Wednesday, December 15, 2010

Economic Equality versus Economic Liberty

Economic Equality versus Economic Liberty by Alex Merced

One of the fundamental divides among activist economics is what is the goal when thinking of policy and the economy. Progressives focus on Economic Equality and how policy can manipulate the economy to distribute resources in a more "equitable" or "fair" way as measured through income statistics. While Libertarians and Conservatives are more concerned with Economic Liberty allowing capital to flow freely increasing the odds of that capital to flow into the hands of those with the greatest entrepeneurial ability who can put that capital to use developing the division of labor, structure or production, and into innovations that create more accessibility to scarce goods for all.

It's hard to measure the effects of Economic Liberty via statistics because it's about the quality of products and services improving and their costs dropping. For example, the Iphone may not be a cheap gadget, but because of it there are many other purchases I can bypass such as buying watches, gaming consoles, calculators,  and many other things people would spend a lot of their wages on is now in one device for much less than all of those individual goods put together. So while looking at income statistics may show "real wages" havn't grown in decades but quality of life sure has increased since less wages are needed to have access to a variety of benefits since you need fewer devices to do more tasks. This is the result on entrepeneurship and innovation which can be magnified by free flow of capital and information which those who support economic liberty focus on.

 Although, those who support Economic Equality measure their policies via aggregate macroeconomic income statistics. Just because numbers such as "real wages" grow or "the income distribution" narrows doesn't mean that an increase in the quality of life has occured because quality of life is not tied to how much you make, but what you can buy with it (oh yeah... and if it makes you happy, which is not measurable) which is constantly being imporved by productivity gains and innovation from entrepeneurs. So instead of the hyper focus on labor wages, they'd be better of focusing on fostering entrepeneurship in individuals like the Economic Libertarians.

Tuesday, November 23, 2010

Understanding Inflation Advocates

Understanding Inflation Advocates by Alex Merced

 There are two fundamental questions that come up people discuss monetary policy, and peoples views on these two questions which shape what they think policy should be. These questions are:

- Do you expect inflation or deflation as tomorrows problem?

- Do you prefer inflation or deflation?

 In terms of these two questions I expect price inflation down the line from the inflation of the money supply which we've seen primarily in bank reserves which I believe has grown beyond the ability for the fed to absorb later on so it's essentially racecar that's revving it's engine before a big race. While I think all manipulations of the money supply have an effect of causing mal-investments in the economy by creating shortages and surpluses of money, if I had to say which is the lesser of two evils I would say deflation. Jorg Guido Hulsmann makes a great case for deflation in his book, Deflation and Liberty.

 Although how about the people who prefer inflation, to Austrians such as myself it may seem bizzarre that someone may genuinely think that devaluing peoples savings, and destroying the purchasing power of people on fixed incomes can somehow be good policy. So I thought I'd take a moment to explain some of the inflationists thought process as I understand it.

Why does Price Stability really mean predictable inflation?

 Last I checked stability meant constant, so price stability to me would initially mean constant nominal prices but in the world of monetary policy it really means low predictable inflation, generally from 2-4%. Why someone would think this is good policy is primarily psycological. The idea is to create an environment where people feel wealthy cause they think their assets are constantly increasing in value, but really the value generally is constant but it just appears different priced relative to a larger money supply. This approach has some merit to it, but it's based on manipulating the misinformation of peoples views on price increases. As people learn and understand inflation on a larger scale, this should quickly lose any effectiveness as we've seen as people have become more knowledgable in economics the last few years.

 This psycological factor is really just a function of the accuracy of peoples education, the 1870s were arguably the most robust period of growth in US history yet it was a period of deflation and generally referred to as the Long Depression. The problem is if people see their assets dropping in nominal prices but don't equate that with increasing purchasing power this can have negative psycological effect, but this only makes the argument for better economic education because growth occured in the 1870s even though people felt negative about their asset values in this era.

 There are different ways for deflation and inflation of prices or money supply to occur (depending on which definition your using) which lead to different phenomena. Although the best way to refute someones views on an issue and open them up to yours is to show you understand and empathize with their view more than they do. Knowledge is power, Creativity is power manifest.

Sunday, November 14, 2010

Liberty: The Soul of New York

Liberty: The Soul of New York by Alex Merced

Many don't the associate New York as a bastion of liberty, with it's vast state controls over wages and rents, and it's cumbersome taxes and regulations on local business. No one thinks of New York as a home of freedom when it's the home of most detrimental of Federal Reserve District Banks, the New York Branch which carries out the asset purchases that destroy our currency and prosperity as it diminishes away. New York is often considered a shadow of the land that was once this nations capital as business flees to greener pastures domestic and abroad, although it wasn't always this way. New York has been the home of many of the greatest individuals in American history who've done a lot to further the cause of Liberty, Peace, and Sound money. New York was home to the greatest U.S. president (Martin Van Buren), and the greatest economist (Murray N. Rothbard).

The Little Magician - Martin Van Buren

Most presidents revered in history are those who against the principles of Liberty and Small government grew the power of the executive branch and breeded conflict into war, Martin Van Buren was none of these things often charachterized as weak by historians. In my view, his willingness to seek peace and stick to principles was his greatest strength. As Andrew Jacsons vice president he helped prevent a conflict with france, and then avoided two more conflicts with Mexico and Britain as president. While someones nationalists senses may say Van buren should of entered these conflicts, the preservation of life that occurs from his willingness to take pause and clarity is something we must appreciate.

While the economy entered a massively painful restructuring from Andrew Jackson rejecting to renew the charter of the Second US Bank, instead of preventing this restructuring Martin Van Buren finished the work towards free banking that Andrew Jackson began. His willingness to allow the needed corrections to occur to have a sustainable economic environment is possibly his greatest achievement, leading to multiple periods of Growth AND Deflation (late 1830s-early 1840s and the 1870s). While no good deed goes unpunished, Van Buren was not re-elected even being rejected by his former president, Andrew Jackson, for his unwillingness to spill american blood to annex Texas. He later on joined the abolitionist party, The Free Soil Party, in which he later carried on a nother failed bid for the presidency.

The Greatest Economist - Murray N. Rothbard

Murray N. Rothbard who was born and raised in the Bronx, is one of the most influential economist in the last century. While he may not be as revered by establishment economist as such enemies to liberty like John Maynard Keyenes, Rothbard was instrumental in the revival Misesian Austrian Economics most pivotal was his treatise on the topic, "Man, Economy, and State". To this day, in his short life the amoung of work done in economic thoughts, history, theory, and more dwarfs what most eonomists accomplish in a lifetime. He leaves behind a veritable library of work for the Liberty minded fellow to strengthen their convictions and sharpen their arguments to a free world.

Saturday, October 30, 2010

A Quick Thank You

A Quick Thank You
by Alex Merced

 I'd like to take a moment to thank all my favorite places to get liberty news and resources on the net and encourage you all to check them out.

Communities: - I spend so much time on this forum It has probably become my #1 way to be connection to the heart of the liberty movement. It's great to see how all of us since the days of the Ron Paul 2008 days have stuck at it and havn't given up the good fight. - The logical next step for the movement after the 2008 campaign had ended, this has served a sgreat source for information and local mobilization.

Youtube Channels:

ProteanView - an independant mind with insightful opinions, always nice to hear his take on the days events

LibertyInOurTime - A youtube playlist where someone is uploading every piece of audio and video from the mises institute, it's now very hard to do a political youtube search without stumbling upon the mises institute, great work.

SchiffReport - With the regular videos discussing the financial markets and the economy, this channel keeps me in tune with what going on the world and everytime I think I've learned what I could learn Peter Schiff always shows me I'm still only a student.

Other Websites:

Mises Institute - The Home of real economics and libertarian thinking on the internet, if you havn't become familiar with this site you have done yourself a great injustice.

Reason.Tv - Great videos about how to increases liberty and why government just well... doesn't work

So thank you all, hope you guys enjoy these sites.

Friday, October 22, 2010

The Money Problem

The Money Problem
by Alex Merced

 While people like me definitely see the virtue of a gold standard, even a gold standard in any of it's historical incarnations still have one fundamental problem, they are a monopoly. I can discuss how the gold standard restrains government which promotes peace and limited government, or that the problem with previous attempts at the gold standard was allowing fractional reserve banking which many see as fraud.

 Although, all of this is only a band aid on the greater problem of money traditionally being a monopoly product of a government, and like any legally protected monopoly results in drops of quality and increases in prices, in this case the increases cost being the extra labor needed to earn enough money to retain purchasing power as the currency is devalued by it's monopolistic issuer.

 Money, like any good needs to be allowed to have a market and competition. While many think you have competitions between nations, politics of government leads to a race to the bottom like you see now where every government compete to see who can provide the worst product instead of the best like when enterprise competes.

 An important aspect of developing such a market is the ability to use multiple currencies and goods as legal tender, instead of the ultimate legal control of legal tender laws which even on it's worst day force people to have some level of demand for some currency. If people could have multiple goods that they could use as legal tender, they could diversify their monetary portfolio like one diversifies their stock portfolio.

 For example, if the US dollar were to collapse owning other currencies and goods would be meaning less since they can't be legally used to tender debts. So at the end of the day, a sound money is great but would probably naturally occur in a competitive market for currency separated from politics (business issued money, not government issued).

Saturday, October 16, 2010

The Difference between Gold and Real Estate

The Difference between Gold and Real Estate
by Alex Merced

 Is there a gold bubble? This seems to be the questions that media pundits are pushing more and more now, so I thought I'd like to discuss some of the fundamental differences between Real Estate and Gold as far  as it's bubbliness (I'm making up words). Many people critique gold proponents saying that saying that gold will continue to go up is like the real estate proponents pre-bust saying real estate will always go up so here are somethings to think about.

Asset Mobility

Gold is a very mobile assets, I can have it stored and I can carry it around with me no matter where economic activity is moving people geographically. Homes on the other hand are not easily mobile, I just can't pack up my house and take it with me wherever I go. In this case if economic activity moves somewhere else geographically it's hard for me to sell it so I can pursue where growth and jobs are because others are doing the same driving down demand for my particular house. This is a problem that's non-existent with gold.


During the height of the housing bubble there was a lot of housing construction going on which increases the supply which lowers the price of any good, and despite all the inflation from the central banks these last few years the supply is still repricing itself versus the money supply. You can't manufacture gold, it can only be mined and the amount that can be mined is essentially fixed so this kind of inflation of the gold supply is not possible as it was in housing so it's relationship versus the money supply is a one sided relationship mainly changing when money supply changes since the gold supply grows slowly and stable.


Gold is fungible (one ounce of gold is generally no different than the next), which makes Gold much easier to trade in markets and base futures, Funds, and other investment vehicles on. This creates a liquidity in the gold market when combined with it's other features makes it a very appealing store of value. Houses on the other hand is a heterogeneous good, meaning every house is a unique product which must find a particular buyer which can be difficult depending on several geographical factors outside of the house itself (neighbors, local schools, local economy).

Growing Demand

More and more of countries we thought were part of the third world are becoming industrialized so the access to medical professionals like dentists are increasing and so is the demand for luxuries like jewelry both which use large amounts of gold. Not only is there a growing consumer demand, but also many central banks are beginning to purchase gold and strengthen their reserves as the US Dollar undermines it's reserve currency status which central banks will most likely hold indefinetly reducing the supply of gold effectively for other uses. Houses on the other hand have shrinking demand since there is a glut in the supply from the excessive construction during the boom, and many people rather rent or share living space till economic prospects allow people to expect the ability to maintain a bigger home.

Overall, in the future some of these factors may change, this the current state of things and as long as this is the case I'll continue hold and purchase gold and other natural resources.

Saturday, October 9, 2010

The Difference between Debt and Equity Financing

The Difference between Debt and Equity Financing
by Alex Merced

 One thing we emphasize here at LibertyIsNow is the relationship between economics and liberty, and without understanding the two neither can see progress. So today I thought I'd briefly introduce an important concept that will shape much of the debate going forward. Financing just means getting the money you need to make some purchase whether it be car, home, or to start a business. There are two types of financing, Equity and Debt financing.

Equity Financing

Equity Financing is done by selling ownership in something to get the money to buy it. For example let's say I wanted to buy a bike and didn't have all the money make the purchase I can ask my friend for the money and we agree we'll share the bike on certain days. Since we both have ownership in the bike, we both have interest in bikes well being because if the other crashes and destroys the bike we both lose our investment. This is similar to the purchase of Common and Preferred stock of companies.

Debt Financing

Debt Financing is done by borrowing the money, which means the borrower retains sole ownership of what is purchased yet has an obligation to pay the lender the original money borrowed, often with a little extra called interest (the reason they would lend it to you in the first place). In this case if I borrowed money from my friend to buy the bike, he could care less about the condition of the bike cause whether I crash the bike or not I am obligated to pay him back his principal and interest. This is similar to the purchase of bonds from a company.

Most of the world is a debt based economy, we borrow to buy cars, homes, and start businesses. This preference for debt financing is a symbol of many things culturally because people could just as easily share in ownership of cars and homes through equity financing and not have to suffer the burden of debt. This cultural characteristic also ties further importance since it ties people down much more to the value of the currency since debts don't adjust with money supply changes like asset prices do. Was this aspect of our culture something that naturally manifested or has it been pushed to extremes by policy decisions promoting lending and borrowing, something we'll be looking into over the next few posts here at LibertyIsNow.

Thursday, September 30, 2010

What does a Strong Dollar Policy Mean?

What does a Strong Dollar Policy Mean?
by Alex Merced

 We always hear that the US has a "Strong Dollar Policy" yet all we see from the federal reserve is constant pump priming and quantitative easing. The purpose of the devaluation of currencies by different nations is to increase exports by leveraging the relative purchasing power of foreign consumers from the devaluation. The fundamental problem with this is that the increase in exports will cause the currency to appreciate again meaning more devaluation must occur. What's going on here is not one country selling another country goods it wants or needs but instead selling what they have by discounting those goods via currency devaluation. It might as well be a liquidation sale but to discount these goods they are also marking up all goods for people domestically which erases any gains from those exports and if probably even makes things worse.

 The way to a strong dollar is not to have policy based on a strong dollar but to focus on what anyone should focus on, producing value for others through enterprise and innovation. A country's people and currency prospers from the demand for it's production through exports and consumption from imports (the latter is only sustainable if the former exists). Because of mal-investment in education and housing as I've discussed before we're seeing drop in the skills necessary to bring back the innovation needed to restore demand for our production. Due to the industrialization of other countries who's moved further in the process of capital accumulation, their citizenry are now consuming global goods more and more reducing the demand for our consumption especially since we produce little they want. Little by little we are bringing ourselves to irrelevance in the global economy and until we understand that the creative forces needed to correct this can only be achieved through Liberty and a Free Market which Market prices we are doomed become an afterthought.

Friday, September 17, 2010

Bill Clinton Visits the Daily Show

Bill Clinton Visits the Daily Show
by Alex Merced

(This is in Reference To This interview on the Daily Show)

 In former President Bill Clintons appearance on the popular satirical news show "The Daily Show" I had to say I was very surprised at Clintons candidness. Clinton, shockingly enough somewhat understood the problems that are preventing the economy from moving foward much better than any Keynes following demand sider I've heard so far. I'm not saying that all of the suddent Bill Clintons an ally or fellow traveler, on the contrary he's very far from what I would remotley call a friend of Free Markets. In that I'd like to respond to many of his points and clarify some of his mistakes.

Worker Mobility

This is actually something I discussed on my series on labor economics, you can read what I wrote about worker mobility here. While Cliton ackowledged that the problem isn't the lack of jobs but the lack of qualified and geographically available labor (the local people don't have the rights skills, and the ones that do are stuck in houses they can't sell). Although what he doesn't venture into is why we have this gap in mobility and skills, cause it then dims the picture on his major policy recommendation... government guaranteed loans.

It's cause of the implicit government guarantees on Freddie/Fannie loans, and the explicit guarantee on Ginnie debt that was the major catalyst for many of these people stuck in these homes which they now can't sell and are less valueable than the loans they took due to price bubbles caused by government guaranteed loans. Easy

It cause of the government guarantee of Sallie May debt that so many people can more easily and painlessly pay lavish tuitions at schools and walk away with degrees in which they learned very few if any practical skills in recession  (My Bachelors is in Popular Culture Studies) and not skills that offer versatility in a changing job market (copywriting, data analysis, marketing, visual arts, programming/web design).

I'm not saying there is no value in a degree in something like ethnic studies and popular culture, but the risk in entering and succeeding in those fields is similar to that of joining the NBA. Essentially, like anything else easy money makes it easy for people to take more risk than they would usually take, if people had to pay higher rates on their loans or didn't get other types of financial aid they'd be more prudent in developing their skills (they'd still minor in their interest, but more than likely major in something like marketing or visual arts which is used in ALL industries). I can attest to this since I would of probably stuck with my original major, Computer Programming, if I was not on a scholarship. Actually I probably would've went to a local community college and transferred later on which would be the more prudent decision.

Bottom Line, since students were willing to take more risk in which skills to invest their education dollars you had a mal-investment or bubble in degrees which could not yield a return on the investment which results in a over supply of labor for some things and shortage of supply for other things. This is essentially mini occurances of the Austrian Business Cycle (easy credit leads to mal-investment which leads to market corrections).

So what would one expect if Bill Clinton had his way and Government Guaranteed loans were made for Small Businesses (it already happens under SBA, Clinton only wants to expand SBA). You'd have more small businesses starting which for sure would create jobs, but only some of those jobs would be sustainable since many of these new businesses might have risky business models that were made possible by this government guarantee (the bank wouldn't loan to a risky model naturally, so the entrepeneur would have adjust his model). The sustainable jobs that are created would've existed anyways since these companies have sound business models that would be able to be capitalized normally. Of the businesses that normally would have not gotten loans only a small chunk might survive which doesn't justify the mis-allocation of investment in the ones that don't survive which then taxpayers foot the bill for.

Construction Jobs

Clinton goes on to talk about green infrastructure and construction jobs because construction is where the most unemployment is (cause the bubble was in housing construction, so many people forgoes developing other skills to participate in the glut of construction demand at the time). Although using the same mechanism of guaranteed loans to create construction jobs is the reason so many people were concentrated in those jobs and are now unemployed in the first place. The 25% unemployment in construction workers isn't a signal that this is an industry that needs stimulus, it's a result of the mal-investment from the housing bubble and sustaining it will make that number bigger in the long run when the bubble re-occurs and even more of the workforce if over-concentrated in construction.

Bottom Line

Tax Cuts for Small Businesses and deductions for particular expenditures is the equivalent of easy credit as far as human behavior, so the solution from the republicans isn't appetizing as well. Although, instead of trying to understand why the situation is what it is, Cliton uses the current state as justification that there is need of more the current government subsidies to different industries.

In Order for the economy return to a sustainable functioning economy, participants need the incentives to make sustainable decisions and that incentive is called "Risk". Loans, Deposits, Insurance, or anything else should not be guaranteed by taxpayer money, and if those moral hazards are removed then people at all levels will be more prudent which means lowering taxes and giving them their money back would make a whole lot of sense since the population will have the right environment to make the right decisions.

Sunday, September 12, 2010

Creating Infrastructure for Private Regulation

Creating Infrastructure for Private Regulation
by Alex Merced

 Everyone on both sides of the aisle have empathy for consumers who are defrauded, swindled, and are tricked into entering trade under false premises. The debate isn't should there be mechanisms to protect and put oversight on the consumer market that'll help prevent these kind of problems, but what should the mechanism be?

 Those typically on the Right believe in the markets ability to take care of itself, and that firms that participate in fraud will eventually fail since they'll cannibalize their consumer base, and only legitimate reputable firms will exist when all is said and done that regulation of any form shouldn't exist cause it inhibits the level of competition that'll keep prices reasonable for consumers and allow pressure to keep firms honest.

 Those typically on the Left believe that even if this is true, the market will leave massive collateral damage in the wake of weeding out these fraudulent firms. They advocate regulating industries into "best practices" via government run regulatory monopolies also known as regulatory agencies. While this may have some effect on prices and the amount of competition, they feel the amount of confidence that consumers will have will outweigh the costs since consumers will feel safer to spend more.

The Problem with both of these positions

- The amount of collateral damage from having no mechanism for oversight can and will deter market confidence for sometimes long periods of time, which can create a society that is skeptical beyond necessity. This can actually inhibit the amount of investment and consumption in the economy.

- Centralized oversight from government monopolies are heavily subject political conflicts of interest and regulatory capture, and since there is no alternative it becomes the equivalent of no oversight but with the added danger of a public that thinks they are being protected and behaving as they are. (Imagine jumping out of plane thinking you are wearing  a parachute, but really they gave you a backpack of bricks, you feel perfectly safe till you hit the ground)

- Overconfidence is just as bad as no confidence, not only is fraudulent firms a problem but also is overconfidence by consumers to trade without doing their due diligence.

- Government enforced monopolies which use police/legal force to force best practices only make it more expensive and difficult for new start ups to compete against larger more established firms who might become more fraudulent feeling safe from competition and also grow too big because of this protection allowing them to capture regulators.

So Then what does Ideal Oversight look like?

Ideal oversight would come from a market of regulation, where competing firms compete to earn fees from consumers for regulatory services such as product reviews/rankings, product disclosures, and consumer education. This offers several benefits:

- Avoid regulatory capture since consumers can switch regulators when one regulator becomes too corrupt

- Since participation by the consumer and the firm is voluntary, consumers don't feel unduly protected unless paying for regulatory service and by trading with firms approved by that regulator.

- This allows for oversight with minimal collateral damage, doesn't move the barrier to entry since compliance with any of these regulatory companies is voluntary (if you don't, you don't have access to their members as customers)

As with anything the answer is not to have something or to have central provision of it, but to have market provision of the service or good. Although there is one way the government can help in fostering such a market in private regulation, by helping establish a model for consumers and regulators to find each other and disclosure of information. While I am against all government intervention, this is more a method to transition from the current monopoly to a regulatory market. To understand my proposal we must understand the logic of the securities act of the 1933.

The Securities Act of 1933

 In the 20's most of the communication technology we take for granted today didn't exist or was in it's earliest stages. A investor looking for an investment had no internet in which to pull a particular companies financials or information to base a decisions off of, only what a broker chose to provide them who had a conflicting interest in getting them to like any particular investment cause of commissions.

 So the logic of the act of 33 wasn't to prevent companies of varying quality to make their securities available to the public, but instead to require that the sale of the securities be made through a disclosure of information we now know as a prospectus. Also, these prospectuses must be registered with the Securities Exchange Commission to make sure all proper disclosures are made.

 The basic idea of disclosure is one of the most interesting parts of this act, it wasn't about making the decision for a customer in what's good for them in the way the FDA does with drugs or more modern financial regulation may do but instead empowering the consumer to be able to carry out their responsibility of making a decision.

 As technology involved, access to information has evolved with the internet and now the SEC has their EDGAR database in which anyone can look up all this disclosure information for any company. Although again, this was not perfect for many reasons...

- The SEC is a public monopoly that use legal/police force which tends to make consumers feel unduly safe so while there is more disclosure retail investors have less incentive to read it feeling the SEC has broad enough jurisdiction

- Consumers will deal with any firm since they assume that all firms are registered with the SEC, instead of looking for an approval sticker or id of some kind (although Broker Check was made to address this, they'd be more willing to use such a service if they were educated to use it)

If the SEC was established not as a monopoly but as a model for what other firms can do as a regulatory business, other firms would approve on many of the shortcomings of the SEC in order to take their market share. A Market would develop and the competition would eventually allow a phasing out of the SEC and the expense for the government... of course government doesn't like competition with their agencies or phasing out power which is just the problem with governments themselves (thus why I'm an anarcho-creatarian).

How do we apply this to today?

The Government could establish a model, an online platform where regulatory businesses can put up all their information and allow consumers to subscribe to their services. The government could of course put stipulations similar to registering a prospectus to putting your company on this platform and take assessments on subscription fees to help fund the platform so it doesn't use taxpayer money.

This platform can categorize all these private regulators by industry, geography, and by services offered. Education materials can be made available on this platform on how to use the services from these regulators, and profits from assessments can be used on ad campaigns (similar to Got Milk commercials).

This should be done in a non-coercive way, regulatory companies are not obliged to post on this service although they stand to benefit from air of legitimacy they'll get and marketing from ad campaigns. Also other companies should be free to create their own competing platforms so this way eventually the government can either close the platform as it loses market share to more innovative platforms or sell it to buyer of their choosing.

This would handle many issues of oversight, regulatory capture, consumer confidence, anti-competitive, and other issues prevalent with the mainstream right and left views of regulation.

Friday, September 3, 2010

Real Estate, Canada, and the Economy oh my!

Real Estate, Canada, and the Economy oh my!
By Alex Merced

In this article what I’d like to discuss is the problems with the logic put forth as the justification for all the government intervention in the economy primarily in real estate. So first let’s discuss the reason why the government thinks it’s prudent to prop up housing prices.

Small Business is the driver of job growth, most small businesses expand based on loans backed by assets such as houses, so by propping up house prices it helps businesses borrow and expand to create jobs.

As usual, mainstream economists and politicians babble out half truths based on bizarre assumptions. Yes, it’s true small business drive economic growth (analogy: who’s going to grow more, an adult or child, similar logic), and yes it’s true small business usually need personal guarantees and collateral to get loans as they establish credit for their company.

So now that we see on what we agree, let’s talk about the weird assumptions. First off, housing aren’t the only assets that can be used as collateral, this emphasis on housing has caused some business owners to not have a diverse portfolio of assets with which to secure a loan for their business. If their wasn’t so much incentives to invest in housing some of their investment capital would go into other assets such as securities, commodities and other things that can be borrowed against and hedges the business owner in case of a dip any particular asset class.

Also, it’s weird to assume banks won’t realize that if prices are propped up and that they'll just be completely ignorant to the fact the prices are unsustainable and the collateral obviously insufficient for the kind of loans people took out before prices collapsed. If anything, having this knowledge and not being able to determine it’s true market value due to intervention would make banks even more hesitant and worried to make the loan fearing the eventual depreciation of the assets.

If prices were allowed to fall, eventually other prices in the economy would drop and the lower amount of money you can borrow against real estate at current prices would still have a similar purchasing power over time.

INTERESTING FACT: Canada allows for short term mortgages with recourse, and doesn’t have many of the incentives to invest in housing as the US yet has higher home ownership rates than the US.

While it’d be hard to say definitely why, I would theorize that due to all the investment incentives artificially placed on the US market drove speculators to have an unhealthy advantage in buying lots of property. So while many investors accumulated large swaths of the American real estate supply, this had pushed up the price so much deterring the ability for other non-speculators to participate. Once again, Canada shows how it surpasses the US with less intervention. Another similar scenario is in the early 1900 when both countries had no central bank and the US had frequent bank panics yet Canada did not, the major different being the US imposed severe branching restrictions on its banks while Canada did not. So while many focus on Canada’s universal healthcare to claim it as a “socialist” country, it’s much more free market than the US in terms of banking and real estate and has had more sustainable and stable economy for it.

Saturday, August 28, 2010

Accumulation of Capital and Knowledge

Accumulation of Capital and Knowledge
by Alex Merced

 While I've discussed capital accumulation a couple of times before I though I'd re-explain this concept and it's implications again since it's so pivotal in understanding many of todays fundamental political questions such as...

Why do the rich grow wealthier at a faster rate than the none rich, why do the smarter get smarter faster than the none-smart?

Capital Accumulation

 The basic premise is this, every input creates output, so the more inputs I have the more output I can create. While innovation and new technology will help magnify the effect of this process let's suspend disbelief and that technology is no longer progressing forward how can a society still become more prosperous?


Smith has $100 with which he can buy a machine that he can create enough goods that he'll generate $20 each week when bringing those goods to the market. So in 5 weeks he'll have recovered his cost and buy another of the same machine and begin to generate $40 and now it'll only 2 1/2 weeks before another machine can be bought.

So even though the machines weren't getting any better or efficient, accumulating the capital of this machinery allowed Smith to generate more wealth in a smaller period of time. It's this process that explains why people with more capital, or "rich" people may be able to accumulate more wealth at faster rates. Those who aren't rich are either earlier in this process of wealth accumulation if they are making these investments, or may be stuck in their circumstances due to lack of investment spending, because they chose to consume instead.

If smith instead bought $100 worth of apples and ate or consumed them, the end results is that smith has nothing left. So consumption in itself does not create more for smith, he must make an investment in order to ensure he can continue his consumption habits. In this case he could save $50 worth of the apples for later or sell them for $100 (assuming he can find a buyer) and consume the other $50.

Notice the difference...

In the first scenario Smith consumed $100 of apples and now has nothing

While in the second scenario Smith consumed $50 of apples and invested/saved the other $50 of Apples is still left with $100 in the end even after consuming $50 meaning a total of $150 of wealth existed for Smith throughout this scenario.

(NOTE: It's with this realization that one should look very suspect at statistics like Gross Domestic Product which assume the creation of value for Consumption spending is the same as Investment Spending, and that all Government spending is equally valuable whether it's on investment or consumption since it only measures the dollars committed not the dollars returned from expenditures. In either of the above examples the GDP of smith would be $100 yet it's obvious he was better off in one example over the other.)

(NOTE 2: The Reason GDP would only be $100 for Smith personally either way cause the only purchase he made was the $100 of apples, and GDP ignored the $100 returned from selling half his apples until he spends it. So GDP is always ignoring return of expenditures, which is this example are vastly different.)

Knowledge Accumulation

 Now if your reading this it's safe to assume your interested in accumulating knowledge, and knowledge accumulation works very similar to that of the example above.

For example, when you were a child in Kindergarten or First Grade you were learning the basics of communication such as the alphabet and how to read, and it takes long time develop those basic skills. Yet, as you get older and you master these fundamental pieces of knowledge your able to attain other pieces of knowledge at greater rates in smaller time frames, or else no child would be able to handle the difference in workload from 1st grade to college. The more you participate in this process the faster and great it becomes. The smart get smarter faster cause they've invested more in previous knowledge to attain future knowledge in the same way smith had invested more in previous capital to purchase future capital.


Many find this magnification of wealth growth to be a sign of inequity, although it's actually the result of the process that creates prosperity, knowledge and wisdom. To demonize capital accumulation and say capital must be taken from the rich and given to the poor is like saying we must take knowledge from a genius and give it to someone who may be referred to as "stupid". We should not fault those who are later in the process of capital accumulation for other being in the early stages of it, their participation in this process does not prevent other from participating in it.

Also, it's this process that separates developed countries from underdeveloped countries. It's not that technological innovations and practices are kept secret from these developing nations, but they are earlier in the stages of capital accumulation making growth seem slower relative to countries further along in the process. Yet if countries further along in this process take it for granted and consume all the fruits of these investments they may find themselves falling behind quite quick.

Wednesday, August 25, 2010

The New Revolution: Anarcho-Creatarianism

The New Revolution: Anarcho-Creatarianism
by Alex Merced

Many people call themselves many things yet come to the same conclusions, but many of us come to those conclusions for many reasons, for example...

Conservatives find themselves wanting to preserve traditional values of the United State which happen to be Life, Liberty, and the Pursuit of Happiness

Libertarians value Liberty as an End in itself so policy that leads Liberty is the goal

an Individualist values the individual above all collectives

Anarchist find freedom from coercion and oppression as the utmost value while they may disagree how to manage resources once this is done (Anarcho-Capitalist versus Anarcho-Socialist)

Although while I agree with many of the views and conclusions of Anarchist, Libertarians, and Conservatives I can't say I really fit any of these philosophies in it's purest sense. At the end of the day my arch virtue, my chief principal is Creativity. So if I spent a moment and try to figure what you would call someone who's life doctrine focuses around Creativity and the term I came up with is...

Creatarian (Someone who holds the doctrine of Creation)

Although this word alone only explains the ends which is creativity/creation which also explains my disdain for it's antithesis, Destruction/Violence. Although what institution embodies violence more than government, which at the end of day is a monopoly on violence over a given people, so to emphasize this realization I figured I'd add the Anarcho pre-fix to emphasize this. Although I guess if you valued creativity and believed in government you'd be a Creatocrat (Rule/Strength by Creation).

Why have a Doctrine of Creation?

Well, I've always been someone who's loved creativity, loved music, art and anything that gives me new experiences. Creativity is Creation, and there is nothing greater than to create and bring something new into this world whether it be a song, an idea, or even a child. New is a beautiful thing, and if you live you life pursuing the creation of relationships, ideas, hope and anything else it can only lead to an enriching life. Vice Versa, living a life of destruction can only lead to life of misery as you live your life destroying relationships and hope around you.

So what are the views of an Anarcho-Creatarian?
 (I'm now writing the Anarcho-Creatarian Manifesto, it'll be released soon)

Liberty: If you are an An-Creat you do value Liberty but not as an ends but as a means because having and valuing Liberty not only allows you the autonomy to be creative but also the mental autonomy, if you think it terms of liberty not only are your actions free'd so is your mind to generate endless ideas on how to create in the world around you.

Life: To give life is creation, to take it is destruction. Also, While people due to their liberty have the autonomy to live a life of destruction they cannot destroy the creations of another (homesteading).

War: Violence, especially war are acts of destruction and the aim of an An-Creat is to reduce destruction in the world and induce creation without violating anyones Liberty (since Liberty is pivotal to a Creative Environment)

Economics: An-Creat desires a strong economy because it fosters incentives for creativity and provides for more leisure and resources for society to pursue creative endeavors. So An-Creat is a strong support of real free market economics (Austrian Economics) in pursuit to these ends.

When the Anarcho-Creatarian Manifesto is created further issues will be illustrated and discussed, and hopefully this will begin the development of Creatarian Philosophy and Ethics.

I have Created a Facebook Page Anarcho-Creatarian if you want to join this new movement as it develops please search and join the page.

Tuesday, August 24, 2010

A Response to Alan Harvey's Demand Side Podcast

A Response to Alan Harvey's Demand Side Podcast
by Alex Merced

This is a Response to THIS episode of Alan Harvey's Demand Side Podcast

 As an anarcho-capitalist aspiring austrian economist, one may ask why would I bother consuming such media such as the Rachael Maddow Show or Alan Harvey's Demand Side podcast which are the antithesis of my own personal opinions and belief structure. Of course, in order to be effective in debate one must be able to empathize and understand the opposing view or debates end up being a shouting match without any progress towards any consensus.

Much of the time our opinions across many spectrums come from similar values and virtues so a consensus can be achived by merely repositioning an issue in a way to reflect that. When Values and Virtues underlying our opinions on an issue differ greatly then of course conclusions will vary in a non-reconcilable way, so being able to recognize this helps one realize that the current debate is useless that the debate must be shifted a step back to a more fundamental ones of which values, goals, and principles should take priority before moving foward. This is important cause if you and your opponent to agree on the underlying assumptions then you debating two completley different issues.

So listening to the views and ideas of your opponents help identify these important variables in debate. Although aside from this reason while I often disagree with the conclusions Maddow comes to, I do appreciate the research and ability to identify problems or symptoms of other problems even if her insinuated solutions are often worse than the problem. As far as Alan Harvey I can't say the same, he's staunch defender of the Keynesian stronghold and it's amuzing to listen to a show that positions itself to the LEFT of Krugman who is pretty far left as it is.

So what is it I want to respond to? Well in his most recent podcast he was makings some critiques of Reinharts and Rogoffs new book "This Time It's Different". While I'm not here to defend the conclusions of this book, since I have no read the book as of yet I do want to address many of the bizzarre insinuations on behalf of Harvey in his critic.

#1 The Government can Never go Bankrupt

 For the most part, to an extent this is true. If a government has control over it's money supply it can always increase the money supply in order to tender it's debts. For example if you can always just print money to make your monthly credit card payments, no matter how much debt you have you won't technically go bankrupt. Although this is not a good thing, cause this means politicians have no incentive to make difficult political decisions and will generally lean towards spending as a solution (which a keynesian would say is good, cause they believe consumption is THE economic driver).

 Although this is not the only problem since an ever increasing money supply leads to inflationary pressures and mal-investment as an increased money supply leads to less saving since interest rates drop yet more investment in capital intensive long term projects which will have no consumer base when completed since there is no savings to purchase them (how many high rise condo were planned but never completed in las vegas). So overall even though the government won't go bankrupt this has been little solace for Zimbabwe and their inflationary problem (everyone in Zimbabwe is a Millionaire... but they still can't buy a cup of coffee). Although if you bring up the inflationary argument it leads to Harveys next ridiculous statement...

#2 that for Developed economies there is little relationship with debt from inflation

The argument Alan Harvey is trying to make is that high debt levels have little to do with inflation if the economy is advanced enough. I would disagree that the size of the economy just eliminates the relationship but that it has more ability to mitigate the conditions that lead to dire consequences in the short run. A larger economy with lots of imports and trade deficits such as the US sends it's dollars abroad as the money supply increases, mitigating the supply increase (although this would still devalue the dollar vs other currencies since people are essentially selling off the dollar to buy foreign goods, but it prevents the domestic flood of dollars). So while a large economic importer economy like the US has this mechanism to deal with money supply increases the result of this is that business and industry follows the money abroad (why be in the US if US dollars are going abroad?).

Although if perpetual money supply increases are perceived then foreign exporters will begin to refuse to take dollars cause of expected supply increases, increasing their currency risk. If enough foreigners refused to take dollars there would be nowhere to soak the growing supply of dollars which would be the trigger for hyperinflation. Although we've been able to buy time cause the US is currently the reserve currency of the world so for the time being for foreign exporters will take dollars despite the currency risk but already many countries are divesting from the dollar.

So will the debt essentially lead to overnight price inflation... maybe not but it eventually will and in the meantime we'll just have to watch all our industry leave first.

#3 Bad Economics Times cause runaway government debt, not the other way around

Once again, on the surface like most Keynesian talking points is very plausible and has a sort of logic to it. The argument that Havey puts forth is that much of thes stimulus spending and deficits wasn't the cause of the 2008 recession but a response to it, which is totally true. Although he tries to pidgeon hole the correlation between government debt and economic difficulties in one direction where the former is caused by the latter. In all reality you have a feedback loop, a viscious cycle.

Government Spending on things like oh say the Iraq War leads to deficits -->
Which Leads to increases in the money supply -->
which leads to lower interest rates -->
which leads to mal-investment -->
which leads to a boom -->
which leads to a bust -->
Government then increases Spending as response... and the cycle begins again....

So yes the current recession wasn't caused by the stimulus but can definetly be tied to Greenspans monetary policy and Bushs deficit spending which sowed the seeds for the mal-investment in the housing sector which allowed for a lack of worker mobility an over commitment of labor in construction which I don't have time to get into. So yes bad economic times can prompt government spending, but government spending can also lead to tough economic times. The answer to this feedback loop is to break the cycle and not spend similar to what was done in the recession of 1920. To anyone who's been following this in depth can see we're making the same mistakes we did in 1929.


At the end of the day Keyensians love to flip-flop causality sometimes just out of the academic challenge of doing so, but if the question is which begets which (production -> consumption) or (consumption -> production) it's easily visible with the following the anology.

(Production -> Consumption)

I baked a cake (production) so now I can eat the cake (consumption)

versus (Consumption -> Production)

I eat the Cake (consumption) so now I can abke a cake

As you can see in the second example the person ate a cake which did not exist, so it's essentially a non-sensical statement since cake MUST be baked first for a cake to be eaten. Consumption is the result of production processes being developed in an economy, although if you focus on getting everyone to consume like Keyensian economics does without disregard if the work people do actually produce (work programs, public sector jobs). Production must occur in order for their to be something to consume  and if not then you'll just find people fighting over more fiercly over a shrinking pie in which everyone has developed an insatiable appetite (Imagine an all you can eat buffet that never gets replenished).

Bottom Line... as much as I try to empathize and understand, the flaws in Keynesian Economics are too obvious and too many to ignore.

Saturday, August 21, 2010

Private Charitability

Private Charitability
by Alex Merced

One of the main justifications for many public services, especially ones that provide for the poor and needy is that the private sector can't or won't provide these services in enough quantities. Although, I would argue that when you coerce resources from the private sector to appropriate for these programs it shrinks the private sector meaning more people will need to participate in these welfare program which creates a self-destructive cycle. This does not this mean there is no way to provide for those who may need a helping hand without throwing a wrench in the mechanisms of capital accumulation and investment that lead to the prosperity we so enjoy.

There are many mechanisms outside of government to provide help such as religious organizations which often do community outreach and charitable work which benefits everyone even if you don't hold the same religious views of the institution. Also, people even independent of religious institutions start charitable organizations in the form of non-profits or even for profit groups.

The problem nowadays is that many rules keep religous organizations and charities from raising funds and actually using the funds to help society. The issue is not only does this make it hard for these funds to be raised and used but in many instances demotivates people to start these organizations in the first place. I know many people with great ideas and intentions just intimidated by the idea of filing the right tax forms and any laws they may violate accidentally for not meeting some health regulation or local ordinance in helping the public.

So essentially, government increases the amount of poor and needy by taking resources from the private sector but then prevents the private sector from giving as much of a helping hand as it could by having complicated red tape and tax laws.

Does this mean we have to wait to shrink government before the private sector can expand it's charitable efforts? No, you should still do your best to give to charities and volunteer your time cause it's a great way to learn lots of skills and meet the right kind of people to enrich your life and your career and of course the lives of others. For example me and my girlfriend put together backpacks and supplies for homeless kids for school for the coalition for the homeless.

As we put together these backpacks I got very into it and started throwing in more goodies than was on the original list of what the kids needed such as geometry sets, USB drives, different books on topics like economics. My girlfriend thought I was being competitive with her bag which I probably was and I was thinking why can't competition be harnessed to maximize the results from this event.

If the average person spends maybe $20 on this effort buying the cheapest supplies, how can we encourage them to do a little bit more? How about a contest, have local businesses submit a variety of gift certificates that whoever puts together the most generous backpack will receive. So now this gives an incentive for people who wouldn't normally participate to participate and those who would to spend a little bit more. Similar to the X Prize sometimes putting forth a prize for one winner will stimulate investment in many individuals.

So if I were calling the shots I would get government out of the charity business and simplify the tax code and regulations to make it easier for the private sector to be able to handle the load. Although if government must be involved how about giving out the money as a rebate for charitable work or as prizes like the X prize foundation.

One example of a rebate, if you mentor a homeless kid you get a rebate for the investment if he makes honor roll or gets accepted into college. If a town builds a community center it operates with a budget surplus a rebate for the costs of intially setting it up. What we must avoid most of all is subsidizing programs running budget deficits and programs which yield no results for this offers little to no benefits to the benficiary or society and only lines the pocket of political entrepeneurs.

Sunday, August 15, 2010

Labor Economics #4 - Unemployment Insurance

Labor Economics #4 - Unemployment Insurance
by Alex Merced

These days unemployment insurance has become more of an issue than it has in recent times. The debate on this issue seems to be misguided. To really understand the unemployment insurance issue, or the issues regarding any kind of insurance you must understand what insurance really is.

Many government advocates always discuss the role of goverment in providing a safety net for those who can't afford to pay for one themselves, this is the purpose of insurance. An insurance company pools the resources of those who have more to write contracts to cover the costs of unforseen risks for premiums that are far less than the cost of not having the insurance contract. This creates a mechanism to handle risk that doesn't deplete resources in the economy since the premiums from unrealized risks pay off the costs of those contracts which are exercised. (although due to corporatist/monopolist partnerships between insurance companies, government power has dimished the accountability of Insurance and other industries to it's consumers. an issue for another time...)

This is why many Anarcho-Capitalist such as myself see a stateless world as one where many insurance companies and similar institutions arise and compete to fill the place of the social safety net in the absence of government, with arguably much better results. One of my favorite writings on the subject is Robert Murphys "Chaos Theory".

Unemployment insurance specifically can be a useful service to help make the transition between jobs for individuals much easier, and in the grander scheme of things ease the pain when resources shift from one industry to another as the wants and needs of people change. The issue becomes what is best way to provide such insurance to individuals, the government or via private enterprise?

The Forgotten Role of Insurance in Risk

In assessing this situation is what is lost is that insurance has much great role to play than just the benefits received when exercising a insurance contract. Insurace also serves as a mechanism to internalize many risks and costs, and incentivize prudent behavior.

 Let's use the example of car insurance. The premiums you may pay for your car insurance factor in many different variable; your driving record, your age, education, the model of the car, even the color to assess the risk of you getting into an accident or having your car stolen. If you buy a Red Ferrari, the chance somone may want to steal your car increases and so does your insurance premium which creates a financial incentive to choose safer car which will less likely be stolen. Also, if you were to get into an accident and file a claim the next time you purcahse insurance your premiums will be higher which again creates an incentive to be a safer driver. Overall, the premium mechanism is arguably vital to having a safety net like car insruance not cause moral hazard.

 Let's pretend the government provided quality car insurance free or at a uniform fee versus what you would've paid in the private markets. The incentive to not buy the ferrari or drive safely are now diminished, cause you either didn't pay or didn't have a differential in what you would pay depending on your behavioral choices.

So it's not only about the benefit, but cost to have the benefit that helps regulate the abuse of the benefit. So now let's apply this concept to unemployment insurance.

The Moral Hazard of Unemployment Insurance

Under the Government provided system of Unemployment the employer pays the costs of insurance, very similar to the situation in retirement and healthcare created out of ERISA. The Premium the employer pays is based on a percentage of the taxable salary of the employee (which is an incentive to give smaller salaries), and is not keyed into in any way other risks such as...

- Does the Employer run a sustainable company that is fiscally sound (if not, the risk is greater)
- Does the Employee have a stable work history (if not, the risk is greater)
- What is the background/education/skills of the Employer/Employee
- What is the Turnover Rate of the Employer (higher, the greater the risk)
- How difficult is it find a similar job

Since there things are not priced into the premium, the premium may be below market or above market depending on the employer and their employee. Since the employee doesn't pay the premiums directly, they have no incentive to take a sustainable job at a company that's well run, because the unsustainable company will probably pay higher salaries which makes it harder for good companies to compete with reckless companies in purchasing talent. The reckless company may go out of business a year later but the unemployment benefit as a percentage of the higher salary may outweight the smaller salary at the sustainable job which makes it hard for modest growth sustainable companies to compete.

This is similar to deposit insurance and the savings rate, the more reckless banks will generally have a higher savings rate but since depositors don't pay their deposit insurance directly they will deposit their money in the higher savings rate bank which more than likely has some liquidity problem causing a whirldpool of good resources into bad places.

All this doesn't take into consideration the political ramifications of having government run unemployment insurance, as we see now with congress using unemployment as a fierce political issue to buy votes by extending the benefits well beyond what has been payed into them and was promised.

The Virtue of a Private Unemployment Insurance

If people could and would purchase their own private unemployment insurance, or employers voluntarily provided it from priavate insurance companies all the factors that weren't calculated into the premium now would. The insurance company would investigate the employer and the employee to assess the risk they both present in the risk of the employee becoming unemployed. So more risk, would equal high premiums leading to a lot of good incentives such as...

- An employer running a sustainably well run company who can't afford lavish salaries will be more competetive. The higher salary at the reckless company would also carry higher premiums, internalizing the risk of which is the more sustainable job. This would also be an incentive to be sustainable, cause it'll be hard to attract talent if working for the company generates high insurance premiums.

- The company would be incetivized to have a pleasent and safe work environment, cause not having one would increase their turnover rate which would increase unemployment premiums.

- The employee would have an incentive to be more prudent in choosing jobs, and to pursure more education and skills. Having a stable work history and lots of credentials and skills will only help them lower their unemployment premiums.

- If working in a niche industry that may take a year or two to find a similar job, the employee can choose to buy benefits beyond what's currently mandated (6 1/2 months) this allows the freedom for those who need more to get more and those who need less to get less.

The Bottom Line

Unemployment Insurance like insurance against any unforseen risk is a healthy institution to have, but the role these institution play in the economy is far greater than just providing benefits but also pricing in the risks of every actor into premiums internalizing many otherwise external costs. When government gets involved in the insurance business it often distorts this mechanism causing the externalities of these risks to remain external causing moral hazard and an economic drain from the increased claims from this moral hazard.

Saturday, August 14, 2010

Labor Economics #3 - The Minimum Wage

Labor Economics #3 - The Minimum Wage
by Alex Merced

One of the most sancrosanct bastions of Labor laws is the minimum wage, and if you want to go beyond this article in learning about it listen to Roger Garrisons lecture on topic from Mises U 2010. Essentially what I want to demostrate through a brief example is...

1. The Minimum Wage actually transfers wealth from the those at the bottom, to the people marginally above them, so it transfers wealth upwards instead of downwards like it intended.

2. The Minimum Wage Creates Unemployment

So let's imagine a world with 300 people in Labor force working at the current wages.

100 People working at $8/hr ($800 spent)

100 People working at $7/hr ($700 spent)

100 People working at $6/hr ($600 spent)

of course, the lower paid workers are the lower skilled and lower educated workers who may be payed more in the future if they learn skills and information on the job. What happens right now is that the economy can allocate work for the entire labor force at these wages, but what happens if we establish a minimum wage of $7/hr. Now our workforce looks like so...

100 People working at $8/hr

185 People working at $7/hr

15 people unemployed

The minimum wage law did not make these employers magically have more resources, so the $600/hr that was was going to the 100 laborers at $6/hr in the first scenario can now only afford to continue to employ 85 out of the 100 laborers leaving 15 unemployed since there is no more resources to employ them. Essentially the lower you are on the wage ladder the more negatively affected you will be by an increase in the minimum wage, it's those in between the bottom wage and the new minimum wage who benefit at the cost of those at the bottom.

(NOTE: One may ask why wouldn't the labor force reduce the wages of the $8/hr workers to keep the $6/hr workers? The answer is simple, the $8/hr workers add more value which is why they are payed a higher wage in the first place so if you had to choose between possibly causing a valued worker to quit from a  pay cut or laying off workers who add the least value you'd choose the latter.)

So this example shows how it causes unemployment, and how increases the wealth of a few at the cost of not those at the top but those at the bottom. So what happens to these unemployed people, they still have to find work so they may move to another location with a lower or no minimum wage in which they can enter the labor force at their skill/education level. Although, if these uneducated/unskilled people migrate from all the places with a minimum wage to this one bastion of freedom with no minimum wage it causes a huge concentration of uneducated/unskilled people in one place.

This explains why the places that are the most free sometimes seem to have some large concentration of uneducated people (a very gross and misplaced charachterization of many souther red states), not because freedom is backwards but because these free places are the only places that will welcome with open arms those from other locations who've been kicked out by wage laws, forbidden to enter the labor market and develop the skills to later make higher wages.

"Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"
- Statue of Liberty

Labor Economics #2 - Labor Geographic Mobility

Labor Economics #2 - Labor Mobility
by Alex Merced

 There is usually a decent job somewhere out there waiting, but the ability for someone to take advatage of that oppotunity also has to do with their willingness and ability to move to where the job is located. Like all capital, labor can be mal-invested for many reasons and this problem occurs out of the laborer actions themselves. Capital usally naturally moves to where it's needed, but if it does not in the form of labor or can't it can slowdown growth or a recovery. While many people will always be hesitant to move due to family, friends, and the life they'd leave behind I want to explore how policy can and usally makes this problem well... more problematic.

Problem #1 - Housing

In the US in particular they've made the pursuit of something they like to call an "Ownership Society" where more and more of the population owns homes. Although ownership of the land or house that you live in, can make it quite encumbering to make changes and follow the demand for labor leaving someone stuck in a bad labor market. So while well documented are all the bad loans, derrivatives, etc. from all the housing incentives in the US, less talked about in the media is reduction in mobility caused by pushing for more housing ownership by more and more people.

Problem #2 - Employer Benefits

If your someone who really enjoys the benefits that your current job provides you you may forgoe a better opportunity elsewhere (I guess it wouldn't be better if you didn't choose it). So one thing the government can do to make things worse is to make more and more services that you may have purchased individually intrinsically attached to employment such as what was done with healthcare and retirement in ERISA in 1974. So if legislation and at the time much higher tax brackets cause an overwhelming incentive for employer to take care of you instead of you yourself, then it'd be difficult to cut ties with an employer in order to keep those non-monetary benefits.

Problem #3 - Local Wage Laws and Taxes

Sometimes Labor doesn't need to move where the demand is, the demand can move to where the labor is. A good example of this is where people start web start ups in cupertino cause it's know for having a base of technology oriented labor. Although some businesses may not move their offices or operations to somewhere with a huge supply of labor with certain skills if the taxes are too high or labor laws too penalizing which actually tend to be the places that give labor the kind of government benefits where they wouldn't want to move from (I'm looking at you California), this is a bad combination of mobility reduction.

The interpersonal reasons why one may move or not move somewhere are endless, but government policy can often create harfmful manipulations of these incentives.

Friday, August 13, 2010

Labor Economics #1 - Sticky Wages

Labor Economics #1 - Sticky Wages
by Alex Merced

The next few posts I'll be writing will be a series on some aspects of labor economics which will mainly center around wages and upward mobility. In this initial part of the series I'm going to address one of the main Keynesian buzzwords, "Sticky Wages".

 John Maynard Keyes (read "Where Keynes went Wrong") makes the admission that it's plausible that an economy can self correct by allowing all prices to adjust downwards if the money supply is reduced for whatever reasons, but contends that there is a problem cause wages are "sticky" so this would make it difficult for businesses to adjust their inventories and prices to maintain the current labor supply since wages won't fall in line with everything else so unemployment ensues. This unemployment will then cause further contraction of the monetary supply causing the economy to just spiral downwards as Keyenes expounds on ideas first proposed by Irving Fisher which really are just echoes of antiquated mercantilist thinking.

 What I contend is not to deny that wages move slower than the prices of consumer goods, but if anything this should be a reason to want deflation not inflation. First let's look at the structure of production to explore why wages would move slower in either direction.

Let's say my structure of production looks like so...

Labor+Materials+Tools = Consumer Good

Deflation Scenario

So if the Demand for the consumer good increases I have three choices on where I can costs in this simplified scenario. For many reasons I may try to cut costs as much as possible in Materials and Tools since they are homogenous instead of giving up my trained skilled labor which is heterogenous. I may still have to ask my labor to take some level of a cut in pay but only after I exausted my ability to lower the other prices. So essentially I may have been able to cut my costs enough to get a drop in price in the good of 10% yet from cutting costs elsewhere only had to cut labor costs by 5%.

So if this is going on across the economy essentially laborers will have gotten an effective pay raise cause goods have dropped in price more than their wages did. Given if you look at editorials in times like 1870's or late 1830's when you had this sort deflation without massive unemployment (actual growth in the 1870's) going on, yet psycoligically many people felt things were bad cause they saw the nominal numbers going down so there is something to be said for the psycological state of people.

Inflation Scenario

So let's say the demand for my goods has increased cause the money supply has grown for whatever reasons. Since demand is increasing all over the economy, the demand for the same materials and tools I use will increase over different industries and firms that use those same tools. This widespread demand increase will cause an increase in the price of my materials and tools which I'll have to pass on to the consumer yet this increase will be larger than any raise I may give to my laborers in a attempt to prevent too much of an increase in the final goods price that would effect it's demand.

So basically due to increases in costs primarily in capital goods the price of the good has gone up 10% and wages went up 5% which if this is a widepread phenomena results a pay cut for the laborer. Again, psycologically they feel good cause they see their nominal wages going up without realizing their real wages are going down. This is essentially the story in any bubble or boom, except due to problems with CPI calculations inflation is usually understated.


If sticky wages are a real phenomena then deflation would be the much better environment for real wages and for the laborer. Although what is usally proposed by Keynesians and other types of leftist is to push for more inflation which actually hurts real wages yet psycologically breeds consent of the labor class since they only think in nominal terms. In order to have the benefits of deflation yet without the psycological pessimism, it would be a proper use of an economic figurehead such as a president to explain this phenomena to manage expectations and sentiment.

Thursday, August 12, 2010

Elaborating on the Austrian Time Preference Theory

Elaborating on the Austrian Time Preference Theory
by Alex Merced

I write this article after listening to Robert Murphys lecture Capital and Interest from Mises U 2010

While Listening to this having heard explanations of Time Preference theory plenty of times, I started having flash backs to an Austrian Scholars Conference lecture where Robert Murphey was actually giving a critic of the ATPT based on his dissertation, basically challenging the idea that a future good is always less valued than a present good. This made me start to think, I do understand ATPT, but I'm not sure if it fully explains why this preference exists fully other than a sort of hedonistic view of human nature to want to satisfy all it's wants now. Then again Patience is a virtue, and one can look at virtues as efforts to fight human nature.

First off let's recap the ATPT for those of you unfamilar...

Austrian Time Preference Theory

The Bottom Line: Present Goods are always more valuable then Future Goods

Example: Pre-Sale Tickets (future good) are cheaper than tickets at the door (present good)

This is an important theory for explaining the Austrians view on Capital and the Interest from Capital. For example I have a $100,000 and I have these two choices which would I make.

Buy $100,000 of Bonds and invest them in Bonds that yield 5%


Buy a $100,000 of fishing supplies expecting to catch enough fish to make $110,000 (10% yield)

So you see here the capital I have I'll put towards the fish equipment cause In the end I'll have a greater yield from my investments, this is how capital naturally gravitates towards it's most productive purpose. If my calculation was correct I can now buy another $100,000 of fishing equipment and next year catch enough fish to make $220,000. As you can see the more I go through this process the more capital I accumulate and the better my life gets even though no new science or technology has been developed, cause I've accumulated capital and can continue to re-invest that capital for interest.

This is what seperates developed countries from developing countries cause they may only be able to afford $20,000 of fishing equipment so a year later they'd only have $22,000 so it'll take some time and re-investment before the capital accumulation brings them to the developed level.

So where time preference theory comes into play is in the issue of why would someone pay me $110,000 for the fish if they can instead get the same fish by buying the Fishing Supplies for $100,000 and save themselves the $10,000. The reason is cause they have a time preference, they don't want to have to wait for a year of fishing to save $10,000 so they rather pay the extra $10,000 to have the fish now. So as we stated, the current good, these fish I've already fished is worth more than the future good, the fish they'd fish if they made the same capital investment.

Ok, so that should sum it up, so now for my addition...

Is it a "Time" Preference or a "Tangibility" Preference

I think the time preference exists not cause there is a time bias, but because there is a tangibility bias. A future good isn't as tangible as a current good so provokes less of a reaction. This Tangibility preference can not only be applied to intemporal scenarios but also other scenarios of differeing subjective values.

Example 1:

"The Stimulus Bill has saved the Jobs of Teachers and Public Sector Workers"


"If the Government had not gotten involved new jobs would've been created from capital reformation"

You ask the typical person which statement seems more plausible, they'd more than likely say the bizzarre keyensian statement I put up first. Why, it's more tangible to them cause they see the jobs that would've been lost, but they can't see the jobs that were prevented from being created. Now of course an Austrian is trained to understand opportunity cost so the increased tangibility from that understanding may have them choose the second statement.

Example 2

"Spend 10% of Income on Your Loved Ones"


"Have 10% of your income taxed which hypotheically benefit your loved once objectively just as much"

Which one you'd think a person would subjectvely value more, the first statement cause the results of this same expenditure is tangible, this would probably be true if the tax money got spent in the same way at the same time cause of it's tangibility. Although a left wing Keynesian might actually value the second statement cause they've been trained to value the benefit to society of impersonal expeditures like in the second statement so them it'd be more tangible.

So in conclusion, I feel time preference is a preference that exists but because of the tangibility of intemporal value. I would expect that a Austrian who is trained to think intertemporally would prefer future goods on occasion, cause it's more tangible. For example we prefer the future value of recession that the current good of stimulus spending. While it's a bit more complicated than simply jobs now versus jobs later a lot of Austrian theory actually emphasizes long term benefits over short term.

If you agree, we can still call this the ATPT, it'd just now stand for the Austrian Tangibility Preference Theory

The Federal Reserve, Price Stability, and CPI

The Federal Reserve, Price Stability, and CPI
by Alex Merced

While here at I've been discussing several economic and philosohical concepts regarding individualism and Liberty, no war is won over night yet strewn across many hard fought battles. The battle at hand is similar to the battle fought by Andrew Jackson/Martin Van Buren against the entrenched banking and government interests protected by a central bank. Aiding in the battle against these interests was treasury secretary under both presidents Levi Woodsbury who I'm now currently researching to write a book on his role in this time period and in the panic of 1837. Any primary sources you can direct me too on these subjects please send over.

So to understand the battle ahead let's go back understand why the fed was created, what was the feds purpose, and their performance.

Why the fed was created?

In the early 20th century the country was subject to very regular banking panics, a large part due to branching restrictions on banks known as Unit Banking. Although you can take a look a look at the Canadian banking system at the time which didn't have these restrictions (and no central bank) did not have the same problem with banking panics as we did. In this interview on EconTalk, economist Charles Calomaris discusses this part of history in building the context for the recent financial crisis.

Part of what really made these banking panics frequent and regular was that agriculture was a bigger portion of our economy that it is now. So in farm towns, between harvests you'd have panics at the local bank. So there were two options on how to deal with this problem:

1. Lift the Branching restrictions to allow banks to diversify their deposits geographically
2. Create a central bank to inject liquidity into these banks between harvests

As documented in the book "Creature from Jekyl Island" by Edward G Griffith many prominent bankers got involved in the creation of the policy that followed to address this problem. Bankers did not want to the extra competition that would come from having banks branch out, so the central bank was the favored route since it preserved bankers local monopolies.

In beginning (1913) the Federal Reserve only lent to banks through it's discount window where banks could bring "high quality" collateral (usually in the form of government bonds/treasuries) in order to get overnight loans to meet their reserve requirement, which is a fixed percetage of their liabilities they must have deposited at the Federal Reserve (currently 10%). This was for the most part the extent of the Federal Reserves actions till later on.

In 1920 a large Recession took hold in the economy during the end of Woodrow Wilsons administration and the beginning of Warren G Harding. As Harding took office, his Secretary of Commerce (Herbert Hoover) and his Secretary of the treasury (Andrew Mellon) did not see eye to on what actions should be. Herbert Hoover advised that Harding should conduct protectionist high wage policies and also advocated spending increases to which advice Harding ignored and allowed deflation to take hold and unemployment had started going down. The federal reserve had taken little action, cause at this point they had not yet entered something called open market operations.

Come 1924 the Federal Reserve was having problems covering it's operation costs with only the proceeds from loans of the discount window, so it began the purchasing and selling of government debt better known as open market operations. These OMO's had great effects on interest rates and mid-decade began to push interest rates down from these actions which arguably triggers the Austrian Theory of the Business Cycle which I explain in this video.

This leads to the recession of 1929, yet now the president was the former Secretary of Commerce Herbert Hoover. Now that he was the one calling the shots, he conducted the expansionist schemes he wasn't allowed to under Harding and Coolidge. Having increased spending to historical highs, enacting the smoot hawley tariff, and establishing informal cartels in most industry to prop up wages; the economy had only worsened unlike in 1920 which saw a relatively speedy recovery.

As things get worse, a Charismatic contender from the opposing party comes along calling Hoover out and extravegant spending and intervention. This candidate, Franklin Delano Roosevelt, wins handidly and yet increases the spending and intervention well beyond his predeccessor (sound familiar).

At this point the rest is history, but now you have a foundation in where the Fed came from, now let's talk about their dual mandate.

The Federal Reserves Dual Mandate

The Federal Resere has dual Mandate to Carry out...

1. The Pursuit of Price Stability
2. The Pursuit of Full Employment

So let's see their score card since 1913...

- Recession in 1920 w/ double digit inflation
- The Great Depression in the 1930's one of the most dire economic event in history
- Major Rationing and Price Controls during World War II
- Intense Stagflation in the 1970's
- High Interest Rates in Response to Inflation in the 80's
- Dot Com Bubble at the turn of the Century
- Housing Bubble in 2008

Let's also sprinkle on a series of mini recessions in between all of that... although to be fair many of those recessions may be over-pronounced due to how GDP is calculated and the effects of deflation, for example the 1870's was known as a long depression but was actually one of the most robust periods of growth in the country. So when looking at a recession one must take a look with a critical eye.

Although, one can clearly see even if the federal reserve was the benevolent overseer of the economy with which it's avocates paint it as, the concept of price stability is a flawed one. Often price drop due to productivity increases as I explain in this article on deflation, this is a great thing that you can now buy the same goods for lower prices and have more to spend elsewhere in the economy. Although when the fed conducts policy for price stability it uses a method called inflation targeting, which very often is keyed to s statistic called CPI, the Consumer Price Index.

What is the Consumer Price Index?

By current day definitions, we look at inflation as an increase in the prices around us and the Keynsian/Monetarist Orthodoxy believes that a moderate amount of inflation is necessary so the federal reserve should target it at some arbritrary number like 3%. So how do we know how much price inflation is? We use CPI which takes a basket of goods and measures it's month over month price increase, so if CPI is up 3% then the basket of goods has increased in price 3%.

So what is in the basket of goods?

We take all the goods that an AVERAGE purchase purchases using the AVERAGE price from many urban cities

There are many obvious problems with the calculation of this number

- Who is this average person? How do we know what goods they buy?

- If we did know what good, don't those good change over time, so the basket of good must change over time as well which you might remember in any science class is a problem, cause if you constantly change your control variable your information is useless.

- Don't prices even differ in the same city, and what about replacement goods, if a price goes up of one good I may just replace it with another good essentially negating the effect of the price increase in my daily life.

- Also how about regional cultural difference, I imagine the prices in New York will be higher than prices in Detroit, and also the brands of goods and specific good will change due to regional cultural difference.

This all hints at the fundamental problem with all Macroeconomic indicators they destroy valuable information needed to understand why certain phenomena occurs. If I see an increase in CPI, sure this tells me certain prices have gone up but without further inspection I don't know which ones and where.

So in General, the Federal Reserve acts like all prices go down and up together uniformly and adjust the money supply to get CPI to hit their target which ignores so many regional factors that it ends up causing regional and microeconomic problems... but as long as those aggregate numbers like CPI and GDP look good, right?

For example, what if CPI drops and it's actually due to productivity gains in technology (cheaper laptops), it'll show up in CPI as a drop in price which doesn't fit the Federal Reserves definition of Price Stability so they put money into the economy to push the price back up to hit their inflation target and essentially erase that productivity gain. If this had not occured, the savings for people from that productivity gain could of been use to buy other goods which would allow more sectors of the economy to grow. Instead all prices have gone up, and generally wages move slower than consumer prices so if prices are increasing wages arn't increasing fast enough to keep up for a net loss. Vice Versa, in a deflation prices more down faster than wages move down, for example if prices dropped 20% and wages drop 11%, you're actually able to buy more stuff which will then again re-stimulate the economy.

Of course the Federal Reserve would never let prices drop for political reasons which I explain in the Deflation article I linked to earlier.

How about maintaining Full Employment?

Another bizzarre goal, cause for a economy to have a healthy transfer of resources from growing industry from a matured industry you'll have some frictional unemployment. For example as the industry for audio cassette manfuacturers died down unemplyment had to come from that industry before those jobs got replace with jobs manufacturing Compact Discs and other goods. So it's not neccessarily imperative to force the economy to constantly have little to no unemployment, (usally they have an arbritrary target). So by injecting money into the economy resources get diverted from transitioning industries into something else which may or may not be sustainable such as New Internet Start-ups or New Housing Construction, get the picture. It's not that the money wouldn't of been invested, it just would've been invested somewhere else that was sustainable. So if jobs get create in an unsustainable industry instead of an sustainable industry their may be an increase in jobs and consumption until it's realized that the job was unsustainable (AKA a recession).

Bottom Line:

While historically it has been shown that an economy can thrive without a central bank (early 1900's canada) or thrive during deflation (1870's USA) we still insist we cannot exist without a Central Bank who's mandates contradict basic economics who operate based on statistics that tell them very little about what is actually going on it the world. Maybe it's time we start taking economics and history a little bit more seriously...


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