Trump's Most Important Decision

The news media is currently abuzz with rumors of possible Trump Administration cabinet-level nominees.

However, no appointment Donald Trump will make is more critical to his Administration’s initial success than his pick for Secretary of the Treasury.

Trump has signaled that he will pursue comprehensive tax reform that will result in significant reductions to personal and corporate marginal rates. He is also looking to roll back onerous regulations that have burdened business in recent years, including major changes to the abominations known as Dodd-Frank and Obamacare. The bad news, however, is Trump has consistently favored a mercantilist trade policy which could lead to meaningful tariff increases and a trade war. Of course, tariffs are simply another form of tax. This has the potential to offset much of the positives on the domestic tax and regulatory front. But I am hopeful that cooler heads will prevail and the trade policies Trump is able to implement do not come close to matching his belligerent campaign rhetoric.

Any pro-growth policies will quite simply lose their potency unless the Treasury is able to deliver a strong and stable dollar to the marketplace. A stable currency will ensure that pro-growth fiscal reforms deliver the intended effects.

The value of the U.S. dollar, as measured by the fall in the price of gold, has strengthened since the election on November 8 as markets price in expectations that many of Trump’s policies will be dollar-bullish. It is not unreasonable to expect gold to retest the lows of earlier this year below $1,100/oz. However, excessive currency strength is undesirable due to the havoc that deflationary pressures can impart to debtors, commodity-producing sectors, and many emerging markets.

The country has been without a Treasury secretary that has a solid grasp of its role as caretaker of the dollar. The last person was Robert Rubin during the Clinton Administration. A relatively stable currency during that era helped create an environment that rewarded work effort, savings and investment. This resulted in immense prosperity during the mid- to latter-part of that decade.

I can think of no better selection for this key role than Steve Forbes, who has reportedly served as an informal economic advisor to the Trump campaign. Arguably no prominent public figure knows more about the importance of sound money than Forbes. He is an enthusiastic proponent of returning to a gold standard system. Other worthy candidates include Jeb Hensarling, John Allison, and Kevin Brady.

Too many economists and commentators focus on the importance of the Federal Reserve in setting monetary policy. The Fed’s control over the value of the dollar is greatly exaggerated. When the decision was made to leave the Bretton Woods Agreement in 1971, it was the U.S. Treasury that led the way. The Fed Chairman at the time, Arthur Burns, wanted nothing to do with it. As the mouthpiece for the dollar, if the Treasury secretary stresses that the Administration desires a strong and stable currency, preferably tied to gold, the market will deliver just that.

Trump will have the opportunity to name a number of members to the Federal Reserve Board. He should choose pro-sound dollar candidates such as Judy Shelton, David Malpass, or Jim Grant to name a few. They can work to bring sanity to the Fed by helping thwart its attempt to manipulate markets via interest-rate targeting and foisting overbearing regulation on the banking industry.

Trump has a grand opportunity to finally fix a highly dysfunctional U.S. monetary system. The right Treasury Secretary could also lead a global currency reform initiative that would stabilize currency values and actually promote trade and capital flows by helping eliminate “beggar-thy-neighbor” devaluations.

My fingers are crossed.  

I wish a blessed Thanksgiving Day to all of my readers!

Say's Law

If you studied economics at the college level, there is a pretty good chance that you've never heard of John-Baptiste Say. John Maynard Kenyes, definitely. Milton Friedman, highly likely. Adam Smith, maybe. David Ricardo, perhaps. But it would not be a stretch to say that J.B. Say is the most important political economist who has ever lived.

My friend Richard Salsman of Intermarket Forecasting Inc. has graciously allowed me to publish a wonderful essay he wrote back in 2003 commemorating the bicentennial of Say's A Treatise on Political Economy (1803).

Other great resources on Say's Law include books by William H. Hutt (A Rehabilitation of Say's Law), Steven Kates (Say's Law and the Keynesian Revolution: How Macroeconomics Lost Its Way), and Thomas Sowell (Say's Law: An Historical Analysis).


The Capitalist Advisor
December 31, 2003

A Great Debate on Fractional Reserve Banking

John Tamny did an admirable job defending his positions on fractional reserve banking and Austrian Business Cycle Theory (ABCT) in a great debate with Jeff Herbener of Grove City College on a recent episode of The Tom Woods Show.

http://tomwoods.com/podcast/ep-757-debate-is-fractional-reserve-banking-economically-benign/

Another Missed Opportunity

I didn't watch any live television coverage of the recent Republican National Convention. I couldn't stomach it. That said, I was disappointed to learn that the Donald Trump and the GOP let a golden opportunity slip by. 

After 7+ years of failed Keynesian fiscal policies and seat-of-your-pants experimental monetary policies, an optimistic message of growth would certainly resonate with the electorate in 2016. Talk about low-hanging fruit.

The corrupt and highly-likely criminal behavior of Hillary Clinton should be a major issue in this campaign and Donald Trump has rightly focused on "Crooked Hillary." But that is simply not enough. The populace is hungry for a more hopeful message of renewed prosperity. One that identifies the crushing burdens being placed on the private sector in the forms of unsound money, stifling regulation, wasteful government spending, high taxes on income and capital, and growing aversion to free trade.

Both Investors Business Daily and The Wall Street Journal editorial boards took notice of Trump's focus instead on a dour populist message of national decline. This approach is not a way to win in November.

Trump needs to pivot from his anti-trade message and fooling around with talk of higher minimum wages and focus on policies that encourage vibrant economic growth.

Will he take advantage? Does he even see the opportunity? Who is advising this guy?



Gaping Hole at the GOP Convention: Jobs and Growth

Investors Business Daily
July 20, 2016

2016 Elections: Anyone who'd hoped to get a sense from the Republican National Convention about how Donald Trump would get the economy moving again after eight years of Obama-led stagnation has so far been sorely disappointed. The topic has barely been mentioned. 

Trump and the convention organizers cleverly labeled each night of the convention. Tuesday's was supposed to be about "Making America Work Again." You'd think Trump would have plenty of say about this, and would be able to line up an array of top-flight speakers who could explain what' wrong with the economy and how he's going to go about fixing it. 

There's plenty of material to work with. Under President Obama, wages have flatlined, economic optimism is still under water, the poverty rate is up, and millions have given up looking for work and have become newly dependent on federal programs.
Now Obama is arguing that this is the best we can expect out of the U.S. economy -- forecasting GDP growth barely above 2% a year as far as the eye can see. You can bet that his fellow Democrats will devote enormous time and resources at their convention next week describing how they plan to redistribute this pie -- by making college free, raising the minimum wage, handing out more government goodies and getting the "top 1%" to pay for it all. You can also be sure that they will paint Trump and the GOP as cold, heartless bastards who are just looking out for their wealthy friends. 

So what is Trump's counter to this? What's his plan to grow the economy faster than a measly 2%? To help businesses feel that it's safe and affordable to add to their workforce? To fix the tax code? To revive the economy's hibernating prosperity? Nobody has said anything yet. 

Instead, as IBD pointed out, for the most part the only business people on the stage during the convention's first two nights have been either those who had nothing to say at all, or who owe everything to Trump himself. 

In fact, it wasn't until the last speaker on Tuesday night when anyone meaningfully brought up the struggles of running a small business against an increasingly imperious central government. Kimberlin Brown, a former soap opera star and now a small-business owner, talked about how "out-of-control unreasonable government regulations ... needlessly add costs to doing business and tie us up in red tape" and made the case that it will take someone like Trump to get the country out of the doldrums. 

There are a few more business leaders scheduled to talk at during the GOP convention's final two days. But if the contentless trend continues, it will be a huge lost opportunity for Republicans to articulate a vision for robust economic growth at a time when millions are tuning in. 

The GOP should be talking about how strong growth is possible, but only by lifting the shackles of government. The party should be explaining why tax reform is vital to unleashing the economy's potential, and bring businesses and jobs back to the U.S. And they should be making the case for why voters, if they want to see a return to prosperity, must reject the big-government promises that Democrats will be making next week and up to the November elections. 

Plenty of speakers in Cleveland have talked about the stakes of this election. But so far they haven't given voters a clear reason to choose Republican economic policies over the Democrats'.

The Dark Knight

The Wall Street Journal
July 22, 2016

Say this much for Donald Trump’s Republican acceptance speech Thursday night: He stayed true to the campaign he has run from the start. The outsider stuck to his dark, populist themes of an America under siege by crime, terrorism, corruption and illegal immigration. He offered himself and his business success, more than any coherent set of ideas, as the revival medicine. 

The speech was aimed at mobilizing an angry electorate to join him in storming the ramparts of Washington. It was a polarizing speech for a polarized era. President Obama has mobilized his two-term progressive majority by pitting secular against religious, minorities against police, young against old, middle class against the affluent, and even women against men. Mr. Trump is bidding to build a mirror-image majority by tapping the voters left out of Mr. Obama’s favored coalition.  

In that sense Mr. Trump’s best moments were his call to speak for “the forgotten men and women,” the “people who work hard but no longer have a voice.” This is an echo of Richard Nixon’s “silent majority” that played well in another angry era, the late 1960s.
He ignored or downplayed traditional Republican themes and constituencies to appeal to “laid-off factory workers”—a direct pitch to Bernie Sanders voters and union members. He spoke the blunt truth that too many African-American children are living in poverty and too many black young people aren’t working, and he said the poor should have the same “choice” of schools as affluent Americans. These are constituencies that recent GOP nominees haven’t spoken to, and they should.  

Mr. Trump also offered a nod to gay Americans, albeit in the context of the terror attack on a gay club in Orlando. Peter Thiel, the Silicon Valley billionaire, made a brave and inspiring appearance by admitting to be a “proud” gay Republican. He was cheered for it. Democrats aren’t likely to have a proud anti-abortion Christian on the stage in Philadelphia next week. And if they did, she would be booed.Yet Mr. Trump’s speech had too little of that political outreach as it offered up a grim portrait of the late Obama years—sometimes to inaccurate excess. Many American cities are seeing murders increase, and one reason is the progressive political assault on police and “broken-windows” policing. But we are a long way from 1968, and some voters may wonder what country he is talking about.

Mr. Trump’s focus on the terror threat is more grounded in reality, and he will no doubt win adherents with his promise that “we are going to defeat the barbarians of ISIS.” We hope he means it.  

But his program for doing so consisted only of “the best intelligence-gathering” in the world, a parroting of Hillary Clinton; no more “nation-building and regime change” in the Middle East, an echo of Mr. Obama; and suspending immigration from any nation “compromised by terrorism until such time as proven vetting mechanisms have been put in place.”  

Better border control won’t defeat ISIS in its safe havens abroad, but Mr. Trump the populist doesn’t want to tell Americans, any more than Mr. Obama does, that a greater U.S. military commitment overseas will be needed.  

Mr. Trump’s biggest lost opportunity was focusing too little on solutions to revive economic growth. The bulk of his economic message blamed low incomes on illegal immigration and “bad trade agreements,” but neither one explains the failures of the Obama economy. 

Illegal immigration was far greater during the 1980s and 1990s when the U.S. economy was booming, and there is little evidence that it has reduced American wages. As for trade, the truth is that the U.S. typically has smaller trade deficits with nations with which we have struck bilateral or multilateral deals. Reducing immigration and trade would hurt the economy and reduce incomes, the opposite of what Mr. Trump is promising. 

The real reason for slower growth is the Obama agenda of high taxes, multiplying regulations across the economy, and government allocation of credit. Mr. Trump did get to those problems, albeit more than an hour into his speech and then as something of a laundry list. Perhaps he feels these ideas won’t appeal to the working-class voters he is targeting in November, but they are the proposals he will have to implement if he wins.
Then again, Mr. Trump’s biggest idea is himself. His politics is personal, not ideological, and his main pitch to Americans is that he can be the agent of the change they want, details to be filled in later. “I am your voice,” he said, in the speech’s signature line. The messenger is his message. This has the virtue of being truth in advertising, but it also means that Democrats next week will do whatever they can to tarnish the Trump brand—business and personal. 

With his anti-trade and anti-immigration populism, Mr. Trump is taking the GOP back to what it was before Ronald Reagan. His message is closer to Richard Nixon’s or the Republican protectionism of the 1920s. Predictions are foolish in this year of so many surprises, and perhaps Mr. Trump’s non-ideological populism can find a majority. Republicans have placed their hopes for revival on the Dark Knight. 

Tom Woods on Why Profit is Crucial

Bernie Sanders and other leftist-types despise the concept of business profit. In their minds, profit is a sign that a business is ripping someone off. In episode 697 of his eponymous podcast, Tom Woods deftly addresses the left's cluelessness regarding the importance of profit to a well-functioning market economy.

If this is your first time listening to The Tom Woods Show, I highly encourage you to subscribe via iTunes or Stitcher and become a regular listener.

http://tomwoods.com/podcast/ep-697-profits-arent-evil/

Book Review: Who Needs The Fed? by John Tamny

"Credit equals resource access." p. 2

In a triumphant sequel to his essential book Popular Economics, John Tamny has written a treatise on money and credit entitled Who Needs the Fed? What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books).

Ever the original thinker, Tamny offers a view of credit that is a clear challenge to the conventional wisdom. Tamny states emphatically that credit is simply access to real economic resources, such as tractors, computers, airplanes, and labor. Credit cannot be created out of thin air by central banks or governments. The latter point may make heads explode on both the left and the right.

In Part One, Tamny focuses on his view of credit in a most effective way by offering numerous interesting examples from the world of popular culture (Taylor Swift, Hollywood), sports (college football coaches), and politics (Hillary Clinton, Donald Trump). His method is unique in that he has made explaining economics this way a feature of his writing. Using no higher math or statistics, it's what made Popular Economics a classic in the image of Henry Hazlitt's Economics in One Lesson. And this style is what animates his regular commentary on Forbes Opinion and Real Clear Markets.

These examples provide the reader with easy to understand narratives of how credit is actually created in the real world.

Tamny rightfully mocks the Federal Reserve's attempt to deem credit cheap by manipulating interest rates. The Fed ignores the fact that by setting interest rates at an artificially low level, fewer savers will offer up their surplus resources to be lent to those in need of funds for immediate consumptive needs. The end result is not an abundance of credit, but rather its scarcity.

Like the manipulation of other prices by government such as wages or apartment rents, bureaucrats believe they can divine proper prices in a dynamic marketplace where supply and demand conditions are shifting constantly. The hubris is staggering.

Supply-siders do not escape criticism in Chapter 7. Although he considers himself a supply-sider, Tamny believes it's time to ditch the Laffer Curve and focus on finding the income tax rate that actually results in less revenues for the government to raise and then subsequently waste. The reason is simple. The government has no resources of its own. It must extract those resources from the private sector. There is simply no way a politician or bureaucrat, undisciplined by the market, can invest better than someone in the accountable private sector.

Part Two of the book deals with banking and contains the most fascinating chapter of the entire book. In Chapter 11, Tamny takes on the Austrian School's belief in fractional-reserve banking and the notion that money can be "multiplied". This requires the reader to keep an open mind and think through the author's logic and the examples provided. It may take awhile for many to come around to his viewpoint, if at all, but it cannot be denied that Tamny has thought through these issues methodically and logically.

Chapters dealing with the declining importance of the banking industry as a source of credit and the real reason behind the housing boom during the decade of the 2000's smash conventional thinking.

Part Three deals with the Fed and how its impact on the economy is overstated. Tamny shatters the widely believed myth that the Fed controls the supply of money. Production is the source of money; it is an effect of productive economic activity. And since the Fed cannot plan production, it will never have the ability the control the money supply.

I particularly enjoyed the vivid example of Baltimore. This economically depressed city would presumably benefit from the Fed's attempts to inject money into its local banks in an effort to stimulate economic activity. But no sooner would the money arrive it would get loaned out by the banks to businesses and consumers outside of the city. As Tamny makes clear, money migrates to the productive. 

The author helpfully reminds us that economic growth and prosperity cannot come from government. Government spending isn't stimulative, simply because politicians can only spend what they extract from the real economy first. Real economic advancement results from entrepreneurial ideas being matched with savings. Economic "stimulus" provided by government is a cruel hoax.

The Fed's manipulation of interest rates is another distortion of markets that is anti-credit creation. As Tamny points out, the Fed's imposition of artificially low interest rates on the way to supposedly easy credit would have to have been one of the few instances in global economic history of price controls actually leading to abundance over scarcity. He again emphasizes that an interest rate is a price like any other. As a price, the interest rate is meant to float to whatever rate maximizes the possibility that those who have access to credit (savers) will transact with those who need access to economic resources (borrowers). So why is it assumed by so many that a handful of bureaucrats at the Fed can define what the proper level of interest rates should be?

It is also assumed by too many people that the Fed's quantitative easing (QE) scheme created a boom in the U.S. stock market. According to Tamny, the Fed wasn't "printing money" to conduct QE.  It was doing something much worse by borrowing trillions from America's banks while backed with America's credit.  His more credible claim is that the Fed helped to deprive the U.S. economy of a massive rebound that would've taken place absent the central bank and federal government presuming to allocate so many trillions of the economy's resources.

If the Fed's QE machinations were the reason for the rise in stock prices in recent years, why didn't Japan's multiple bouts of QE since the 1990s not boost the Japanese stock market? The Nikkei 225 is no where near the level it was in the late 1980s. A more plausible reason for the rebound in U.S. stocks since early 2009 can be better explained by the impressive recovery in corporate profits from the lows of the last recession.

Tamny addresses the Fed's ludicrous belief in the Phillips Curve, which posits an inverse relationship between inflation and unemployment. Essentially, the Fed believes that inflation is created by too much prosperity. Could a theory more antithetical to prosperity possibly be promulgated? It must be stressed that economic growth, if anything, leads to lower prices. Goods that are initially available only to the wealthy become available to the masses as entrepreneurs find ways to lower prices of such goods to serve a much larger market. Historical examples abound, including the automobile, the personal computer, flat-screen televisions, and cell phones. All were once available exclusively to the ultra-wealthy but soon became ubiquitous. That's the beauty of capitalism.

In the final chapter, Tamny states that robots will ultimately be the biggest job creators, because automation will free up humans to do new types of work by virtue of robots eliminating work that was once essential. It seems every major advance that improves human living standards initially creates fears that workers will be displaced. But as Tamny notes, what resources are saved on labor will redound to increased credit availability for new ideas. We "see" the jobs destroyed by advances in technology but the "unseen" is all the new forms of work that will be created.

Tamny repeats key points frequently throughout the book. Some may find that somewhat annoying, but I believe his repetition helps drive critical points home.

Readers outside of the United States may not be quite familiar with the names of the college football coaches cited in Chapter Two, but that shouldn't distract from an understanding of the points Tamny is conveying about labor as a form of credit.

Tamny has a real gift for clear writing and making sense of issues that are unnecessarily complicated by the economics profession and the media. Who Needs the Fed? is a provocative, yet highly enjoyable companion volume to his 2015 book Popular Economics. 

John Tamny on The Tom Woods Show

John Tamny was a guest on episode 686 of The Tom Woods Show to discuss his latest book, Who Needs the Fed? 

It's a great interview that includes a spirited debate between Woods and Tamny over the author's view of fractional reserve banking.

http://tomwoods.com/podcast/ep-686-we-dont-need-the-fed-a-central-planning-agency/

Over-regulated! Part II

With the Obama Administration promising to issue an avalanche of new business regulations in its final year of office, much is being written about the massive drag the existing regulatory regime is having on the U.S. economy. Please see my prior post Over-regulated!

An Investors Business Daily (IBD) editorial highlights the damage from the growing pile of onerous rules and red-tape mandated on businesses.  The impact is shocking.

Study: GDP Would Be 25% Bigger If Government Regulations Had Been Capped In 1980

April 26, 2016 

Red Tape: Economists scratch their heads when asked to explain the economy’s tepid growth over the past several years. A new study gives a possible answer: the growing, cumulative burden of federal regulations. 

Under President Obama, annual GDP growth never once even hit 3%. Under Bush before him, there were only two years when growth topped 3%. But in the two decades before that, annual GDP growth was above 3% in all but six years. 

Growth has been so anemic for so long, we’re now being told that this is the “new normal.” As the Bureau of Labor Statistics put it, “annual U.S. GDP growth exceeding 3% … is not expected to be attainable over the coming decade.” It lists everything as a cause, except for one thing: federal regulations. 

Whenever a new regulation gets passed, the government puts out a cost analysis, which focuses on annual compliance costs. That’s fine for a point in time. But these regulations don’t go away. And every year more get added to the pile. The Code of Federal Regulations is now more than 81,000 pages long. 

What’s the cumulative impact of all these rules,  

regulations and mandates over several decades? A new study by the Mercatus Center at George Mason University tries to get an answer, and what it found is mind-boggling. 

The paper looked at regulations imposed since 1977 on 22 different industries, their actual growth, and what might have happened if all those regulations had not been imposed. 

What it found is that if the regulatory state had remained frozen in place in 1980, the economy would have been $4 trillion — or 25% — bigger than it was in 2012. That’s equal to almost $13,000 per person in that one year alone. 

Looked at another way, if the economic growth lost to regulation in the U.S. were its own country, it would be the fourth largest economy in the world, as the nearby chart shows. 

The authors — Patrick McLaughlin, Bentley Coffey, and Pietro Peretto — are quick to point out that this calculation includes only the costs of complying with federal regulations, not benefits — like cleaner air, safer workplaces, etc. — that don’t show up in the GDP numbers. 

Still, does anyone really think that we are getting $4 trillion worth of benefits from federal regulations today? 

Bad as this picture is, it has only gotten much, much worse since 2012, as President Obama has embarked on a regulatory free-for-all since winning re-election. While his administration imposed 172 “economically significant” regulations in Obama’s first terms, it’s added another 200 since then. The pace of regulations under this president far exceeds those of either Bush or Clinton. At the end of last year, Obama had imposed 85 more than Clinton and 100 more than Bush. Plus, the scale of Obama’s regulations are arguably far grander than his predecessors, including the entire health care industry, the banking and financial services industry, and the overbearing carbon emission rules.

Yet, mysteriously, this massive and growing regulatory burden on the private sector never comes up when the discussion turns to underwhelming economic growth. Instead, we hear about “headwinds” and the lingering effects of the financial crisis. 

The authors say their findings suggest “that a wide-scale review of regulations … would deliver not only lower compliance costs but also a substantially higher economic growth rate.” 

Indeed it would.

Another excellent opinion piece in IBD is from supply-sider Peter Ferrara, a senior fellow at the Heartland Institute, providing additional color on some of the damage done by the EPA, ObamaCare, and Dodd-Frank. Ferrara mentions the proposed REINS Act as a means to at least slow the stampede of growth-crushing regulations.

How Overregulation is Killing The Economy 

Peter Ferrara
April 27, 2016

The Competitive Enterprise Institute publishes an annual report on how much federal regulation is costing the economy, cheekily named the Ten Thousand Commandments. The 2015 edition estimated the cost that year to be $1.88 trillion, more than 5 times the cost of federal corporate income taxes that year, and about 10% of the entire 2015 GDP. 

The costliest regulatory burden has got be the EPA’s assault on American energy industries. We have a president today conducting a war against our own nation’s coal industry. Oil and natural gas are next on the chopping block. 

The Heritage Foundation’s Steve Moore has produced a study estimating the total value of proven reserves of oil and natural gas in America at $50 trillion! That is about three times our entire nation’s GDP. 

But so-called progressives are leading a crusade to deny that buried treasure to the American people, under the foolish slogan “Leave it in the ground.” 

That is the fairest measure of the cost of the president’s anti-American energy regulation, for which the justification is a fairy tale. The Heartland Institute is now completing the third of three 1,000-page volumes of double-peer-reviewed science published over the past year under the title Climate Change Reconsidered II, demonstrating that the risk of catastrophic consequences from the use of those fossil fuels is indistinguishable from zero. 

A close second in regulatory costs is ObamaCare, which is increasing the costs of health insurance by double digits every year. The employer mandate requires all employers employing 50 or more full-time workers to buy mandated health insurance for those workers. The result is 6.1 million involuntary part-time workers today, which the Bureau of Labor Statistics defines as those who “would have preferred full-time employment, (but) were working part-time because their hours had been cut back or because they were unable to find a full-time job.” 

But the next most onerous overregulation is Dodd-Frank, whose burdensome costs fall disproportionally on small community banks with fewer employees. Dodd-Frank has led to a decline of over 40% in such smaller banks, which specialize in loans to small businesses, whose growth has been badly lagging. 

The Federal Reserve reports that the sharp decline in commercial banks has been driven by the dearth of new bank formation since Dodd-Frank was adopted in 2010, with zero new banks in 2012, and just one in 2013. Consequently, Dodd-Frank has only added the new problem of “Too Small to Succeed” to the old problem of “Too Big to Fail.” 

Particularly destabilizing has been the Durbin rule enacted in Dodd-Frank, which arbitrarily slashed by about half the fees banks could charge merchants for use of debit cards by their customers. The Federal Reserve estimates that has cost banks about $14 billion a year, which banks have been recouping by increasing fees to their customers and terminating services such as free checking. 

A new economic study by the Perryman Group estimates that the modern, international electronic payments system arising from card payments creates 23 million permanent jobs and increases GDP by 12%. That results because modern electronic payments reduce transaction costs by 50% compared to paper currency transactions, and because the widespread availability of mobile touch-and-pay systems makes the formation of new business models possible, such as Uber and Airbnb. The Durbin rule arbitrarily slashes payment for this pro-growth innovation, which will only tend to limit and shrink it. 

A good means of addressing the explosion of federal overregulation is the proposed REINS (Regulations of the Executive In Need of Scrutiny) Act. That act would cut back on executive overreach by requiring that any federal regulation imposing $100 million in increased costs on the private sector would have to be approved by Congress before going into effect. 

That would have preempted the entire EPA jihad against traditional American energy production, as well as most Dodd-Frank regulations. Congress would never have allowed Obama to bankrupt the coal industry, for example. 

• Peter Ferrara is Senior Fellow for Entitlement and Budget Policy at the Heartland Institute, and Senior Policy Advisor for the National Tax Limitation Committee. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.

A Deeper Look at U.S. Corporate Taxation

Richard Salsman, President and Chief Market Strategist at InterMarket Forecasting Inc., recently published a note to clients, "The Disproportionate Burden of U.S. Corporate Taxation", which he has generously shared below for readers of this blog.

Salsman discusses many of the problems with the current U.S. corporate tax code.

The biggest problem is the fact that the statutory U.S. corporate tax rate, 39%, is THE highest among OECD countries. Critics of those who advocate a lower statutory rate often cite the lower effective U.S. corporate tax rate, noting that most corporations don't pay anywhere near the 39% rate.

While that is true, as the statutory rate goes higher corporations turn to lobbyists to pressure politicians to implement all manner of tax loopholes, carve-outs and exemptions that greatly distort the tax code.

When this happens, capital is directed to activities that might never be pursued absent the favorable tax treatment. Capital is scarce and the more of it that is directed to purposes preferred by the political class, the less that is available for intrepid entrepreneurs looking to fund exciting new business endeavors.

Another huge problem is that the U.S. is one of the few countries that taxes corporate income on a global basis, versus the territorial system utilized by most other counties. As Salsman notes, this is a system that incentivizes companies to keep their profits abroad to avoid repatriating them. Once repatriated, the profits are then taxed at a higher rate. This is what encourages U.S.-based companies to consider entering into a business transaction with a foreign-based company via an inversion. The result is a change of corporate domicile to a lower tax country. John Tamny also discussed inversions in a recent article at Forbes Opinion.

A solution to this madness?

The political corruption via lobbying that the present corporate tax code encourages, coupled with high compliance costs and the fact that corporate taxes raise a relatively trivial amount of revenue for the central government, strongly suggests the optimal U.S. corporate tax rate is zero.

The Capitalist Advisor 
April 14, 2016

Over-regulated!

As if the U.S. economy was not struggling hard enough today with unsound money, excessive taxation and hostility to free and open foreign trade, now comes word that the Obama Administration plans to saddle us with even more useless, burdensome regulations.

Unfortunately, too many people quite simply don't trust the incredible power of the free market to police itself. Businesses are always portrayed as predatory, corner-cutting, polluting...pick your favorite stereotype. Customers/clients are always being taken advantage of, overcharged, or physically harmed. Employees are always getting the shaft in terms of working conditions, benefits, or pay.

All of this in the pursuit of that ugly concept called generating profits. Often referred to by the left as "obscene profits."

That businesses operating in a market economy (even one as far from "free" as the U.S. economy is) cannot survive very long treating customers poorly or attract talent if employees are not treated well is completely lost on the politicians and bureaucrats who hand down onerous rules from on high.

Caroline Baum outlines some of the growth-retarding initiatives in the works in a recent Economics21.org article. Added to the incredible amount of harmful regulations passed in recent years by the alphabet-soup of federal regulatory agencies, is it any wonder the U.S. economy can only muster real growth at a pathetic 2%-3% annual rate?

Obama's Costly End-Run on Regulations
By Caroline Baum
April 19, 2016

President Barack Obama may have already checked out of the White House, figuratively speaking, but he is still very much engaged when it comes to his legacy. That's why he wants to leave us with an array of growth-sapping rules and regulations before he leaves office. 

"Obama Readies Flurry of Regulations" read the April 7 headline in the Wall Street Journal. After lowering the boom on corporate tax inversions and imposing new rules on retirement brokers, the Obama administration is looking to implement regulations that will affect "broad swaths of the economy," including labor, health, finance and the environment, the Journal reported. 

For example, Obama has proposed doubling the salary threshold - from $24,000 to $50,000 - that determines eligibility for overtime pay. A good deal for workers, right? Only for those who aren't downgraded from salaried to hourly workers. 

Obama and his minions fail to grasp the depressing effect such rules will have on employers and on business activity in general. Those who provide goods and services to consumers are not passive participants in the government's regulatory schemes. They are active, profit-maximizing agents. 

As a general rule, liberals tend to ignore the economy's supply side. They seem to think constraints placed on business will have no effect on decisions about investment, hiring and compensation. They never consider the unintended consequences of government-imposed rules. Good intentions - higher pay, expanded job opportunities - are no guarantee of good results. 

The New York Times editorial board was positively gleeful over the Labor Department's proposed new rule for retirement brokers. In an attempt to encourage the industry to adopt the practice of charging up-front fees instead of commissions, the rule would impose a "fiduciary standard" on commissioned brokers. That means signing a contract stating that they are acting in the best interest of their client, along with other disclosures (think lawsuits). A good deal for small savers? Only if you consider reduced access to affordable investment advice, services and products, along with potential higher costs and lower returns, to be a plus. 

Perhaps you have heard of the "Paycheck Fairness Act," a feminist preoccupation that has languished in Congress for two decades. Obama has decided to apply his governing credo - "If Congress won't act, I will" - to achieve a back-door solution by "manipulating the obscure Paperwork Reduction Act for its exact opposite purpose," said Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute, in a Wall Street Journal op-ed last week. 

The Equal Employment Opportunity Commission is planning to expand the number of data points from 140 to 3,360 on an employer form required of companies with more than 100 workers, according to Furchtgott-Roth. The annual cost of complying with these and additional burdens is $10 million (EEOC estimate) or $693 million (Chamber of Commerce estimate), which businesses will pass along to consumers in the form of higher prices. Don't forget the "avalanche of lawsuits and investigations" for presumed discrimination, Furchtgott-Roth said. A good deal for women? Only if companies aren't deterred from hiring in general and hiring women in particular. 

The supply side of the economy is a big mystery to Obama, who managed to spend 12 years as a lecturer at the University of Chicago Law School without absorbing any of the "Chicago School" ethos. And he fails to understand why a carrot is often more effective than a stick when it comes to achieving desired results. 

Take the Treasury's new, expanded rules to prevent U.S. companies from incorporating overseas, a process known as inversion. U.S. companies aren't clamoring to leave the U.S. for business-conduct purposes. The cost of staying in the U.S. puts them at a competitive disadvantage because the U.S.corporate tax rate, at 35 percent, is the highest among developed nations. Its worldwide tax system, abandoned by most developed nations in favor of a territorial system, is another disincentive to remaining in the U.S.Think how much simpler, and efficient, it would be to dangle a carrot in front of business instead. Reduce the corporate tax rate to 25%, in line with the developed-world average. U.S. companies would choose to remain in the United States, invest and create jobs at home, and pay taxes in the United States. Instead, the Treasury is determined to punish companies seeking to increase profitability for shareholders. 

Liberals may harbor an instinctive aversion to any phrase that contains the words "supply side." After all, supply-side economics - better known as trickle-down economics or tax cuts for the rich - has become a pejorative. 

It just so happens that the nation's future depends on supply-side initiatives. "Secular stagnation," a concept revived by Harvard's Larry Summers in 2013 to explain today's slow-growth economy, is a supply-side phenomenon coined by another Harvard economist, Alvin Hansen, in the 1930s. Seeking to explain why the Great Depression lasted so long, Hansen adopted the phrase secular stagnation. He said that all the ingredients for economic growth - technological innovation, population growth and territorial expansion - had been exhausted. 

All three are supply-side phenomenon. Yet Hansen's proposed solution was cyclical: constant deficit spending by the government. 

Hansen was wrong in his determination that everything that could be invented had been invented by the 1930s. The post-war baby boom, and mass influx of women into labor force starting in the late 1960s, provided the other catalyst for potential growth. 

Like Hansen, Summers sees government spending, or "infrastructure investment," as the way out of today's slow-growth quagmire. But secular problems need secular solutions. Skills-based immigration reform would augment slow growth in the U.S. labor force. A friendlier corporate tax structure would encourage domestic investment. A reduction in red tape would stimulate entrepreneurship and new business formation, the true engine of job creation. 

What about the technological innovation, which holds the key to faster productivity growth? On that score, I'll defer to Melanie Griffith's character in the movie, 'Working Girl," who said it best: "You never know where the next big idea might come from."

Startup Slump Not That Surprising

What is the state of entrepreneurship in America?

Fortune columnist Geoff Colvin recently wrote about this topic in a recent issue. He cites "surprising" research suggesting that the rate of new company formation has fallen sharply over the past 30+ years.

Interestingly, the research found that a turning point occurred around 2000 whereby the economy generated fewer young, high-growth firms.

So what happened? Colvin states that the academics/economists who produced the research are still searching for answers.

I don't dispute the negative implications to the U.S. economy of fewer startups that Colvin cites such as stagnating wages, long-term unemployment and low productivity growth. He also suggests that venture capital firms are competing to invest in fewer higher-growth startups which may be driving up company valuations to unjustified levels.

Actually, I don't think this research is surprising at all. The finding of fewer high-growth startups since 2000 correlates rather nicely with the decision by the Bush Administration to weaken the U.S. dollar in a misguided attempt to stimulate exports.

With the decline in the value of the U.S. dollar during the 2000s, limited investment capital largely migrated away from promising new business concepts into hard assets most impervious to currency depreciation. This helps explain the bull market in residential real estate, gold, and other inflation hedges.

Of course, there are a number of notable high-growth startups founded since 2000 cited by Colvin that are thriving today including Facebook, Uber, and Airbnb, but it is impossible to measure the promising ideas that never received funding because capital was instead diverted to hot investments of the day which were hard assets.

Another factor in subdued risk-taking on the part of entrepreneurs, admittedly difficult to quantify, is the poor overall business climate. Entrepreneurs tend to find their way around government barriers to success, such as a rising regulatory burden and poor fiscal and monetary policies, but on the margin I suspect getting a business off the ground has been a lot more difficult in recent years.

A better supply-side policy mix, that is lower taxes on capital and income, free and open trade, a rollback in burdensome regulations and a stable monetary policy would do wonders for entrepreneurship in America. Unfortunately, there are no presidential candidates even talking about such a mix as part of a plan to revive a frustratingly moribund U.S. economy.

Are Unconventional Presidential Candidates Making Investors Nervous?

I recently met with clients and prospects to discuss my firm's investment outlook. Naturally, investors are nervous given the rough start to the year for global equity markets and are eager for answers as to what exactly is going on.

Markets are complex adaptive systems. Therefore it is virtually impossible to discern the collective wisdom of countless investors with diverse perspectives to pinpoint what is moving markets at any given moment. That's why I am skeptical when a talking head on CNBC or Bloomberg TV says with certainty that X is moving the markets.

That said, I gave it my best shot by highlighting a number of factors that I believe are impacting markets of late.

The key risk in my mind is that markets are signaling a monetary policy error committed by the U.S. Treasury Department and the Federal Reserve. A weak and unstable fiat dollar has wreaked havoc across the globe during most of the past 15+ years as demonstrated by the misallocations of capital (i.e., malinvestment) to housing and the production of raw commodities such as crude oil, copper, and iron ore. "Money illusion" drove all manner of capital investment literally into the ground and away from concepts that would result in true wealth creation. Pundits believed that many commodities were becoming scarce when the real answer was the currency that commodities are predominantly priced in, the U.S. dollar, was being devalued.

The "financial crisis" of 2008 and the current ongoing recession within the energy and basic materials sectors would never have occurred under a stable dollar.

The rapid strengthening of the dollar over the past few years, as measured by the fall in the price of gold and decline in the value of the CRB Index, has crushed commodity prices. Additional investment in the production of many commodities can no longer be justified at current prices. Investments in infrastructure and labor made when prices were much higher are no longer viable. Massive capital spending cuts and worker layoffs continue to be announced. If prices persist at current levels, a rising number of bankruptcies is likely to follow. The market must cleanse itself from the result of poor investment decisions.

A second possible reason is developing risks of another European banking crisis brought on by the European Central Bank's (ECB) negative interest-rate policy (NIRP) as well as the refusal of the European political class to implement pro-growth economic policies to stimulate moribund economies.

Third, some claim that sovereign wealth funds (SWFs) of resource-based countries such as Saudi Arabia and Qatar are putting selling pressure on equities as they raise cash to plug huge budget gaps created by the decline in the price of oil.

I was pleased to see that this week's edition of Barron's highlighted yet another reason I presented to clients for the volatility and fear in markets. One that seems to fly under the radar of most commentators. It is the impressive rise of two unconventional presidential candidates in Donald Trump and Bernie Sanders.

John Tamny also made this case in a provocative article a few weeks ago at Forbes Opinion.

As Barron's writes,

The rise of outsider presidential candidates Donald Trump and Bernie Sanders is more than a fascinating political story. Their ascendancy—Trump’s in the Republican Party, and Sanders’ among Democrats—could be one more reason why stock markets are under pressure and could remain so for awhile.  

Many market pundits are too focused on the latest Chinese economic data, oil-price movements, or negative-interest-rate chatter to connect the dots between the presidential-primary results and the stock indexes. By taking such a traditional view of market-moving developments, they might be overlooking a story that is leading news reports every day and night.

It is clear that the electorate is fed-up with the establishment of both major parties. Establishment Republicans are seen as spineless and unwilling to take a stand against President Obama's agenda. Meanwhile, Democrats are not exactly enamored with the Clinton Machine. The Democratic Party has turned decidedly to the left in recent years and Hillary simply doesn't excite the base. There is also growing unease with her possible legal problems if (and when) the Department of Justice finally decides to recommend she be indicted for crimes related to her mistreatment of state secrets and the use of a private server to hide communications from the public eye.

Both Trump and Sanders are candidates that have generated the most excitement among the base of their respective parties (note: Sanders is not a registered Democrat but caucuses with them as a member of the Senate. He labels himself a democratic socialist.)

The problem with both is that their policies, if implemented, would be a disaster for the U.S. economy.

Trump may be a relatively successful businessman, but he is an economic illiterate. His signature issue is trade. He believes trade with China and Mexico is "killing us" and would seek to implement massive tariffs on imports. This could easily lead to a replay of the disaster that was the Smoot-Hawley tariff in the 1920s. Other anti-growth stances include tighter restrictions on immigration and the possibility that he would govern as a rogue, with little patience (like Obama) with the separation of powers.

Sanders thinks the federal government is too small and doesn't spend enough on entitlements. Therefore, he has proposed a single-payer health care system, free public college tuition, and massive income tax increases on the wealthy. He also wants to "crack down" on Wall Street for perceived kid-glove treatment by the feds in the wake of the previous recession.

Of course even if Trump or Sanders is elected doesn't mean that his agenda will be implemented carte blanche. The House of Representatives is widely expected to stay under GOP control. The Senate is a toss-up and would likely lean toward the party of the winning presidential candidate. Fortunately, divided government is generally a positive for markets because it tends to derail an ambitious chief executive.

Even if Trump were elected with a GOP-controlled House and Senate, it is difficult to imagine a relatively conservative House leadership willing to go along with Trump on starting an all-out trade war with China.

Betting markets indicate a Trump v. Clinton matchup with Clinton still the overwhelming favorite to win. But a lot can happen between now and November. If Clinton is indicted, I believe that all bets are off.

Therefore, it appears investors should gird themselves for more volatility in the weeks ahead.

Are Lower Oil Prices Leading to Recession?

About a month ago Don Luskin, CIO at Trend Macrolytics LLC, wrote an op-ed in the Wall Street Journal claiming the U.S. is in recession due to falling oil prices.

According to Luskin,

"The drop is entirely the result of America’s supply-side technology breakthrough with horizontal drilling and hydraulic fracturing—“fracking.” 

This is a common view among the usual crowd of investors (including energy analysts and strategists), market pundits, and economists.

There is no denying that improvements in hydraulic fracturing technology have led to impressive increases in oil-well productivity in the various shale oil basins throughout the U.S. And the decline in oil prices is beginning to have an adverse impact on the industry as companies begin to slash capital spending and lay off workers. On the margin, supply and demand dynamics has some influence of course. But step back and think, has global supply and demand shifted so drastically over the past year or so to account for such a massive drop in crude oil? Or for that matter, so many other raw commodity prices.

What Luskin and many others miss is that the strength of the U.S. dollar is the reason for the decline of global oil prices (and the general decline in commodities overall as measured by the CRB Index). Neglect of the dollar by the Administration under clueless U.S. Treasury Secretary Jack Lew and secondarily by a hapless Federal Reserve Board is why it is wreaking such havoc in markets across the globe.

Crude oil is priced globally in U.S. dollars. As those dollars appreciate in value, the best market indicator being the price of gold, it takes fewer dollars to purchase a barrel of oil. Recall, oil rose to >$100 per barrel back in 2011 as the dollar was plummeting in value (gold having peaked at just under $2,000/oz.). It didn't rise to this level because there was a global shortage of oil or because demand suddenly rose sharply. The weak dollar was driving a global commodities boom.

If oil remains below $50 per barrel for an extended period of time, there will be more pain to come in terms of layoffs and capital spending cuts in extraction-related industries. Commodity-dependent emerging market nations will also suffer from additional painful adjustments. The market must cleanse itself of malinvestment wrought by "money illusion."

If recession does come to the U.S., it will be due to this process and it will be a good thing.

Why? Because a reorientation of investment capital away from energy extraction in the U.S. and towards "first order goods" that John Tamny describes in a recent column will eventually redound to the benefit of our economic well-being. Extracting raw commodities from the earth is not particularly profitable and can be done by countries far less advanced than ours. Our comparative advantage lies elsewhere in technology and health care, for example.

What the U.S. (and world) economy desperately needs is a stable dollar that is defined as fixed weight of gold. Fiat currency schemes simple don't work. The damage floating currency values do the economy by disrupting vital market price signals is being abundantly demonstrated before our eyes today.

Baum Takes A Closer Look At Loopy Economics

As author of a blog dedicated to highlighting Keynesian nonsense, the title of Caroline Baum's December 16, 2015 article on Economics21.org, Pent-Up Nonsense and Other Loopy Ideas from 2015, piqued my curiosity. Caroline is a veteran economics journalist who does an excellent job challenging conventional wisdom.

In point #1, Pent-up Nonsense, Baum criticizes the use of "pent-up" demand as a reason to explain weakness or strength in consumer spending. As humans, our wants are unlimited; they are never satiated. However, consuming is not the problem. Acquiring the means to consume is. We must produce first in order to consume. Since our production is our demand, politicians should remove as many barriers to production as possible to maximize output. Barriers include high taxes on income and capital, trade restrictions, onerous regulations, and unstable money.

In point #2, Lower Oil Prices Are Not Like a Tax Cut, Baum asks a great question, why are lower oil prices assumed to be the equivalent of a tax cut? While consumers may have more money in their pockets due to lower gasoline prices, those businesses and individuals tied to the oil and gas industry have that much less to spend and invest. Total spending is unchanged, only its composition has shifted. The "windfall" is an illusion.

I quibble somewhat with point #4, The Uncertainty Principle. Baum is skeptical of citing economic policy uncertainty as a reason why businesses are reluctant to invest. Yes, of course the future is uncertain. But I don't believe federal laws, such as Sarbanes-Oxley, Dodd-Frank, and Obamacare, which run thousands of pages long with rules that will be written in the future by unelected bureaucrats, make for an environment conductive for business investment and expansion.

In Happy New Regulatory Year, the Wall Street Journal editorial board states that over 82,000 pages of new and proposed rules were added to the Federal Register in 2015. The editorial also notes the Obama Administration has generated six of the seven most prolific years of regulating in the history of the country. Instead of focusing resources and effort on creating value, businesses must instead divert more of the same to activities that are required to keep the bureaucrats at bay.

Federal Reserve monetary policy is another potent source of uncertainty. David Ranson demonstrates in The Fed is Holding Rates Down for All the Wrong Reasons, a consistent inverse relationship between month-to-month volatility in the federal funds rate (the rate the Fed targets via open-market operations) and the subsequent year's real GDP growth.

During 2015, how much time and effort was wasted on "Fed-watching" and guessing when the Fed would indeed move to increase the federal funds rate? Is this a productive activity for investors and businesses? Clearly not, but something that must be done when the Fed's activities have such impact on the capital markets and the economy.

Her final point, #5, Two Lumps Are Better Than One, takes issue with the notion that the amount of work in an economy is fixed, such that new immigrants and productivity improvements (e.g. robots replacing humans or using ATMs rather than bank tellers) steal jobs. Not true. Jobs (and the wages they generate) are the result of investment. Wherever there is investment, you will find jobs (e.g. Silicon Valley and until recently in shale oil basins in Texas). Many people believe poor immigrants drive down wages but this is false. John Tamny explains this in Immigration Grandstanding by Ted Cruz Vandalizes Basic Economics. He cites low-wage Detroit to refute this point.