UBI, or Something Better?

What’s odd about this discussion on Universal Basic Income below is that nobody successful in Silicon Valley participates in a UBI scheme, nor would they. They rely on risk-taking, equity, and reward. Not sure why they don’t advocate this for everybody – after all, because of the way risk is assigned to asset ownership, labor ends up taking all kinds of risk, yet almost never participates in the rewards to that risk. Instead they get a one-time bonus or profit-sharing.

But Zuckerberg would never accept those terms, either now or before he made his first dollar. It looks to me that Silicon valley tech supports redistribution in order to make their outsized gains from network effects more politically palatable.

Unfortunately, this critic of Zuckerberg and Silicon Valley in general wants to double down on failed tax and redistribution schemes instead of empowering people to participate in the risks and rewards of capitalist entrepreneurial success.

“He (or She) who is without capital in a capitalist society is little more than a wage slave and a captive consumer.” 

Another truism about the future: In a world run by robots, he who owns and controls the robots is king. Make sure you own your robot!

Original article here.

What Mark Zuckerberg Gets Wrong About UBI

New Republic, July 7, 2017

By Clio Chang

It’s no secret that tech bros love universal basic income. Sam Altman of Y Combinator is funding a UBI pilot program in Oakland, California, in part because he was inspired by Star Trek. Tesla’s Elon Musk supports the policy because he realizes that the aggressive automation caused by the tech industry will make UBI “necessary.” This week, as part of his “I’m-not-running-for-president” tour around the country, Mark Zuckerberg visited Homer, Alaska, which resulted in him writing a Facebook post lauding the merits of the state’s Permanent Fund as a model for a national form of basic income.

UBI, a concept that dates back centuries, is the idea that every person should receive some amount of money so that no one dips beneath a basic standard of living. For those on the left, it’s seen as an alternative to our country’s woefully limited cash welfare system. For libertarians, a basic income is lauded as a slimmer, less intrusive way to deliver government benefits. It is the rare utopian idea that people of different political stripes can agree on—Zuckerberg himself made sure to note the “bipartisan” appeal of the policy in his post.

But Zuckerberg reveals exactly why the left should be alarmed that Silicon Valley is taking the lead on this issue.

First, the idea that UBI has bipartisan appeal is disingenuous. The left would have a policy that redistributes wealth by funding UBI through a more progressive tax scheme or the diverting of capital income. But libertarians like Charles Murray argue for a UBI that completely scraps our existing welfare state, including programs like Medicare, Medicaid, and housing subsidies. This would be extremely regressive, since money currently directed towards the poor would instead be spread out for a basic income for all. And certain benefits like health insurance can’t effectively be replaced with cash.

Second, Zuckerberg asserts that Alaska’s Permanent Fund—which uses the state’s oil resources to pay a dividend to each Alaskan and is seen as one of the few examples of an actual UBI-like policy—is advantageous because it “comes from conservative principles of smaller government, rather than progressive principles of a larger safety net.” But a UBI policy can only reflect small government principles if one envisions it eating into the country’s existing welfare state, rather than coming on top of it. In this respect, Zuckerberg’s advocacy of UBI “bipartisanship” starts to look more like a veiled libertarian agenda.

This attitude echoes other pro-UBI tech lords like Altman, who sees basic income as providing a “floor” but not a ceiling. In his ideal scheme, no one will be very poor, but people like Altman will still be free to get “as rich as they fucking want.” The tech vision of the world is one where it can wash its hands of the rising joblessness it will generate through automation, but where those at the top can still wallow in extreme wealth. As Altman told Business Insider, “We need to be ready for a world with trillionaires in it, and that’s always going to feel deeply unfair. It feels unfair to me. But to drive society forward, you’ve got to let that happen.”

This is deeply telling of the tech UBI mentality: driving society forward doesn’t mean reducing inequality, but rather fostering more entrepreneurship. The former is viewed as unnecessary and the latter as an inherent good.

Zuckerberg also compares Alaska’s Permanent Fund to running a business—a very specific one:

Seeing how Alaska put this dividend in place reminded me of a lesson I learned early at Facebook: organizations think profoundly differently when they’re profitable than when they’re in debt. When you’re losing money, your mentality is largely about survival. But when you’re profitable, you’re confident about your future and you look for opportunities to invest and grow further. Alaska’s economy has historically created this winning mentality, which has led to this basic income. That may be a lesson for the rest of the country as well.

The idea that a “winning mentality” is what is going to lead to a basic income in the United States reveals how little Zuckerberg understands about politics. This is a pervasive ideology among tech leaders, who believe the lessons that they have gleaned from their own industry are applicable to all of the country’s problems. But remember the last time a disrupter said he was going to step into the political arena and run our country like a business?

For moguls like Zuckerberg, there is never any deep consideration of, say, the fact that racism, sexism, and classism are deeply intertwined with our country’s policies and are some of the biggest obstacles to implementing a highly redistributive policy like a UBI. Nor is there any attempt to consult with lifelong organizers and activists on the issue.

At the end of his post, Zuckerberg states that the “most effective safety net programs create an incentive or need to work rather than just giving a handout.” This echoes the “personal responsibility” rhetoric that drove workfare policies in the 1990s, which ended up kicking millions of people off of welfare rolls, leaving them in extreme poverty. The line also directly undermines the push for a UBI, which is quite literally a handout that can help liberate people from the “need to work.”

It would appear that Silicon Valley’s support for a basic income comes from self-interest. As Jathan Sadowski writes in the Guardian, “the trouble comes when UBI is used as a way of merely making techno-capitalism more tolerable for people, when it is administered like a painkiller that numbs the pain and masks the symptoms of economic injustice without addressing the root causes of exploitation and inequality.”

Tech moguls may seem like tempting allies for UBI advocates, but their vision of an ideal social safety net does not look anything like the left’s. If it did, they wouldn’t be pushing just for a basic income, but also for things like universal health care, free public education (not just for engineers!), and strong labor unions. For Silicon Valley, UBI is a sleek technological means to a very different end.

Book Review: Makers and Takers

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

Crown Business; 1st edition (May 17, 2016)

Ms. Foroohar does a fine job of journalistic reporting here. She identifies many of the failures of the current economic policy regime that has led to the dominance of the financial industry. She follows the logical progression of central bank credit policy to inflate the banking system, that in turn captures democratic politics and policymaking in a vicious cycle of anti-democratic cronyism.

However, her ability to follow the money and power is not matched by an ability to analyze the true cause and effect and thus misguides her proposed solutions. Typical of a journalistic narrative, she identifies certain “culprits” in this story: the bankers and policymakers who favor them. But the true cause of this failed paradigm of easy credit and debt is found in the central bank and monetary policy.

Since 1971 the Western democracies have operated under a global fiat currency regime, where the value of the currencies are based solely on the full faith and credit of the various governments. In the case of the US$, that represents the taxing power of our Federal government in D.C.

The unfortunate reality, based on polling the American people (and Europeans) on trust in government, is that trust in our governmental institutions has plunged from almost 80% in 1964 to less than 20% today. Our 2016 POTUS campaign reflects this deep mistrust in the status quo and the political direction of the country. For good reason. So, what is the value of a dollar if nobody trusts the government to defend it? How does one invest under that uncertainty? You don’t.

One would hope Ms. Foroohar would ask, how did we get here? The essential cause is cheap excess credit, as has been experienced in financial crises all through history. The collapse of Bretton Woods in 1971, when the US repudiated the dollar gold conversion, called the gold peg, has allowed central banks to fund excessive government spending on cheap credit – exploding our debt obligations to the tune of $19 trillion. There seems to be no end in sight as the Federal Reserve promises to write checks without end.

Why has this caused the complete financialization of the economy? Because real economic growth depends on technology and demographics and cannot keep up with 4-6% per year. So the excess credit goes into asset speculation, mostly currency, commodity, and securities trading. This explosion of trading has amped incentives to develop new financial technologies and instruments to trade. Thus, we have the explosion of derivatives trading, which essentially is trading on trading, ad infinitum. Thus, Wall Street finance has come to be dominated by trading and socialized risk-taking rather than investing and private risk management.

After 2001 the central bank decided housing as an asset class was ripe for a boom, and that’s what we got: a debt-fueled bubble that we’ve merely re-inflated since 2008. There is a fundamental value to a house, and in most regions we have far departed from it.

So much money floating through so few hands naturally ends up in the political arena to influence policy going forward. Thus, not only is democratic politics corrupted, but so are any legal regulatory restraints on banking and finance. The simplistic cure of “More regulation!” is belied by the ease with which the bureaucratic regulatory system is captured by powerful interests.

The true problem is the policy paradigm pushed by the consortium of central banks in Europe, Japan, China, and the US. (The Swiss have resisted, but not out of altruism for the poor savers of the world.) Until monetary/credit policy in the free world becomes tethered and disciplined by something more than the promises of politicians and central bankers, we will continue full-speed off the eventual cliff. But our financial masters see this eventuality as a great buying opportunity.


…between central bank policies, economic growth and unemployment. Stockman distinctly and colorfully explains why we are experiencing 1-2% growth these days. I’m not sure any of the candidates for POTUS have a good answer for this…It’s a sad commentary on our intellectual and political leaders.

Losing Ground In Flyover America, Part 2

In fact, the combination of pumping-up inflation toward 2% and hammering-down interest rates to the so-called zero bound is economically lethal. The former destroys the purchasing power of main street wages while the latter strip mines capital from business and channels it into Wall Street financial engineering and the inflation of stock prices.

In the case of the 2% inflation target, even if it was good for the general economy, which it most assuredly is not, it’s a horrible curse on flyover America. That’s because its nominal pay levels are set on the margin by labor costs in the export factories of China and the EM and the service sector outsourcing shops in India and its imitators.

Accordingly, wage earners actually need zero or even negative CPI’s to maximize the value of pay envelopes constrained by global competition. Indeed, in a world where the global labor market is deflating wage levels, the last thing main street needs is a central bank fanatically seeking to pump up the cost of living.

So why do the geniuses domiciled in the Eccles Building not see something that obvious?

The short answer is they are trapped in a 50-year old intellectual time warp that presumes that the US economy is more or less a closed system. Call it the Keynesian bathtub theory of macroeconomics and you have succinctly described the primitive architecture of the thing.

According to this fossilized worldview, monetary policy must drive interest rates ever lower in order to elicit more borrowing and aggregate spending. And then authorities must rinse and repeat this monetary “stimulus” until the bathtub of “potential GDP” is filled up to the brim.

Moreover, as the economy moves close to the economic bathtub’s brim or full employment GDP, labor allegedly becomes scarcer, thereby causing employers to bid up wage rates. Indeed, at full employment and 2% inflation wages will purportedly rise much faster than consumer prices, permitting real wage rates to rise and living standards to increase.

Except it doesn’t remotely work that way because the US economy is blessed with a decent measure of free trade in goods and services and virtually no restrictions on the flow of capital and short-term financial assets. That is, the Fed can’t fill up the economic bathtub with aggregate demand because it functions in a radically open system where incremental demand is as likely to be satisfied by off-shore goods and services as by domestic production.

This leakage through the bathtub’s side portals into the global economy, in turn, means that the Fed’s 2% inflation and full employment quest can’t cause domestic wage rates to rev-up, either. Incremental demands for labor hours, on the margin, are as likely to be met from the rice paddies of China as the purportedly diminishing cue of idle domestic workers.

Indeed, there has never been a theory so wrong-headed. And yet the financial commentariat, which embraces the Fed’s misbegotten bathtub economics model hook, line and sinker, disdains Donald Trump because his economic ideas are allegedly so primitive!

The irony of the matter is especially ripe. Even as the Fed leans harder into its misbegotten inflation campaign it is drastically mis-measuring its target, meaning that flyover American is getting  an extra dose of punishment.

On the one hand, real inflation where main street households live has been clocking in at over 3% for most of this century. At the same time, the Fed’s faulty measuring stick has led it to keep interest pinned to the zero bound for 89 straight months, thereby fueling the gambling spree in the Wall Street casino. The baleful consequence is that more and more capital has been diverted to financial engineering rather than equipping main street workers with productive capital equipment.

As we indicated in Part 1, even the Fed’s preferred inflation measuring stick——the PCE deflator less food and energy—has risen at a 1.7% rate for the last 16 years and 1.5% during the 6 years. Yet while it obsesses about a trivial miss that can not be meaningful in the context of an open economy, it fails to note that actual main street inflation—led by the four horseman of food, energy, medical and housing—–has been running at 3.1% per annum since the turn of the century.

After 16 years the annual gap, of course, has ballooned into a chasm. As shown in the graph, the consumer price level faced by flyover America is now actually 35% higher than what the Fed’s yardstick shows to the case.

Flyover CPI vs PCE Since 1999

Stated differently, main street households are not whooping up the spending storm that our monetary central planners have ordained because they don’t have the loot. Their real purchasing power has been tapped out.

To be sure, real growth and prosperity stems from the supply-side ingredients of labor, enterprise, capital and production, not the hoary myth that consumer spending is the fount of wealth. Still, the Fed has been consistently and almost comically wrong in its GDP growth projections because the expected surge in wages and consumer spending hasn’t happened.

growth chart

Statistical Fixations

Martin Feldstein is nowhere near as excitable as David Stockman on Fed manipulations (link to D.S.’s commentary), but they both end up at the same place: the enormous risks we are sowing with abnormal monetary policies. The economy is not nearly as healthy as the Fed would like, but pockets of the economy are bubbling up while other pockets are still deflating. There is a correlation relationship, probably causal.

The problem with “inflation targeting” is that bubble economics warps relative prices and so the correction must drive some prices down and others up. In other words, massive relative price corrections are called for. But inflation targeting targets the general price level as measured by biased sample statistics – so if the Fed is trying to prop up prices that previously bubbled up and need to decline, such as housing and stocks, they are pushing against a correction. The obvious problem has been these debt-driven asset prices, like stocks, government bonds, and real estate. In the meantime, we get no new investment that would increase labor demand.

The global economy needs to absorb the negative in order to spread the positive consequences of these easy central bank policies. The time is now because who knows what happens after the turmoil of the US POTUS election?

Ending the Fed’s Inflation Fixation

The focus is misplaced—and because it delays an overdue interest-rate rise, it is also dangerous.

The Wall Street Journal, May 17, 2016 7:02 p.m. ET

The primary role of the Federal Reserve and other central banks should be to prevent high rates of inflation. The double-digit inflation rates of the late 1970s and early ’80s were a destructive and frightening experience that could have been avoided by better monetary policy in the previous decade. Fortunately, the Fed’s tighter monetary policy under Paul Volcker brought the inflation rate down and set the stage for a strong economic recovery during the Reagan years.

The Federal Reserve has two congressionally mandated policy goals: “full employment” and “price stability.” The current unemployment rate of 5% means that the economy is essentially at full employment, very close to the 4.8% unemployment rate that the members of the Fed’s Open Market Committee say is the lowest sustainable rate of unemployment.

For price stability, the Fed since 2012 has interpreted its mandate as a long-term inflation rate of 2%. Although it has achieved full employment, the Fed continues to maintain excessively low interest rates in order to move toward its inflation target. This has created substantial risks that could lead to another financial crisis and economic downturn.

The Fed did raise the federal-funds rate by 0.25 percentage points in December, but interest rates remain excessively low and are still driving investors and lenders to take unsound risks to reach for yield, leading to a serious mispricing of assets. The S&P 500 price-earnings ratio is more than 50% above its historic average. Commercial real estate is priced as if low bond yields will last forever. Banks and other lenders are lending to lower quality borrowers and making loans with fewer conditions.

When interest rates return to normal there will be substantial losses to investors, lenders and borrowers. The adverse impact on the overall economy could be very serious.
A fundamental problem with an explicit inflation target is the difficulty of knowing if it has been hit. The index of consumer prices that the Fed targets should in principle measure how much more it costs to buy goods and services that create the same value for consumers as the goods and services that they bought the year before. Estimating that cost would be an easy task for the national income statisticians if consumers bought the same things year after year. But the things that we buy are continually evolving, with improvements in quality and with the introduction of new goods and services. These changes imply that our dollars buy goods and services with greater value year after year.

Adjusting the price index for these changes is an impossibly difficult task. The methods used by the Bureau of Labor Statistics fail to capture the extent of quality improvements and don’t even try to capture the value created by new goods and services.

The true value of the national income is therefore rising faster than the official estimates of real gross domestic product and real incomes imply. For the same reason, the official measure of inflation overstates the increase in the true cost of the goods and services that consumers buy. If the official measure of inflation were 1%, the true cost of buying goods and services that create the same value to consumers may have actually declined. The true rate of inflation could be minus 1% or minus 3% or minus 5%. There is simply no way to know.

With a margin of error that large, it makes no sense to focus monetary policy on trying to hit a precise inflation target. The problem that consumers care about and that should be the subject of Fed policy is avoiding a return to the rapidly rising inflation that took measured inflation from less than 2% in 1965 to 5% in 1970 and to more than 12% in 1980.

Although we cannot know the true rate of inflation at any time, we can see if the measured inflation rate starts rising rapidly. If that happens, it would be a sign that true inflation is also rising because of excess demand in product and labor markets. That would be an indication that the Fed should be tightening monetary policy.

The situation today in which the official inflation rate is close to zero implies that the true inflation rate is now less than zero. Fortunately this doesn’t create the kind of deflation problem that would occur if households’ money incomes were falling. If that occurred, households would cut back on spending, leading to declines in overall demand and a possible downward spiral in prices and economic activity.

Not only are nominal wages and incomes not falling in the U.S. now, they are rising at about 2% a year. The negative true inflation rate means that true real incomes are rising more rapidly than the official statistics imply. [Sounds good, huh? Not quite. Read Stockman’s analysis.]

The Federal Reserve should now eliminate the explicit inflation target policy that it adopted less than five years ago. The Fed should instead emphasize its commitment to avoiding both high inflation and declining nominal wages. That would permit it to raise interest rates more rapidly today and to pursue a sounder monetary policy in the years ahead.


Share the Wealth?

The Third Way? No, the Only Way forward. It’s called peoples’ capitalism, the Ownership Society, employee ownership, inclusive capitalism, etc. (Ironic how Reich has embraced a concept introduced in national politics by George W. Bush.)
Reprinted from the Huff Post. Comment below…

The Third Way: Share-the-Gains Capitalism

by Robert Reich

Marissa Mayer tells us a lot about why Americans are so angry, and why anti-establishment fury has become the biggest single force in American politics today.

Mayer is CEO of Yahoo. Yahoo’s stock lost about a third of its value last year, as the company went from making $7.5 billion in 2014 to losing $4.4 billion in 2015. Yet Mayer raked in $36 million in compensation.

Even if Yahoo’s board fires her, her contract stipulates she gets $54.9 million in severance. The severance package was disclosed in a regulatory filing last Friday with the Securities and Exchange Commission.

In other words, Mayer can’t lose.

It’s another example of no-lose socialism for the rich — winning big regardless of what you do.

Why do Yahoo’s shareholders put up with it? Mostly because they don’t know about it.

Most of their shares are held by big pension funds, mutual funds, and insurance funds whose managers don’t want to rock the boat because they skim the cream regardless of what happens to Yahoo.

In other words, more no-lose socialism for the rich.

I don’t want to pick on Ms. Mayer or the managers of the funds that invest in Yahoo. They’re typical of the no-lose system in which America’s corporate and financial elite now operate.

But the rest of America works in a different system.

Theirs is cutthroat hyper-capitalism — in which wages are shrinking, median household income continues to drop, workers are fired without warning, two-thirds are living paycheck to paycheck, and employees are being classified as “independent contractors” without any labor protections at all.

Why is there no-lose socialism for the rich and cutthroat hyper-capitalism for everyone else?

Because the rules of the game — including labor laws, pension laws, corporate laws, and tax laws — have been crafted by those at the top, and the lawyers and lobbyists who work for them.

Does that mean we have to await Bernie Sanders’s “political revolution” (or, perish the thought, Donald Trump’s authoritarian populism) before any of this is likely to change?

Before we go to the barricades, you should know about another CEO named Hamdi Ulukaya, who’s developing a third model — neither no-lose socialism for the rich nor hyper-capitalism for everyone else.

Ulukaya is the Turkish-born founder and CEO of Chobani, the upstart Greek yogurt maker recently valued at as much as $5 billion.

Last Tuesday Ulukaya announced he’s giving all his 2,000 full-time workers shares of stock worth up to 10 percent of the privately held company’s value when it’s sold or goes public, based on each employee’s tenure and role at the company.

If the company ends up being valued at $3 billion, for example, the average employee payout could be $150,000. Some long-tenured employees will get more than $1 million.

Ulukaya’s announcement raised eyebrows all over corporate America. Many are viewing it as an act of charity (Forbes Magazine calls it one of “the most selfless corporate acts of the year”).

In reality, Mr. Ulukaya’s decision is just good business. Employees who are partners become even more dedicated to increasing a company’s value.

Which is why research shows that employee-owned companies — even those with workers holding only a minority stake — tend to out-perform the competition.

Mr. Ulukaya just increased the odds that Chobani will be valued at more than $5 billion when it’s sold or its shares of stock are available to the public. Which will make him, as well as his employees, far wealthier.

As Ulukaya wrote to his workers, the award isn’t a gift but “a mutual promise to work together with a shared purpose and responsibility.”

A handful of other companies are inching their way in a similar direction.

Apple decided last October it would award shares not just to executives or engineers but to hourly paid workers as well. Twitter CEO Jack Dorsey is giving a third of his Twitter stock (about 1 percent of the company) “to our employee equity pool to reinvest directly in our people.“

Employee stock ownership plans, which have been around for years, are lately seeing a bit of a comeback.

But the vast majority of American companies are still locked in the old hyper-capitalist model that views workers as costs to be cut rather than as partners to share in success.

That’s largely because Wall Street still looks unfavorably on such collaboration (remember, Chobani is still privately held).

The Street remains obsessed with short-term stock performance, and its analysts don’t believe hourly workers have much to contribute to the bottom line.

But they’re prepared to lavish unprecedented rewards on CEOs who don’t deserve squat.

Let them compare Yahoo with Chobani in a few years, and see which model works best.

If I were a betting man, I’d put my money on Greek yoghurt.

And I’d bet on a model of capitalism that’s neither no-lose socialism for the rich nor cruel hyper-capitalism for the rest, but share-the-gains capitalism for everyone.

My comment:
Reich’s argument for inclusive “ownership” capital is certainly a welcome improvement over artificially raising labor costs through wage mandates or union restrictions. Kudos to Mr. Ulukaya, but a more widely adopted model can’t rely solely on enlightened capitalists. Mr. Reich glosses over the important issue of who bears the risks of capitalist enterprise before success. Sharing the gains unfortunately also means sharing the financial risks, or the direct relationship between human loss aversion and risk-taking enterprise collapses. In other words, nobody gets to receive gains without taking risks and nobody take risks without expected gains. If that truth escapes you, you’re probably not a casino gambler.
Mr. Ulukaya bore these risks and now wisely seeks to share the risks and rewards going forward. But these ownership rights should be negotiated by employees across the economy and can’t rely on the benevolence of successful entrepreneurs. Labor organizations could play a collective action role here on securing and enforcing ownership rights. The public sector also should address how economic risks can be better managed through a functioning private insurance market complemented by social insurance where private markets are incomplete.
The current desire to centralize risk and control in big government, big business, and big labor is sorely misguided and it would be helpful if both left and right could come together on that fact. Ideology be damned.
I include this cartoon below for its comic irony. So many people reading this article mistake Reich’s argument for Bernie Sanders-style socialism when it is the exact opposite. It’s about extending capital ownership to labor, whereas socialism is about abolishing capital ownership in favor of some altruistic notion of communalism.

Unicorns, Tooth Fairies, and Free Markets

The most frequent criticism of free markets lies in their comparison to unicorns, fairies, and leprechauns. In other words, they exist only in our imaginations and thus are unworthy of serious discussion. This is sheer nonsense. It is like denying the value of Plato’s ideal forms as a means of comparison and judgment. Democracy also does not exist in its pure, idealistic form, so, is it a useless figment of our imaginations? I don’t believe so.

Free markets should be thought of as markets for free people, much like democracy is a political market for free people. In terms of exchange, people are free when buyer and seller can either mutually agree on an exchange or walk away. This freedom obtains best when there are lots of competing and comparable alternatives to any particular good or service. Also, voluntary action is enhanced when the terms of the transaction are transparent to both parties. Some markets offer better and more options than others, while some are more transparent than others, so markets are defined along a continuum from “free” to “unfree.” The whole thrust of free market theory is to point us in the right direction.

Oddly enough, the failure of unfree, or controlled, markets is often cited as proof that markets don’t work. This is like pulling the wheels off my car and then stating that since it can’t go anywhere, cars are a poor form of transportation. Such arguments should be the butt of jokes, not serious debate. Some may qualify this argument by saying some markets are easier to manipulate or control by narrow interests or are less transparent, and thus need to be regulated by a disinterested third party such as a government bureaucracy. But that just begs the more important question over what means will insure that any particular market becomes freer?

Regulation vs. Competition

We can’t really answer this question without a careful analysis of behavioral incentives, of both the economic and political variety. It is widely accepted that economic and political actors pursue their narrow self-interests, with economic behavior determined by loss aversion and profit/utility maximization and political behavior more influenced by power, status, and control. These behaviors dovetail in real people as we all seek to survive by pursuing wealth, power, and control over our own destinies. When we scrape beneath the surface we find that survival is more about not losing (loss aversion), than winning (big rewards).

We would assume from these incentives that most actors would like to manipulate markets to their personal advantage, so how do we constrain or redirect this?

Most people would look to contract law as the explanation for what keeps us honest, but that offers only a narrow understanding of how markets work. We make dozens, if not hundreds, of market transactions every day and very few ever reach that threshold where we feel the need to consult legal counsel or call our Congressperson in Washington. Instead, we rely on more efficient means, such as trust, reciprocity, the implicit value of repeat business, and competing alternatives to guide our choices.

This point about competing alternatives is crucial because while trust, reciprocity, and relationships help ameliorate the need for transparency, competition gives us freedom of choice. Anti-competitive monopolies are considered economic evils because they control the market for their product or service, so consumers must pay their price or go without. (Likewise why we despise political tyranny.) Critics often deride market capitalism as a competitive conflictual system, but that too is a myopic point of view. Markets foster cooperation as much as competition, and many of the transactions in economic markets are win-win positive sum games rather than win-lose zero-sum games.

Think about it: Sellers compete among themselves in order to develop a long-term cooperative relationship with their buyers and suppliers. Ever wonder why a department store takes back that dress or pair of shoes you bought last week because you changed your mind? That doesn’t seem in their immediate profit interest, but it does when you consider how the retailer values repeat business against the freedom you have to take your business elsewhere.

It is not laws or regulatory watchdogs but open competition under accepted market rules that constrains most of our selfish economic behavior. In addition, market competitors have the biggest incentive to insure all play by the established rules, thus they are the watchdogs. This implies the need for transparency. Third party regulatory agencies are inadequate to the task of monitoring the multitude of transactions in markets, especially financial markets. For example, the banking industry is the most regulated industry in the US, and yet the financial crisis of “too big to fail” revealed how ineffective that regulation was. So the test should not be regulation OR competition, but regulation FOR competition. Financial markets in particular need to be open, transparent, and competitive to constrain behavior that risks the integrity of the financial system. In financial markets, failure is a big inducement for prudence.

For an illustrative case, consider the policy response to the financial crisis of 2008, the 2010 Dodd-Frank law. Under that legislation, “too big to fail” banks have gotten even bigger, while 1,500 community banks—the source of half of all loans to local businesses—reportedly have been destroyed. The remaining community banks have had to hire 50% more compliance staff just to keep up with the regulations. That means far less competition among lenders to serve borrowers and more concentrated finance that does not respond to the bankruptcy constraint. It means a far less efficient and just credit market and far more control centralized in a financial oligopoly seeking to influence the policymaking process in its favor. According to the practice of regulatory capture – where lobbyists “buy” politicians with campaign contributions to formulate policy to constrain their competitors – we’ve discovered too often that big government mostly works for big business, the powerful, the wealthy and the well-connected to the detriment of open and honest competition among free people.

One could make the same argument against health care reform under the Affordable Care Act. Has policy made the market more open, transparent, and competitive, or less? Health care provision is really about competition and abundance in the supply of health care rather than the price and distribution of access. With an abundance of competitive health care providers, price and access take care of themselves.

The most important argument in favor of markets is the crucial role they play in providing information feedback signals. Free markets provide the most accurate and essential signals to consumers and producers needed to make efficient economic decisions, like comparing alternatives to maximize preferences, or where to invest and how much to produce, and how to adapt to changing market conditions. These signals are embodied in prices and inventory quantities and without these, producers are operating in the dark about what people want. Hayek was the first to point out the lack of private exchange markets would make central planning under socialism untenable over time. He was right.

Market failures do exist and we don’t live in a world of idealized free markets. But in addressing those failures we should strive not to make the perfect the enemy of the good, because free markets support free people and that’s the bottom line.

Besides, it would be heartbreaking to admit to our children that this is best we can do when it comes to unicorns and tooth fairies:

adult-unicorn-costume toothfairy1

Why the World Wants Capitalism

In the forests of India, something exciting is going on. Villagers are regaining property taken from them when the British colonial authorities nationalized their forests. Just as exciting, in urban Kenya and elsewhere, people are doing away with the need for banks by exchanging and saving their money digitally. All over the world, poor people are discovering the blessings of bottom-up capitalism.


I repost this interesting article on economic development around the world, specifically in the poorest societies. The key words to note are property, ownership, and capital. Another key concept is control over that capital, constituting legal rights. The development and accumulation of capital assets (incl. human) also leads to the expansion of credit to leverage present capital into future capital.

Gee, maybe that’s why we call it capitalism, ya’ think?


Bernanke Spinning the Roulette Wheel

The central bank did its job. What about everyone else?

In today’s Wall St. Journal, former Fed Chairman Ben Bernanke offered up this generous performance review of his stint leading monetary policy after the financial crisis (appended below).

Bernanke assertions regarding unemployment and inflation are questionable on both fronts. First, misguided monetary policy has made a mess of full productive resource utilization. Fed policies such as ZIRP and QE4ever distort relative prices and lead to uncertainty of fundamental valuations over time. Thus, investment time horizons and commitments are shortened (who lends out 30 years now at a fixed rate of interest?). Second, the misallocation of resources leads to increased malinvestment (see housing), portending even more dislocations and corrections in the future. The Fed’s fantasies are further aided by distorted statistical measures like “core inflation” and unemployment. The labor participation rate is weak and weakening and the real growth rate is anemic – that is a true lasting drag on Americans’ well-being. All of this will eventually be borne out by empirical studies, proving the ineffectiveness of global central bank policy.

What the Fed has really accomplished is to let the politicians off the hook by accommodating their dereliction of duty over productive fiscal policy. If economic headline statistics had threatened re-election chances, maybe the executive and legislatures would have stopped playing petty power games and gotten down to the business of governing the nation. This is Washington D.C. at work.

How the Fed Saved the Economy

Full employment without inflation is in sight. The central bank did its job. What about everyone else?

By Ben S. Bernanke

Oct. 4, 2015

For the first time in nearly a decade, the Federal Reserve is considering raising its target interest rate, which would end a long period of near-zero rates. Like the cessation of large-scale asset purchases in October 2014, that action will be an important milestone in the unwinding of extraordinary monetary policies, adopted during my tenure as Fed chairman, to help the economy recover from a historic financial crisis. As such, it’s a good time to evaluate the results of those measures, and to consider where policy makers should go from here.

To begin, it’s essential to be clear on what monetary policy can and cannot achieve. Fed critics sometimes argue that you can’t “print your way to prosperity,” and I agree, at least on one level. The Fed has little or no control over long-term economic fundamentals—the skills of the workforce, the energy and vision of entrepreneurs, and the pace at which new technologies are developed and adapted for commercial use.

What the Fed can do is two things: First, by mitigating recessions, monetary policy can try to ensure that the economy makes full use of its resources, especially the workforce. High unemployment is a tragedy for the jobless, but it is also costly for taxpayers, investors and anyone interested in the health of the economy. Second, by keeping inflation low and stable, the Fed can help the market-based system function better and make it easier for people to plan for the future. Considering the economic risks posed by deflation, as well as the probability that interest rates will approach zero when inflation is very low, the Fed sets an inflation target of 2%, similar to that of most other central banks around the world.

How has monetary policy scored on these two criteria? Reasonable people can disagree on whether the economy is at full employment. The 5.1% headline unemployment rate would suggest that the labor market is close to normal. Other indicators—the relatively low labor-force participation rate, the apparent lack of wage pressures, for example—indicate that there is some distance left to go.

But there is no doubt that the jobs situation is today far healthier than it was a few years ago. That improvement (as measured by the unemployment rate) has been quicker than expected by most economists, both inside and outside the Fed.

On the inflation front, various measures suggest that underlying inflation is around 1.5%. That is somewhat below the 2% target, a situation the Fed needs to remedy. But if there is a problem with inflation, it isn’t the one expected by the Fed’s critics, who repeatedly predicted that the Fed’s policies would lead to high inflation (if not hyperinflation), a collapsing dollar and surging commodity prices. None of that has happened.

It is instructive to compare recent U.S. economic performance with that of Europe, a major industrialized economy of similar size. There are many differences between the U.S. and Europe, but a critical one is that Europe’s economic orthodoxy has until recently largely blocked the use of monetary or fiscal policy to aid recovery. Economic philosophy, not feasibility, is the constraint: Greece might have limited options, but Germany and several other countries don’t. And the European Central Bank has broader monetary powers than the Fed does.

Europe’s failure to employ monetary and fiscal policy aggressively after the financial crisis is a big reason that eurozone output is today about 0.8% below its pre-crisis peak. In contrast, the output of the U.S. economy is 8.9% above the earlier peak—an enormous difference in performance. In November 2010, when the Fed undertook its second round of quantitative easing, German Finance Minister Wolfgang Schäuble reportedly called the action “clueless.” At the time, the unemployment rates in Europe and the U.S. were 10.2% and 9.4%, respectively. Today the U.S. jobless rate is close to 5%, while the European rate has risen to 10.9%.

Six years after the Fed, the ECB has begun an aggressive program of quantitative easing, and European fiscal policy has become less restrictive. Given those policy shifts, it isn’t surprising that the European outlook appears to be improving, though it will take years to recover the growth lost over the past few years. Meanwhile, the United Kingdom is enjoying a solid recovery, in large part because the Bank of England pursued monetary policies similar to the Fed’s in both timing and relative magnitude.

It is encouraging to see that the U.S. economy is approaching full employment with low inflation, the goals for which the Fed has been striving. That certainly doesn’t mean all is well. Jobs are being created, but overall growth is modest, reflecting subpar gains in productivity and slow labor-force growth, among other factors. The benefits of growth aren’t shared equally, and as a result many Americans have seen little improvement in living standards. These, unfortunately, aren’t problems that the Fed has the power to alleviate. [Does Mr. Bernanke really think Fed policies have had a benign effect on these trends?]

With full employment in sight, further economic growth will have to come from the supply side, primarily from increases in productivity. That means that the Fed will continue to do what it can, but monetary policy can no longer be the only game in town. Fiscal-policy makers in Congress need to step up. As a country, we need to do more to improve worker skills, foster capital investment and support research and development. Monetary policy can accomplish a lot, but, as I often said as Fed chairman, it is no panacea. New efforts both inside and outside government will be essential to sustaining U.S. growth.

Bernanke prayer

House of Cards: Truth Stranger Than Fiction

As a political economist and policy analyst I have to say I’ve found the NetFlix series, House of Cards very entertaining. Of course, it is over the top with political sleaze and corruption, something that probably syncs well with the public’s impression of Washington politics these days. (I find it interesting that the writers chose to designate the depraved, murderous POTUS Frank Underwood, played by Kevin Spacey, as a big “D” Democrat. With an annoyingly ambitious, self-righteous wife as co-president – sound familiar? Apparently, depravity with good intentions is somewhat acceptable these days in partisan circles, with Underwood often turning to the audience to explain the bare facts of Machiavellian realpolitik. How unfortunate for poor Niccolo, who was a true republican patriot, but recast by history as the apologist for a ruthless, depraved Prince.)

I have been most amused by Season 3, where Pres. Underwood proposes a massive jobs program paid for by slashing entitlements. This is just too juicy to let pass unnoticed. Let’s translate this “promise” of a full employment Nirvana: “I’m going to take your hard earned money we extorted through Social Security and Medicare taxes and give it away to companies that will employ workers for jobs that the productive private economy will not create because they lose money. Isn’t that grand? We’ll all feel better about humanity, even though we’ll be poorer for it (all except me, that is).”

The irony is that this absurd fiction is actually proposed too often as serious politics in the real Washington D.C. Quite a few other bloggers have explained the surrealness of a POTUS creating jobs from whole cloth just because he can command it from the White House. The numbers just don’t add up. But I was struck more by the widely accepted premise that asserts “jobs” as the end-all of what ails a society of free citizens. The Underwood character actually says, “People are dying from unemployment!” This cuts pretty close to home with Obama recently claiming that “chanting ‘Death to America’ does not create jobs.” Really? Is that what they’re beheading innocents over, a few good jobs?

People don’t die from unemployment, they die from poverty, deprivation, and disease. They die from oppression and violence. Unproductive jobs subsidized by governments do not alleviate poverty, they merely spread poverty around. The thing is, politicians focus on jobs because that is the only way they know how to spread the benefits of capitalism around the population. But we are moving into a new age that departs from the skilled labor-intensive manufacturing of the post-WWII years. Our financial policies have accelerated this trend away from labor by providing cheap capital to take advantage of cheaper labor overseas or machine/robot substitution. We are entering the information, artificial intelligence, and robotics age, and yet our politicians are still making false promises of a job and two chickens in every pot. Not going to happen. We need to think outside that box to discover how we are going to create and share wealth in the new economy. There are many alternative ways to participate in a market economy than solely as a labor input.

In the meantime, enjoy the entertainment. It’s hilarious. But don’t expect a job from America Works.

Money For Nothing?


…there is now a nagging fear that credibility in central bankers is being lost. Investors, it seems, are losing confidence in the Fed.

You think? I believe the definition of insanity is to keep doing the same thing over and over and expecting a different result. It seems to me the Fed has sidelined itself and the future path of the economy will be determined by markets, and it won’t all be good. As Stockman says (see second article below), the global economy in many respects is at peak debt, thus the global private and public sectors are both struggling to de-leverage. The only borrowers are national governments and those speculating in asset markets.

Thus, the Fed’s efforts to boost inflation to 2% have been for naught and merely goosed asset markets and resource misallocation. For the global economy to re-balance from peak debt requires debts to be written down, something that occurs with bankruptcy accompanied by price deflation. Forestalling instead of managing these corrections only means a larger correction at some point in the future.

On another note, our experience is confirming the weakness of Friedman’s monetarism. Inflation is not purely a monetary phenomenon – more important, it is a behavioral one based on demographics and the perceived level of uncertainty and risk regarding the future of the economy and policy distortions.

Markets reflect the collective intelligence of humans; they’re not all stupid.

Why Wall Street’s Stimulus Junkies Weren’t Thrilled by the Fed’s Rate Decision

By Anthony Mirhaydari
It wasn’t supposed to be like this.

In a massively hyped Federal Reserve policy announcement Thursday — one that threatened to end the nearly seven-year experiment with interest rates near 0 percent and usher in the first rate hike since 2006 — Chair Janet Yellen and her cohorts gave Wall Street exactly what they wanted: No change, in line with futures market odds.

And yet stocks drifted lower, even as the action in the currency and commodities market was as expected, with the dollar falling hard and gold up 0.8 percent. Why?

Cutting to the quick: Investors, it seems, are losing confidence in the Fed.

While the Wall Street stimulus junkies should’ve been happy with the continuation of the status quo, there is now a nagging fear that credibility in central bankers is being lost — something that RBS’ Head of Macro Credit Research Alberto Gallo took to Twitter this afternoon to reiterate.

Moreover, the Summary of Economic Projections by Fed officials revealed that, at the median, policymakers now only expect a single rate hike by the end of 2015. The futures market is now pricing in a 49 percent chance of a hike at the December meeting (although Yellen noted that the October meeting was “live” and could result in a hike should markets and economic data improve).

But the kicker — the one that pushed large-cap stocks lower into the closing bell — was the appearance of a negative interest rate projection by a Fed policymaker on the newly released “dot plot.” Someone, it seems, expects federal funds policy rate to be in negative territory at the end of 2016. Four officials don’t expect any hikes this year at all.

Not only does this undermine confidence in the state of the economy, but it calls into question the efficacy of the Fed’s ultra-easy monetary policy stance that has been in place, to varying degrees, since 2008. Moving forward, it will be critical for the bulls to recover from Thursday’s intra-day selloff. The day’s action resulted in a very negative “shooting star” technical pattern that signals buying exhaustion and often precedes pullbacks.

In their statement, Federal Open Market Committee members fingered recent global economic weakness and financial market turbulence as giving reason to believe that inflation would take longer to return to their 2 percent target. So the new dot plot shows the median rate projection for the end of 2015 falling to 0.375 percent from 0.625 percent as of June; to 1.375 percent for 2016 vs. 1.625 percent before; and 2.625 percent for 2017 from 2.875 percent. The long-term neutral rate declined to 3.5 percent from 3.75 percent, signifying ongoing structural problems in the economy holding down its potential growth rate.

But a tree should be judged by the fruit it produces. In this case, median household incomes are stagnating despite all the Fed has already done, including three bond-buying programs and the “Operation Twist” maturity extension program. With corporate profits rolling over and global growth stagnating, people are wondering: Is this all the Fed and its central banking counterparts can do? Fresh threats, such as another possible debt ceiling showdown on Capitol Hill this autumn and an election in Greece, are approaching.

As for what comes next, Societe Generale Chief U.S. Economist Aneta Markowska suggests a replay of the late 2013 experience surrounding the beginning of the end of the QE3 bond-buying program: “Our scenario is reminiscent of 2013 when the ‘taper tantrum’ spooked the Fed in September, a government shutdown spooked the Committee in October, and the fog finally lifted by December when the taper was finally announced.”

If the Fed left rates unchanged, there were some new wrinkles in its statement. In explaining their decision, Fed officials elevated issues like global economic growth and the dollar’s valuation seemingly above its traditional mandate regarding labor market health. J.P. Morgan Chief U.S. Economist Michael Feroli believes investors shouldn’t read too much into the new factors being cited. In a paraphrase of the infamous rant by former Arizona Cardinals coach Dennis Green: Yellen is a dove. She is who we thought she was. And until higher inflation becomes a clear and present problem, this continual moving of the goalposts for Fed rate hikes — deferring until more data comes in — looks set to continue.

But that may no longer be enough to keep stocks happy.



David Stockman is not a fan of the Fed. In fact he claims that the Fed is on a “jihad” against retirees and savers.

The former Reagan budget director and author of “The Great Deformation: The Corruption of Capitalism in America” visited Yahoo Finance ahead of the Fed announcement to discuss his predictions and the potential impact of today’s interest rate decision. “80 months of zero interest rates is downright crazy and it hasn’t helped the Main Street economy because we’re at peak debt,” he says.

Businesses in the U.S. are $12 trillion in debt. That’s $2 trillion more than before the crisis, but “all of it has gone into financial engineering—stock buybacks, mergers and acquisitions and so forth,” according to Stockman. “The jig is up; [the Fed] needs to get on with the business of allowing interest rates to find some normalized level.”

While Stockman believes that the Fed should absolutely raise rates today, he isn’t so sure that they will (Note: they did not). But even if they do, he says they’ll muddle the effect by saying “‘one and done’ or ‘we’re going to sit back and watch this thing unfold for the next two or three months.’”

This all fuels an inflationary bubble on Wall Street, according to Stockman. “This massive money printing we’ve had has never gotten out of the canyons of Wall Street. It’s sitting there as excess reserves.”

According to Stockman, the weakness of the U.S. economy has been due to a lack of investment over the past 15 years and inflated labor costs in America that can’t compete on a global scale. “Simply printing more money and keeping interest rates at zero do not help that problem.”

Zero interest policies, says Stockman, are leading to the global economic turmoil we are currently experiencing. “In the last 15 years China took its debt from $2 trillion to $28 trillion… it’s a house of cards with an enormous overcapacity and enormous speculation and gambling that is beginning to roll over,” he says. “It’s just the leading edge of a global deflation that I think is underway as a consequence of all this excess credit growth that we’ve had.”

If the Fed raises rates and doesn’t mince words there’s going to be a long-running market correction, says Stockman. If the Fed doesn’t raise rates there will be a short-term relief rally but eventually the markets will lose confidence in the central bank bubble and we’ll be in store for a “huge correction.”

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