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.