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.