Why would Anyone Oppose the Federal Reserves plan to Bail out Europe?

 

Mark Thoma of CBS’s Money watch outlined the plans of several central banks to bailout Europe in an article titled “Will the Fed’s move to help Europe hurt the U.S?”. This article was written the same day that central bankers around the globe announced their decision, and briefly describes the potential costs and benefits of such a plan. Additionally, the article ends by stating that this move may indeed smooth market conditions, but does very little to actually address the primary problem involved in the European debt crisis. Henceforth central banks around the globe have agreed to provide liquidity swaps in an attempt to reduce the costs of loans between central banks. Therefore countries such as Greece could benefit from this plan since their government would end up paying less for the loans they need. Thus it is reasonable to assume that although this plan doesn’t address the underlying problems inherent in the EU sovereign debt crisis, it may indeed mitigate some of the economic woes plaguing countries such as Greece.

On a final note I would also like to point out that this isn’t the first time that the United States has involved themselves in providing liquidity loans to a foreign country. The last time our government did such a thing was in the mid 90′s when the Treasury department made a 20 billion dollar loan to Mexico. Not only did these loans prevent a border country from becoming a failed state, but it also produced a $500 million profit for the Treasury department, and therefore extra revenue that helped to pay down our deficit. Thus why would anyone oppose the Federal reserves plan in bailing out Europe? Not only could such a move potentially help to pay off our deficit, but it may very well prevent the EU from economic collapse.

Tax loopholes that benefit the elite.

S class corporations are often times exempt from paying both state and federal income tax’s. Henceforth, subchapter S of chapter 1 of the Internal Revenue Code should be reformed to close this loophole.

Multinationals whom operate in high-tax foreign countries automatically receive tax credits, and benefit from a loophole dealing with inventory property sales. Henceforth, subchapter N of chapter 1 of the Internal Revenue Code should be reformed to close this loophole.

High-income investors and corporations are often exempt from paying tax’s on the interest rate of state and local bonds. Henceforth section 103 of the Internal Revenue Code should be reformed to close this loophole.

Pharmaceutical companies, and large Agricultural conglomerates benefit from a 20% tax credit, they don’t need. Henceforth, section 41 of the Internal Revenue Code should be reformed to no longer include this tax break to large companies.

Food and Agriculture conglomerates often benefit from an alcohol fuel credit. Henceforth, subchapter B of chapter 65 should be reformed.

Multinational companies often avoid paying taxes because of the “Deferral of income from controlled foreign corporations rule”. Henceforth, subchapter N of chapter 1 should have the language of subpart F reformed in order to close this loophole.

Finally, conservatives like to point out that the United States has the highest corporate tax rate in the world. This is indeed correct, but often time’s corporations pay very little in taxes because of the various loopholes that benefit them.

Why I am not an Austrian Economist part two.

Before elaborating on my reasons as to why I am uninterested in the works of Austrian economics, it would be most beneficial for the reader to understand what Austrian economics is. In brief Austrian economics is a school of thought built upon similar foundations as welfare, Neo-classical economics, and principles that are often a derivative of these two fields. For example, both Austrian economists and mainstream economics assume that consumer behavior has at least some kind of rational element. Henceforth the economic models provided by both schools of thought may vary slightly, but in many cases both are based off of very similar assumptions. One shouldn’t be surprised that a school of thought developed in the early part of the 20^th century would include these principles. After all, economics of that time period was still muddled in the works of 19^th century thinkers. Thus, Austrian economics is a school of thought that relies on the framework of 19^th century economists.

Economics as a social science has evolved greatly since the early parts of the 20^th century, and although many of its fields still rely on some old axioms it has developed new methodologies, research techniques and so forth. Meanwhile the Austrian school refuses to participate, and conduct research with these advancements in thought. Therefore, Austrian economics has become an exclusive field that only dedicates itself to playing by its own rules. Thus even when Austrian economists are right, or share the same conclusion as others, there isn’t much else to gain beyond this. In short my disagreement with Austrian economics relies on the fact that their findings lack creativity, innovation, and similar concepts that form the core of developing greater insight.  What use is a field of thought if it restricts the mind from engaging in creative, and critical thought?

Why I am Not an Austrian Economist.

 

http://econfaculty.gmu.edu/bcaplan/whyaust.htm

The following passage is derived from an essay written by Bryan Caplan in which he explains as to why he is not an Austrian Economist. This is simply a preview of my next blog post, which shall go into detail explaining as to why I am not an Austrian Economist. Finally, Caplan’s critique will differ considerably from mine, but some of the key concepts that he explores will be apart of the next post. Henceforth, anyone who is curious about what I plan to present should try to become familiar with the terms in Caplan’s essay.

Austrian scholars have made important contributions to economics in recent years. I personally am most impressed by the work of Lawrence White and George Selgin on free banking and other monetary issues, though certainly other Austrians have made significant contributions too. Set in historical context, I also consider the economics of Mises and Rothbard to be a great achievement in spite of my numerous reservations about it. Yet all too large a fraction of Austrian research has not been in economics at all, but rather in meta-economics: philosophy, methodology, and history of thought. Admittedly, much of the meta-economics stems out of the work of F.A. Hayek and his numerous interpreters, whose contributions to economics the present essay did not discuss save by implication. But the students of Mises and Rothbard have done more than their fair share of meta-economics too. Neoclassical economists go too far by purging meta-economics almost entirely, but there is certainly a reason to be suspicious of scholars who talk about economics without ever doing it. Paraphrasing Deng Xiaoping, “One should not talk of methodology every day. In real life, not everything is methodology.”[59]

While the substantive contributions of Austrian economists to economics are significant, their sum from Human Action on is small compared to the progress that neoclassical economics has made over the same time period. The ten good ideas listed in section 4.3 are only the beginning of what economists have learned since 1949 – in spite of the large deadweight cost of mathematics and econometrics. Mises and Rothbard certainly produced an original alternate paradigm for economics – and applied this paradigm to a number of interesting topics. Unfortunately, the foundations of their new paradigm are unfounded, and their most important applied conclusions unsound or overstated. The reasonable intellectual course for Austrian economists to take is to give up their quest for a paradigm shift and content themselves with sharing whatever valuable substantive contributions they have to offer with the rest of the economics profession – and of course, with the intellectually involved public. In sum, Milton Friedman spoke wisely when he declared that “there is no Austrian economics – only good economics, and bad economics,”[60] to which I would append: “Austrians do some good economics, but most good economics is not Austrian.”

the deficit should not be measured by its size, but instead by the strength of our T-Bills.

The single most discussed issue involves the manner in which our country should handle our deficit. Despite the popularity of such a topic, the conversation hasn’t evolved beyond the following claim, “China is going to screw us, we owe them and we should pay up, and therefore we should stop borrowing from them”. Not only does this claim lack basic economic insight, but it also neglects the fundamental inclusion of what the process of government borrowing actually is. Therefore the concept of Treasury auctions will be explained, because it is one of the mechanisms used by our government to fund the deficit. Henceforth, Treasury Auctions pertain to the sale and consumption of Treasury notes. Furthermore, the proceeds of these sales go towards the payment of programs in the federal budget, but at the same time the issuance of these bonds create a future debt obligation. This is because countries such as China, or the general public buy these bonds premised upon the idea that the United States treasury will pay their future value once these bonds mature. In brief the process by itself helps to pay down the deficit, while at the same time it also creates a future debt obligation as well.

Treasury Auctions occur on a routine basis and therefore as long as our T-bills bond ratings continue to maintain top tier status, both governments and the public will continue to invest in them. In short as long as our treasury notes continue to maintain a triple A rating our deficit is not a problem. In conclusion the deficit should not be measured by its size, but instead by the strength of our financial instruments.

Ten Economic Policies for the Future.

1)                    A 0.25% multilateral currency transaction tax (Tobin Tax’s). These taxes would impact currency trades that are done across borders. The estimated revenue could potentially be half a trillion each year. Not bad for a tax that only collects 25cents off of every currency trade. This revenue could be used for numerous things from fighting poverty to mitigating the effects of climate change on a global scale. Additionally such a tax system would protect countries from currency speculation, and potentially end the chance of participating countries from defaulting.

2)                    A change in domestic currency laws, which would allow for small communities to introduce labor certificates whenever there is an economic downturn. The idea is exactly the same as the theory of Stamped Money. Originally proposed by Silvio Gesell and eventually implemented in 1932, the monetary reform would eventually lead to the economic miracle of Worgl.

3)                    Stricter insider trading laws, and especially the introduction of regulation that would mitigate the conflict of interest that is currently inherent in the Credit Default Swap market. For example in the year 2000 regulation S.E.C rule 10b5-1 changed the original definition of insider trading, that made it legal to posses inside information.

4)                    Create legislation that would require the chairman of Mutual funds to be more independent of the interests of management. The Investment Company Act of 1940 explicitly requires that Mutual Funds operate in the interests of the Shareholders, and therefore their interests should come first.

5)                    Close the Tax Loophole for S class Corporations in employee stock ownership plans. Those stocks were meant to benefit the workers that belong to these corporations. Finally why should S Class Corporations benefit from a tax loophole? They already are exempt from paying federal and state income taxes.

6)                    Grant shareholders the legal right to nominate opposition candidates to corporate boards.

7)                    Promote better underwriting standards, subsidized mortgages, starter homes, and credit counseling for first time homebuyers.

8)                    Abolish the Debt Ceiling. The Treasury shouldn’t be hindered by anything that would prevent the issuance of new T-bills, which are needed to pay down the deficit.

9)                    Promote economic policies that will ensure greater stability and income equality.

10)                Make society more democratic by constructing policy that encourages participation. For example shareholders, and workers should simply have more of a say in what a company does.

A brief synopsis of the Pullman strike. (Something that Occupiers could learn a great deal from)

            The Chaotic social atmosphere of the 19^th century hosted a series of events that shook the world. Such events as the Civil War overthrew the vestiges of an outdated social order, while occurrences such as the economic panic of 1890 provided the catalyst for challenging welfare capitalism. Henceforth towards the end of this turbulent century, a market collapse would give rise to the Pullman Strike of 1894.  The nature of this strike resonated deeply with the conscious of Americans, and generated support ranging from charities to law firms.  In turn this sentiment eventually became nation wide, as the demands of the Pullman worker echoed throughout the streets of Chicago, and reverberated in the halls of congress. In brief, the vestiges of the Pullman strike struck a chord with the collective thoughts of Americans in that time period, and forever challenged the unbound privileges of those whom controlled the wealth.

It is 1894 and the unemployment rate is estimated to be around 17%, and the quality of life is bleak. Author and Journalist John Swinton wrote, “ Do we hear cries of distress from a million idle people? The wail of hunger from men, women, and children? The groans of anguish from the multitudes who suffer in many a great city? Do we see hordes of men, mingled with women, looking for work which they may earn their daily bread? Does strife rage between the workers and the capitalist? Do we hear the tramp of a hundred thousand soldiers, bearing guns, with which they are ready to shoot their own countrymen?”(1) This observation came towards the end of the year, but the expression was merely a summation of what the populace was thinking. Additionally, the workers in the company town of Pullman also conveyed similar thoughts when they forwarded a letter to the mayor. Upon reading this letter the Mayor of Chicago responded by writing to George Pullman “ Sir-I have examined the conditions at Pullman yesterday, visited even the kitchens and bedrooms of many of the people. Two representatives of your company were with me and we found the distress as great as it was represented. The men are hungry, and the women and children are actually suffering. They have been living on charity for a number of months and it is exhausted…” The letter ends by stating “ No matter what caused this distress, it must be met.”(2). In brief the livelihoods of many stood in the balance as the crisis of capitalism spread throughout the country, but the workers of Pullman were already taking active measures to fight off the contagion brought by the economic panic.

The efforts to notify the mayor, and George Pullman were of no help. Instead The only reply that these letters were met with was an increase in rent, and a reduction in pay. The aforementioned conditions described in the letters eventually became worse as the income levels of these individuals declined as a direct result of Pullman’s policies. Eventually on the tenth of may “ a committee of workers presented a list of grievances to Thomas H. Wickes, a Pullman vice president, and received assurances that they would suffer no reprisal for the petition”.(3)  In response to this petition the company fired “Three members of the committee that had presented the petition”(4). This news was quick to reach the ears of the workers, and “Immediately without exception, dropped their tools and struck”. In short, the workers and inhabitants of Pullman’s company town began to occupy the property of their corporate boss George Pullman. What started out as a series of letters eventually evolved into a highly organized effort to restore the economic security that was lost during the panic of the 1890’s.

Two months prior to the strike the workers had already enlisted the help of Eugene Debs. Debs had been successful in organizing strikes before which were highly reliant on his ability to reign in the benefits of broad ranging support. Henceforth, Debs would rely on coordinating the sympathies of the middle class with the efforts of the Pullman workers. Organizations such as the Civic Federation offered material, and attempts to arbitrate with George Pullman. Additionally, the “Law firm of Mayor John Hopkins donated 25,000 pounds of flour and meat and established a medical clinic”(5). Meanwhile the Chicago Daily News provided a rent-free office to coordinate relief efforts.”(6). Finally “the active trade unions of Chicago supported the strikers fully, and the fire department collected almost $1,000 for the strike fund”. In brief the entire city came to the aid of the workers, and by the time it was all over, the strike had captured the attention of our nation in a few short months.

Unfortunately what started in the spring of 1894 would eventually come to an end during midsummer.  Moreover because of internal disagreements, and the appearance of Federal troops none of the demands put forth by the worker council were met. In the end the most these workers got was a congressional investigation, and despite the committee offering a balanced opinion it did very little to change things. Instead, events like these would help build momentum for the progressive era., an era, which reflected the prior grievances of capitalism, while also calling for a more equitable and stable social system. In closing such events at the Pullman strike helped to perpetuate the progress of society by not only challenging the existing social order, but also by encouraging individuals around the world to think about what the strike meant.  Perhaps it was Eugene Debs who summed up the Pullman Strike ‘s ability to spark the interests of humanity, and evoke the thoughts of others concerned with the progress of society “ The great lesson of the Pullman strike is found in the fact that it arouses widespread sympathy. This fellow-feeling for the woes of others-this desire to help the unfortunate…should be accepted as at once the hope of civilization and the supreme glory of manhood”(7).

1)Lindsey, Almont.  The Pullman Strike: the story of a unique experiment and of a great labor upheaval. University of Chicago press, 1964. Page 1.

2) http://herb.ashp.cuny.edu/items/show/687

3) Salvatore, Nick. Eugene V. Debs Citizen and Socialist. University of Illinois Press 1982. P. 128

4)^P. 128

5)^p. 128

6)^p. 128

7)^p. 137

Lets Discuss Deficit Reduction when indicators actually suggest the Deficit is a problem.

The very notion that our legislator is currently debating ways to reduce the deficit is preposterous, and contrary to what should be done in lieu of the current economic conditions. Increasing austerity measures before the labor market has recovered is an unintelligible position of the highest order. Likewise calling for deficit reductions in the midst of 9% unemployment is a viewpoint counterintuitive to the fundamentals of Macroeconomics, as well as the lessons of our past.  Moreover, such sentiments are diametrically opposed to the ideas postulated by John Maynard Keynes. Keynes to his credit, not only shaped the modern foundations of Macroeconomics, but also ushered in the age of depression economics with the publication of his magnum opus in 1936. The title of his greatest work “ The General Theory of Employment, Interest and Money”, provided an economic doctrine which suggested that a government should deficit spend, and avoid debt reduction until the worse was over. The logic of Keynes theory was well understood prior to the publication of his book, and the message had been forwarded to both policy makers and the public alike through letters, and interviews. Prior to 1936 he proclaimed in an interview with Redbook magazine that increases in “spending” are essential for generating an economic recovery (1). Furthermore, In 1931 Keynes attacked Ramsay Macdonald’s National government for cutting “road building and house construction programs out of the budget “(2).  Despite these efforts the learning curve for policy makers was rather pronounced, and lawmakers didn’t learn the lesson of Keynesian economics until 1937, when FDR’s attempt to balance the budget merely prolonged the great depression. In brief the very idea that legislators are currently debating spending cuts not only defies the foundations of modern macroeconomics, but it also shows that lawmakers are willing to forgo these lessons in the aftermath of the recent financial crisis. Is it too much to ask our Senators and Congressmen to allow the lessons of history, and economics to decide what should be debated? Should the general public stand idle, and allow this erroneous manner of thinking to shape the economy?  In short, not only is the current discussion intellectually insulting, but it also presents a huge risk to the public just like it did in 1937.

Unfortunately, the current political dialogue is still centered upon the idea that deficit reduction is of a primary importance, and the aforementioned debt super committee serves as evidence to this observation. Furthermore the noted trend for legislators to think wrongly in terms of economic policy, suggests the current discourse will continue to be based off of this principle. Fortunately, by highlighting a few simple facts about our current deficit it is possible to correct such erroneous thinking.  Therefore the following passage will be dedicated to the argument that spending cuts are unnecessary according to some important indicators.

The ability to pay off current debts, and create new debt obligations is largely dependent upon the interest rate on our bonds. For example in “2002 Japan was downgraded by S&P”, but despite this downgrade the “interest rate on the Japanese Ten year bond is still one percent in present times” (3). Therefore Japan, which has a higher GDP-to-Debt ratio when compared to us, is still able to run a deficit. Thus as long as the interest rates on our bonds remain low, the United States can continue to run a deficit, but most importantly the lesson is this. As long as our bonds continue to posses a low interest rate, then it is most likely that investors will continue to help fund our debt. Furthermore even if an independent credit rating downgrades us, it doesn’t mean the United States runs the risk of a sovereign debt crisis. Instead it simply implies that the final arbiter in regards to our deficit is the interest rate on our bonds.

Finally, the previous paragraph mentioned that Japan has a higher GDP-to-Debt ratio than ours. This is important because according to the book “This Time Is Different: Eight Centuries of Financial Folly”, there is an historical threshold strongly associated with indicating the risk of a country going into default. Historically countries are more likely to reach default on their debt “ when government debt-to-GDP ratio rises above 90%”.(4) The article which borrows this number from the previously mentioned book adds onto this figure by claiming “…the U.S Debt-to-GDP-ratio will pass the 90% threshold in 2011 and reach 102% by 2016”(4). The prediction itself may be alarming, but similar countries such as Japan currently have a GDP/debt ratio of 199.70 % and have not defaulted (5). Thus even if the United States surpasses this historical threshold; there is still a strong argument that the government should pass another stimulus, and failure to do so would only prove that legislators have ignored two simple lessons. The first being the fundamentals of Macro, and the ability to perceive basic indicators such as the interest rates on our bonds. Secondly any call for further reductions in the deficit would show that legislator’s biases are immune to the lessons of the Great Depression, and the recession of 1937.

The Economic Panic of the 1870′s, a preview of things to come.

The 19th century witnessed both the blessings, and horrors of Capitalism. The standard of living, and overall economic growth brought the United States into an age of prosperity, that wasn’t surpassed until a superior economic order surfaced in the post Worst War two era. Despite all of these gains our country experienced in the 19th century, most of them would eventually be wiped out by the onset of a economic panic. Economic panics were the 19th century’s term for a downturn in the business cycle, but their nature was more severe than any post-war recession, and their occurrence was more frequent as well. Henceforth the economic order of the 19th century witnessed tremendous growth rates and innovation, but at the same time experienced widespread hardships that are almost entirely absent in todays social system.

The economic panic of the 1870′s provides a good case example of the kind of financial turmoil that persisted during this chaotic century. Originally I had hoped to find a video on the economic panic of the 1890′s in order to provide a nice backdrop to the Pullman Strike, but instead I could only find a good video about a panic that was very similar in nature. The similarities of these panics lay in the fact that both were caused by speculation, and the collapse of the railroads. In addition to this both Economic Panics were not only fairly long, but also produced a massive amount of unemployment and deflation comparable to the Great Depression. Furthermore, both of these economic panics gave rise to the popular use of the general strike as a means to combat economic conditions, and challenge the status quo. For example the economic panic of the 1870′s gave way to “the great rail way strike”, while at the same time the downturn of the 90′s gave rise to the Pullman Strike. Hopefully this information will be enough to provide a nice backdrop for the following post which will focus on the Pullman Strike.

Milton Friedman explains role of gold in Great Depression.

Historically, countries that left the gold standard got out of the Great Depression faster compared to countries that stayed on it. This is unsurprising considering the fact that such currencies are prone to have a deflationary bias. Secondly, the Federal Reserve would have never had to have raise interest rates in the first place if it wasn’t for the Gold Standard. In brief what could have been a short recession turned about to be the longest economic panic in modern history.