ending growth. Remove Audrey II from the modern discussion and what do we have? The error made on the Right is to assume this obsession with economics is in order to avoid answering that question. It may simply be that they fear discussing culture because it may upset the gods of growth and then there will be hell to pay.

To the Gas Chambers!

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Most men grow out of libertarianism, if they were ever so foolish, by their mid-20’s. It is at that age when you have enough experience in the world to see the foolishness of it. It takes longer for the young Progressive male to wake up because of the cultural reinforcements all around us. We live in lands controlled by the Cult of Modern Liberalism. To be something other than a Progressive tests the mind on a daily basis.

I’m fond of pointing out that liberalism and libertarianism are two sides of the same coin. People find that assertion bizarre, but both are utopian and both start with a hatred of humanity. That is the heart of materialism, after all. Materialism places efficency at the top of the moral hierarchy and people somewhere further down. The main difference between the faiths is the the liberal hates all men equally, while the libertarian simply detests the unfit.

This is on full display in this column by Kevin Williamson. The style is familiar where the curdled hatred of humanity is couched in an ad hoc critique of the bogeymen that haunt the dreams of reactionaries and libertarians alike. There’s also the standard layer of free market frosting about the glories of free trade and the free movement of people. It’s the part we’re supposed to notice, rather than the sadistic misanthropy at the core of the article.

Phillips, Inc., in the end decided it had no need for Phillips, Texas, and the town was scrubbed right off the map. The local homeowners owned their houses but not the land they sat on, which belonged to the company. (These sorts of arrangements were, and are, more common than you’d think, as in the case of the many Californians in the Coachella Valley who own their houses but lease their land from the Agua Caliente band of Cahuilla Indians.) Many of the residents of Phillips were uneager to be evicted from their homes, and they sued the company with the help of the famously theatrical Texas trial lawyer Racehorse Haynes, who informed the good people of Phillips: “They might whup us fair and square, but they better bring lunch.” Lunch was served, and Phillips is just gone.
It was the right thing to do. Some towns are better off dead.

That’s always been the truth at the heart of libertarianism, as well as the various implementations of Rousseau’s monstrous ideas. Libertarians have always imagined themselves as trapped with a bunch of fat lazy takers. Lacking the courage to confront the slackers themselves, they seek a system that will do the dirty work for them. Liberals have this same view. They see themselves as the saints of a fallen world and their system will take care of all those sinners.

Way back in the olden thymes, Whittaker Chambers unriddled this connection in his review of Ayn Rand.

Systems of philosophic materialism, so long as they merely circle outside this world’s atmosphere, matter little to most of us. The trouble is that they keep coming down to earth. It is when a system of materialist ideas presumes to give positive answers to real problems of our real life that mischief starts. In a age like ours, in which a highly complex technological society is everywhere in a high state of instability, such answers however philosophic, translate quickly into political realities. And in the degree to which problems of complexity and instability are most bewildering to masses of men, a temptation sets in to let some species of Big Brother solve and supervise them.

The liberal and the libertarian look at the messy arrangements of mankind and wish to clean the slate and start anew, because to work through the current arrangements is dirty and time consuming. One does not seek to alter the current arrangements out of a love or respect for the current arrangements. All utopians first aim to destroy and that is done best with a passion, which can only arise from contempt.

That’s what bleeds from Kevin Williamson’s writing. He looks at the “losers” in America with contempt. Some towns are better off dead. My guess is he thought that was a cheeky line, as he tends to the adolescent, but maybe he did think much about it. As Chambers noticed, libertarians are not full of introspection.

Nor has the author, apparently, brooded on the degree to which, in a wicked world, a materialism of the Right and a materialism of the Left, first surprisingly resemble, then in action tend to blend each with each, because, while differing at the top in avowed purposed, and possibly in conflict there, at bottom they are much the same thing. The embarrassing similarities between Hitler’s National Socialism and Stalin’s brand of Communism are familiar. For the world, as seen in materialist view from the Left. The question becomes chiefly: who is to run that world in whose interests, or perhaps, at best, who can run it more efficiently?

That last line sounds remarkably like Lenin’s adage, “who, whom?”

Rambling about the Maths of Debt

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The other day, Kevin Williamson posted this about balancing the Federal Budget. It is the typical snarling, snide polemic he is known for recently. Maybe he accidentally drank out of his ink bottle or took a blow to the head, but his work has been of this type for a while. This recent piece is mostly another deranged rant about Donald Trump. The bulk of his column is crap, but this got my attention.

At the moment, our national fiscal situation is considerably less bad than it was during the Obama-Pelosi-Reid era of one-party Democratic rule; the 2010 and 2011 federal deficits were 8.7 and 8.5 percent of GDP, respectively, but the 2014 deficit was only 2.8 percent of GDP. Federal spending went from 24.4 percent of GDP in 2009 to 20.3 percent in 2014, thanks in no small part to budget sequestration, the one national policy in which Washington’s Democrats and Washington’s Republicans are united in loathing. The 2017 deficit is projected to be 2.3 percent of GDP.

That puts us within striking distance of having a balanced budget (albeit one that is balanced at a spending point that is too high for my own taste) or at least the reduction of budget deficits to trivial levels. All that is needed to get there is a little sober reform on the taxing front and a little sober reform on the spending front, with the hardest piece being reform of our entitlement programs, which in the long run will be the major drivers of deficits. I like the idea of radical tax reform, scrapping the tax code, abolishing the IRS, and starting over, and then privatizing Social Security and abolishing Medicare and Medicaid to boot. But you don’t actually have to do that to balance the budget.

That struck me as implausible so I did some mathing. The first thing we need to know is how much debt the Feds are piling on each year. In fact, that’s probably the only thing worth knowing as that is the tax on the future we may or may not be able to sustain. Greece stopped being a country, after all, because it could not service its debt, not because it spent too much or taxed too little. When you can no longer service your debt, you’re done as a country.

According to the Treasury, the amount of total debt held by the public has gone up 23.9% since the heroic budget deal Williamson is fond of touting. That’s better than the previous four years when debt rose by 37%, but there was also the big giant recession where tax receipts dropped. On the other hand, it is still well above the average over the last 35 years, so no one should be celebrating this modest reduction.

The larger point he is making is that with some small tweaks, the federal budget can be balanced. Well, over the last 35 years the annual increase in Federal debt has been 8.3%. In 1980 the debt was $907,701,000,000 and it is now $17,824,071,380,733, as of the end of the 2014 fiscal year. That’s a staggering amount of debt that happened during the two biggest economic booms in the nation’s history. Put another way, in the best of times we have run up debt at record levels.

For another way to look at it, here is the inflation adjusted debt since the 60’s:

fredgraph

There’s no way a sober person can look at the number and come away thinking we are a few tweaks away from solving the debt problem. If that were true, the graph above would not exist. Instead the line would bounce along in that 30% range as it had for so long. Something changed in the 1980’s and as a result debt as been on a steady run upward ever since, regardless of the party in charge and the amount of tweaking.

That raises another interesting question. If debt as a percentage of GDP is spiraling upward and neither party seems to have a way to stop it, what is driving the debt spiral? The most obvious place to look is the spending side as taxes have not changed a whole bunch in my lifetime. They lower rates, but remove deductions. Then they raise rates, but add back in a bunch of deductions. As Reason Magazine noted a few years ago, tax collection remains fairly constant over time.

Here’s one of my favorite charts. It is the per capita inflation adjusted spending. Using 1980 as the starting point, the size of the Federal government has doubled, even adjusting for inflation.

When you look at per capita, inflation adjusted GDP growth, you see something curious. The average growth rate has been 1.86% since 1980, which is interesting for a number of reasons, but what’s relevant here is that it explains the chart above. The cost, per capita, of government may have doubled in 35 years, but so has per capita, inflation adjusted GDP. The cost of the Federal government has simply kept pace with rise of incomes. The relative cost of government has not changed much.

So, what is driving the debt spiral?

The answer is the the debt spiral is self-perpetuating in a zero interest rate world. Imagine you have a personal income of $100,000 per year after taxes and expenses of $105,000 per year. You borrow $5,000 to cover the deficit. Every year your earnings go up 5%, but your expenses go up 5% as well. In 20 years, that annual deficit is $12,500, which sounds pretty good. Your annual deficit percentage has not changed, but your total debt is now $165,000!

Of course, it gets much worse because debt has interest. Even the government pays something in interest today. Using the above example and the historic norm of 7%, the total debt would balloon to over $200,000 in that 20 years and the debt payments would eat up a big chunk of the budget. Long before you got the 100% debt range, your little country would have been forced to cut back and pay down debt.

What’s happened in the free money era since the 1980’s is the cost of borrowing, in the view of politicians, has disappeared. In the age of market based borrowing rates, the bond markets forced the government to choose between competing options. Do you spend more on defense or more on roads? Do you make pension promises for ten years out or does the impact on borrowing make that untenable, because it cuts into current spending on other constituents?

That has not been the case for a generation. Instead of choosing between competing interests, pols just borrow to pacify both interests. The Republicans borrow to cut taxes for their patrons and the Democrats borrow to give goodies to their patrons. Elections, therefore, have no consequences as the parties never threaten each others interest. The voters are simply deciding who gets to spend time at the debt trough.

Of course, there’s a limit to how much debt a government can run up even in a zero interest world. If central banks begin to let rates rise, then the day of reckoning comes much sooner, which is why they can never let rates rise, at least not on purpose. That returns me to the original topic. The only “tweak” that can fix the debt problem is actually a radical change and that comes but one way.

The Crushing Reality of Mathematics

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A fun book to read, if you have a thick skin, is called The Big Questions by a libertarian crackpot named Steve Landsburg. Somewhere in the book he makes the excellent point that mathematics is universal and immutable. At the dawn of time, two plus two equaled four for all values of two. It’s never changed and will never change, even if the universe collapses into an infinitely dense mass.

If you are looking for a nice shorthand definition of reality, mathematics is a good choice. Consequently, a good definition of “crisis” is when beliefs violently realign with mathematics. The Greek crisis is about the number of Euros they owe to creditors is bigger than the number of Euros they have in their accounts.

To paraphrase Philip K. Dick, math is that which, when you stop believing in it, doesn’t go away. Like reality, people can only take so much math, so we spend a lot of time pretending it is negotiable. The most obvious example is the American pension system. Every week we see stories like this one about how cities and towns are being crushed by pension debts.

There are three bits of math to consider here. One is the fact that you can only tax people so much before they revolt. They may revolt by tax avoidance, or they may hang their politicians, but there’s a point where they will not pay any more in taxes. That means every government has a cap on what it can collect from its subjects.

The second bit of math is that people expect certain minimum things from their rulers. Towns have to keep the streets clean, catch criminals, runs schools, etc. National governments have to defend the borders, run the courts, police the economy, attack the muzzies and so on. These things cost money and that amount is always more than the people think they should pay, but it is just below the maximum they will pay.

The final bit of math is the hardest and that has to do with debt. Pension systems are a type of debt. If I hire you and as a part of your compensation, I promise to pay you a monthly stipend after you turn 65, that’s a debt. That debt must be backed by collateral. In a pension system that collateral is the cash contributed by members and the employer, plus whatever interest that cash earns.

Pols have been jacking up the benefits for decades as a way to buy support from unions. This is just another way of saying they have been borrowing massive amounts to buy votes. To hide this reality, these pension systems claim their investments will return 7.5% or more, which they promise will cover their liabilities.

The trouble is the math says otherwise. If your pension system has $100 million in liabilities and those liabilities are growing by 7.5% per year, your returns have to be 7.5% to keep pace, as long as your assets are $100 million.  In many cases, these pensions have assets between 60-70 percent of liabilities. That means 10-12% returns are required and most of these funds are seeing returns of 2-3%.

The only way to make up for this gap, which is getting worse every year, is to divert money for operating expense like street cleaning, to pay pension debts. That and raise taxes, but in most of America we are at the maximum people will pay. The result is the people pay more and more for less and less government. At some point, mathematical reality crushes these municipalities and the states.

Most estimates put the math problem at about $4 trillion, but we have to assume that is the best case scenario. Greece is an excellent example of how math avoidance leads to compounding mistakes, thus making the math worse. Ten years ago, Greece could have unwound their debt with an orderly exit from the Euro. Now they just wait for the revolution.

There’s no reason to think the same thing will not happen in the state pension systems. Some states can cut benefits and others have quietly transferred the liabilities to cities and towns, which can use bankruptcy to cut their debts. California, on the other hand, is looking at a Greek-style economic meltdown in the next decade.

None of these things happen in a vacuum. California owes its former workers money it will not pay. Those employees owe money they cannot play. Of course, California bonds sit on the balance sheet of banks who pledge them as collateral. The math of the pension crisis says it is going to wipe out more than the savings of a few retired bus drivers. The math says we’re all doomed.

Currency Wars

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I have a pet theory that a good way to understand history is to examine the currency arrangements. Historians will address the rampant debasement of the currency by the Romans in the third century, for example, but they never try to explain events through the lens of currency. I think you can argue that the history of money is the history of man in the sense that the arc of civilization is the mastery of money by the people in charge.

Two good examples are Charlemagne and Offa of Mercia. They were contemporaries and both reformed the coinage and mastered seigniorage. Forever after them, a key goal of the ambitious ruler was to control the coinage and use it as part of his arsenal against his adversaries. Closer to home, the history of the world post World War II is all about the dollar and its role as the reserve currency of the world.

Anyway, it looks like James Rickards was right a few years ago when he said the world is descending into a another currency war. That’s a great book, by the way. The Wall Street Journal reports that China is debasing its currency and sending shock waves through the emerging markets.

China’s devaluation of its currency jolted global markets Tuesday, hitting stocks and commodities and boosting government bonds.

The Dow Jones Industrial Average fell 1.2% to 17402.84, erasing most of the previous session’s gains. The S&P 500 fell 1% to 2084.07. The pan-European Stoxx Europe 600 index closed 1.6% lower.

Oil and metals prices also fell sharply, while demand for haven assets pushed down bond yields in the U.S. and Europe, as investors worried that Beijing’s move signaled concerns over growth in the world’s second-largest economy.

The moves came after the People’s Bank of China on Tuesday pushed down the yuan’s trading range against the dollar, setting its daily fixing rate 1.9% lower. Investors reacted to the move by pushing the yuan down almost 2% from that level.

Financial markets saw it as a sign that Chinese authorities believe it is necessary to act to boost flagging growth, said Ewen Cameron Watt, chief investment strategist at BlackRock’s Inc.’s Investment Institute.

They call currency devaluation “beggar thy neighbor” for a reason. China, in an effort to boost exports, will start printing money, thus lowering its value against the dollar and other currencies. That will make Chinese products more competitive in US and European markets. This may be fine for the US and Europe as it means cheap goods and people like cheap goods for a while.

The trouble is everyone else will have no choice but to follow suit and debase their currency. It can easily become a race to the bottom. International management through central banks is probably enough to keep things from getting out of hand, but there are unknown unknowns. The biggest is the off the books carry trade market that is possibly over $9 Trillion USD now.

The entirety of this market is leverage. You borrow money to invest it in another currency. Presumably, settlement of both ends of the transaction leaves a profit, but big moves in the currency rates means huge losses. Those losses are covered by liquidating other assets to cover the loss. This can set off a cascading effect blowing up whole markets in days, even with the loss prevention systems governments have in place. The most obvious example is The Asian Financial Crisis of ’97.

Life is not a math problem and so economic problems become political problems. Brazil, which is already struggling, cannot withstand a currency war. This is not a country with a stable political and cultural foundation. The current president is already under fire so a deepening economic crisis will probably lead to political turmoil or worse. Military coup is the traditional way of doing things in Brazil so you never can rule that out as a possibility.

Currency wars never end well. The currency war that started in the 1920’s ended with depression and world war. The disorganized flight from the Bretton Woods system eventually led to the current system of towering world debt that may be about to tip over. The only way for the West to maintain their massive custodial states is through unlimited credit emissions. A full on currency war probably brings that to an end.