More Nonsense with the Phillips Curve

At the New York Times, Neil Irwin wrote an article that discusses the Federal Reserve's dependence on the long discredited Phillips Curve.

Caroline Baum also posted a related article at Economics21.

The Phillips Curve is a key tenet of Keynesian thought. It purports to show an inverse relationship between the the rate of inflation and the rate of unemployment. 

One would think the stagflation era of the late 1970s and early 1980s, when the U.S. economy experienced high levels of both inflation and unemployment, would relegate the Phillips Curve to the dustbin of history. Unfortunately Keynesians never give up that easily. According to Irwin, Fed chairwoman Janet Yellen said the Phillips Curve "is a core component of every realistic macroeconomic model."

Little wonder the U.S. economy is mired in such a pathetic "recovery" with geniuses like Yellen and her ilk burdening the economy with policy nonsense that goes by the acronyms ZIRP (zero interest-rate policy) and QE (quantitative easing).

Yellen is convinced that if the unemployment rate falls below the "natural" rate of unemployment (whatever that is), inflation is likely to accelerate. The thinking here is that low rates of unemployment will drive up wages and eventually result in higher prices for goods and services. Such a theory assumes that labor markets are inflexible and that companies can't access abundant sources of labor overseas.

The really perverse aspect of the Phillips Curve is that it assumes that too many people working and prospering is inflationary. Actually, the truth is just the opposite. With such thinking, is it any wonder that economic output is significantly below its potential?

As Ralph Benko notes at The Pulse 2016, The House of Representatives passed legislation (H.R. 3189, Fed Oversight Reform and Modernization Act of 2015) on November 19 that promises to reform the way the Fed sets monetary policy. Naturally, Janet Yellen is vehemently opposed and President Obama promises a veto if the bill makes it through the Senate and reaches his desk.

Of course, any reform that minimizes the impact of the Fed's flawed economic models, such as the Phillips Curve, is most welcome. If it prevents further Fed market manipulation in the form of ZIRP and QE, the economy can only benefit.

The Left Fires Intellectual Spitballs at the Gold Standard

ThinkProgress recently posted an article ("Ted Cruz Embraces Fringe Monetary Policy That Went Out of Style in the 1930s") by Alan Pyke lampooning Ted Cruz's advocacy of a monetary system tied to gold at the Republican debate on October 28.

Tom Woods and two guests, Austrian-school economists Joseph Salerno and Jeffrey Herbener, rip apart Pyke's ill-informed analysis in entertaining fashion in an episode of the Tom Woods Show podcast.

Not that Pyke made it very difficult to do so.

The Austrian-school view of money does differ from the supply-side view in many respects, but Woods et al. are still staunch supporters of sound money.

Although supply-side economics is most often associated with tax-cutting, the supply-side literature is rich in its advocacy of sound money, i.e., a stable currency backed by gold.

Using long discredited arguments and the usual caricatures, Pyke apparently hasn't read any of the recent literature on the successful history of gold standard systems such as two books written by expert Nathan Lewis, Gold: The Once and Future Money and Gold: The Monetary Polaris.

In addition, recent books by Steve Forbes (Money) and John Tamny (Popular Economics) discuss the critical importance of stable money in promoting production and exchange.

The political left has to realize that saying "everyone agrees the gold standard was terrible" as Pyke does is simply shoddy analysis. Just because many of today's gold standard advocates are not academics with economics Ph.D's from elite universities does not mean that they are to be simply ignored. The burden is clearly on those who believe an all-powerful central bank is necessary to "manage" the currency and the economy. The evidence is not on their side.

Gold Finally Muscles Its Way Into the GOP Policy Debate

Since the last Republican debate on October 28, there has considerable buzz in supply-side circles regarding the brief, but notable comments by U.S. Senator Ted Cruz in support of linking the U.S. dollar to gold (as well his support for "Audit the Fed" legislation) at the CNBC sponsored forum.

Ralph Benko provides commentary at The Pulse 2016 and Forbes Opinions.

Judy Shelton, co-director of the Sound Money Project for the Atlas Network, offers her thoughts at thehill.com.

The New York Sun gives credit to CNBC's Rick Santilli for asking Senator Cruz (and U.S. Senator Rand Paul) to comment on the Federal Reserve and monetary policy. The Sun correctly identifies monetary policy as the greatest issue of the election and in the final two paragraphs asks a number of critical questions that need to be answered. These are questions that the policy elite refuse to address.

Steve Forbes wrote a great piece in Forbes using the occasion of the Cruz's comments to offer a simple to understand explanation of why a gold standard is so vital to economic prosperity. If only this man could be U.S. Treasury Secretary!

It would indeed be a shame if Cruz and Paul do not carry the momentum of this issue into the next debate that is being sponsored by the Fox Business Network on November 10. The Democrat Party frontrunners Hillary Clinton and Bernie Sanders are quite comfortable with the status quo of having a handful of masterminds at the Fed manipulating interest rates and "managing" the economy.

It is a winning issue for the GOP. Let's hope for even more substantive discussion of this issue in upcoming debates and out on the campaign trail.

From ZIRP to NIRP

Richard Salsman, President and Chief Market Strategist at Intermarket Forecasting Inc., has written a pithy commentary in the Financial Post suggesting the Federal Reserve is open to a negative interest rate policy (NIRP) if it determines that economic conditions warrant such action.

The final few sentences are key:

"In finance there’s a standard “risk-reward trade-off.” With ZIRPs [zero interest-rate policy] and NIRPs, policymakers effectively seek to eradicate return, then wonder, in disbelief, why an economy lacks risk-taking and entrepreneurial spirit, and why banks, firms, and household alike persist in hoarding cash."

A reader from Calgary, Alberta posted a laughable comment stating that the article is ignorant of basic economic facts. Such a comment could only be written by someone so steeped in Keynesian nonsense that he believes corporate investment is weak because of "the persistent low rate of inflation (and the fear of deflation)". The reader obviously didn't grasp the passage cited above.

Quite simply, the Federal Reserve (and other central banks) cannot distort (e.g. artificially depress) one of the most important prices in the world (the benchmark overnight lending rate) and not expect serious consequences to the economy. Just because the Fed has managed to keep short-term interest rates at abnormally low levels does not mean the credit is cheap and plentiful. Price controls do no such thing. As long as central banks continue to manipulate vital market prices via a "ZIRP" or "quantitative easing (QE)", the economy will be robbed of vigor. Those with resources to lend will not offer those resources up to borrowers absent a return on that capital reflective of the risk taken. Capital will not migrate to its highest and best uses absent market-based price signals. This is pretty basic stuff and completely lost on most of the pathetic economics profession.

Note: For more information on Intermarket Forecasting Inc., please click here.

A Supply-Side Look at the Harper Defeat

Steve Forbes and John Tamny published separate commentaries recently at Forbes Opinions analyzing the electoral defeat of Canadian Prime Minister Stephen Harper to Liberal Party candidate Justin Trudeau on October 18.

Their analysis is sure to run counter to most political pundits who focus more on things such as personalities, turnout, campaign strategies, etc.

Both agree that a weak U.S. dollar was the culprit behind the poor performance of the Canadian economy in recent quarters. But Forbes believes that Trudeau is predominantly indebted to Federal Reserve chairwoman Janet Yellen for his victory. Tamny places most of the blame on the executive branch via the U.S. Treasury's responsibility as the mouthpiece for the dollar. He argues that U.S presidents get the dollar they want and with the administration of George W. Bush desiring a weak dollar, that is exactly what they got.

In an attempt to help pull the U.S. economy out of the 2000-2001 recession and to help boost American exports, the Bush Administration supported dollar weakness. Bush Treasury secretaries Paul O'Neill and John Snow were effective in talking down the dollar during their tenures.

Given the importance of the U.S. dollar to global commerce, the effects of a weak dollar reverberate worldwide. In particular, those nations that are resource-intensive such as Canada, Australia, Brazil, and Russia feel the most pain as commodities are priced and traded in U.S. dollars.

With the dollar falling in value, investors fled productive investment in favor of hard assets most resistant to the devaluation of the currency. Scare investment capital migrated to housing and other forms of real estate and to the production of commodities such as precious metals, nonferrous metals, and petroleum. The resultant boom was widely celebrated as a major boost to economic growth in the affected countries but it eventually proved illusory. The rise in prices tricked investors in thinking such commodities were in short supply when in reality supply and demand fundamentals could not explain such huge price movements. Commodities were not suddenly become scare, it was simply the dollar shrinking in value.

Canada saw a major boom in the extraction of metals and the production of crude oil, specifically from high-cost oil sands in Alberta. However, once the dollar began to strengthen from its 2011 low of roughly 1/1900th of an ounce of gold, the profitability of such resource extraction began to suffer. Investment capital started to flow away from the commodity sector and Canada's economy began a painful adjustment that continues to this day.

Unfortunately for former PM Harper, his political career fell victim to an unfortunate Mercantilist policy decision that was made some 15 years ago by his neighbor to the south.

An Analysis of Trump's Tax Plan

In a Wall Street Journal commentary on September 28, Donald Trump provided a relatively brief outline of his plan to reform the tax code. The WSJ's editorial board review of the Trump plan can be found here.

[Trump's truly awful mercantilist trade views deserve greater discussion in a future blog post.]

Trump's plan has a few attractive elements but overall still rates as underwhelming.

The best parts of Trump's plan are the four personal income tax brackets (0%, 10%, 20%, 25%) that hit the top rate for a married couple earning greater than $300,000. A low flat tax of 15% that Steve Forbes has proposed in the past or a consumption tax would be preferable simply because it doesn't punish success with progressively higher rates. Relative to the thresholds proposed by Jeb Bush, Trump's plan is superior. Bush's max rate of 28% begins at only $141,200 for a married couple.

Like Bush, Trump eliminates the death tax, the marriage penalty, and the ongoing absurdity complex alternative minimum tax (AMT).

Trump proposes eliminating deductions and loopholes but fails to get into the specifics in any meaningful way. He does say that the "middle class" will get to keep most of their deductions while those for the wealthiest Americans will be eliminated. Apparently this means the Trump plan will continue to subsidize certain behaviors by allowing deductions on mortgage interest and charitable giving to remain. Social engineering via the tax code is frustratingly difficult to eliminate.

Trump proposes lowering the corporate tax rate to 15%, which is lower than the 20% in the Bush plan. Included is a repatriation rate of 10% for cash returned to the U.S. currently held overseas which is nothing more than a gimmick. The 15% rate will certainly help raise the attractiveness of the U.S. as a destination for investment capital after cuts in recent years by other countries in the OECD  rendered the U.S. among the least competitive among the developed nations of the world.

As for the all-important capital gains tax, Trump inexplicably doesn't mention it at all in his commentary but details on his website indicate he wants it lowered to 20% for those taxpayers in the highest marginal bracket. This is still disappointing. Given the critical importance of capital investment to the creation of jobs, the optimal capital gains tax rate is zero.

He also seeks to treat "carried interest" generated by successful hedge fund and private equity investors as ordinary income. Carried interest income is created only when these managers are able to successfully invest capital on behalf of their investors. Like the capital gains tax, in a sane world carried interest wouldn't be taxed at all. We want Wall Street's best and brightest allocating scarce capital in pursuit of wealth-enhancing investment opportunities.

Trump does imply that the plan will be "revenue neutral" and not add to the national debt. He therefore keeps alive the tradition of candidates highlighting that their plans ensure the government will not have any less to spend going forward than it does now, as if that is some grand achievement. The true burden of government is the total amount of resources it is able to commandeer from the market-disciplined private sector. As supply-siders, we want the government to have less in the way of those resources to waste.

As I mentioned in my recent review of Bush's plan, what the the U.S. tax code needs now after a long period of subpar economic growth is anything but tinkering around the edges. It calls for nothing short of bold action. Trump's plan simply doesn't get the job done. Sure, it's better than the current Internal Revenue Code, but that's admittedly a very low bar.

Contra Krugman

Thomas E. Woods, Jr., historian and Senior Fellow of the Mises Institute and Robert Murphy, Research Assistant Professor with the Free Market Institute at Texas Tech University have finally launched Contra Krugman, a podcast intended to deconstruct the weekly New York Times column of Paul Krugman, professor of economics at Princeton University.

Krugman is widely considered the public face of Keynesianism today. His weekly New York Times column is (apparently) quite influential. However, Krugman is arrogant, petulant, casually dismissive of his critics, and often downright nasty.

Whether it's the efficacy of massive government spending as "stimulus", massive tax increases, Federal Reserve manipulation of interest rates, "quantitative easing (QE)", Obamacare, etc., Krugman is a tireless supporter of state intervention in the economy and in the lives of individual Americans.

Woods and Murphy have designed the podcast not to be merely an anti-Krugman forum per se. They intend to provide the listen with a weekly economics lesson from the perspective of the Austrian school, with which both are identified. And what better way to do that than to pick apart Krugman's  column.

I embrace much of the Austrian school's free market framework, although I generally disagree with its views on monetary policy. But we are in the same camp that believes the Federal Reserve is a menace to global economic prosperity and the best thing that could be done from a policy perspective is to "End the Fed" and allow a free market in money to take its place.

No one knows Krugman the way Murphy does. He is a true Krugman scholar. He knows things Krugman wrote in past columns better than Krugman himself. He will undoubtedly demonstrate this ability frequently in the course of this podcast series.

Having listened to The Tom Woods Show for some time, I know that it will be done in an informative and entertaining manner. What also makes me happy is this new podcast is sure to get under Krugman's skin in a major way!

You can subscribe to Contra Krugman on iTunes or Stitcher. Let the fun begin!