Saturday, October 1, 2016

Selgin on Kocherlakota regarding Discretion vs. Rules

George Selgin was highly critical of   Kocherlakota's claim that the Fed's response to the 2008 recession was hampered by its devotion to the Taylor rule and that we would have been better off if the Fed had exercised more discretion.

Selgin properly points out that the Fed has exercised plenty of discretion and has not slavishly adhered to the Taylor rule by any means.   However,  I still think Kocherlakota has a point.   

In my view, coming up with a simple formula relating a setting for the federal funds rate to past deviations of inflation from target and output gaps is a fools errand.   Of course, I favor a level target growth path for nominal GDP rather than a target for inflation and an effort to minimize output gaps.   But I don't think coming up with a fixed rule for changing the federal funds rate based upon past or even forecasted deviations of nominal GDP from target is wise.   Nor do I favor coming up with a fixed rule for adjusting the quantity of base money according to past or even forecasted deviations of nominal GDP from its target level.

In a market economic system, setting prices and quantities is an entrepreneurial decision.   It cannot be distilled into a rule.    I do think that an economy needs a nominal anchor.    But no one is proposing that the federal funds rate serve as a nominal anchor.  And Taylor-type rules don't make the quantity of base money into the nominal anchor either.   (The two percent inflation target is the only nominal anchor with a Taylor rule.)  

I don't think the Federal Reserve should worry about the federal funds rate at all, but it should adjust the interest rate it pays on the reserve accounts held by banks and the quantity of base money it creates.   It should also adjust the interest rate it charges for loans to banks.    Its goal should be to keep the quantity of base money equal to the demand to hold it.   Changes in the interest rate it pays will influence the demand.   Open market operations and lending to banks will determine the quantity.   The decision on interest rate and quantity needs to be forward looking, like all entrepreneurship.

The demand for base money also depends on nominal GDP and so these decision do need to be constrained by the need to keep nominal GDP on target.   But the rule should relate to the commitment to the nominal anchor, preferably a target growth path for nominal GDP--not the level of base money or the interest rates the Fed pays or charges.   The Fed's only commitment should be that it will set interest rates and a quantity of base money consistent with nominal GDP being on target in the near future (for example, one year from now.)   The Fed should make no commitment as to what either these interests rate or the quantity of base money should be.

Of course, the Fed has a monopoly on the issue of base money.    But even so, I don't think that means that its pricing and quantity decisions should be based upon some mechanical rule.   It needs to be understood to be entrepreneurial like all such decisions, even when a producer has a monopoly on the provision of an important product.   Just because a firm has a patent on a lifesaving drug doesn't mean that its price and quantity should adjusted by some mechanical rule.

Putting all of the entrepreneurial eggs in a monopolist's basket is not the ideal course.   Introducing competition so that interest rates and the quantity of money are determined competitively, arising out of the decisions of many entrepreneurs should be the goal.   But can that be combined with the constraint of a decent nominal anchor?

I have long argued that the Fed should float its interest rates--paying less and charging more than market-determined short term interest rates.    It should adjust the quantity of base money to try to meet the demand to hold it at market determined interest rates    In effect, the determination of the interest rates that Fed sets would be farmed out to a competitive market.    Of course, changes in the quantity of base money will influence market interest rates in the short term and so indirectly the interest rates the Fed would charge and pay.    The institutional framework would be consistent with the Fed gauging its open market operations to keep short term market interest rates at a level it believes is consistent with a quantity of money adjusting to the demand constrained by the nominal anchor.

I have also advocated the complete privatization of hand-to-hand currency.   The quantity of that important portion of what is now base money would then be jointly determined by competitive forces.   Each bank would entrepreneurally determine its issue of currency and the total quantity of currency would be the sum total of those decisions.   

However, since I believe it is both desirable and highly likely that any such currency would be redeemable with the remaining portion of base money--reserve deposits at the Fed--this would not take away the key Fed monopoly and the Fed's need to act entrepreneurally to determine the appropriate quantity of reserves.  That is, meeting the demand by banks to hold them at market determined interest rates and consistent with the nominal anchor.   

I believe that it may be possible to design a clearing mechanism that uses index futures convertibility to enforce the nominal anchor without there being any base money at all.   The position of each bank on the futures contract would vary with its net clearing balance at the clearinghouse.   If any net debit balance would be secured by specified securities (like T-bills) and the interest rate charged on net debit balances is more than that generated by the securities and the interest rate paid on net credit balances is less, then desired balance for each bank would be zero.    Under such a system there would be a quantity of reserves.  It would be the total of the net credit balances of  banks and always matched by the total of the debit balances of other banks.   It is just that in equilibrium the quantity would equal the demand to hold them which would be zero.    The system is disciplined by the index futures contract so that if nominal GDP is expected to stray from target, the private interests of the banks participating in the system will drive changes in both the market determined quantity of money (largely checkable deposits) and market determined interest rates to return it to target.   It is all just a variation on the mechanics of clearing in the Black-Fama-Hall system developed by Greenfield and Yeager years ago.

Well, maybe it won't work.   But that brings me back to Kocherlakota.   He seemed to be criticizing a mechanical rule relating the federal fund rate to inflation and output gaps.   But his substitute is that the Fed should remain strongly committed to its goal.   To me, that rings true.   I think that the Fed, or our monetary institutions generally, should be strongly tied to the nominal anchor.  The Fed should not be able to adjust the nominal anchor on the fly.   For me, that is, it should not be able to adjust the target growth path for nominal GDP period by period.   But it should not be tied to any mechanical rule for manipulating market interest rates or broad conglomerations of monetary assets or even the interest rates it pays or charges or the quantity of the monetary liabilities it issues.   Taylor type rules are a bad idea.

Kidland and Prescott's model has the Fed changing the nominal anchor period by period to exploit a short run phillips curve and obtain modest decreases in unemployment.   This would be like having the Fed raise the target growth path for nominal GDP period by period to try to create temporary booms in real output.   That is a bad idea.   

Kydland and Prescott didn't show that keeping the quantity of money growing at a constant rate despite fluctuations in velocity is better than adjusting the quantity of money to keep nominal GDP growth, inflation, output and employment more stable.   Nor did they show that manipulating interest rates according to rule based upon past inflation and estimated past output gaps when shifts in investment demand or saving supply are causing changes in the natural interest rate are better than adjusting interest rates in a way that keeps nominal GDP, inflation, real output and employment more stable.   

Selgin points this out as well, noting that older arguments for rules as opposed to discretion emphasized the difficulty in forecasting velocity and the natural interest rate.   I grant that, but I think that a fixed rule for manipulating interest rates or base money are really just nonstarters.   

Wednesday, September 21, 2016

Selgin on the Fed's Money Supply Process

George Selgin has a great post on the money supply process here.  

Tuesday, September 20, 2016

Romer on Macro

I am teaching Principles of Macro this semester as I frequently do.  What to make of Paul Romer's broadside against Macroeconomics?

I believe it was Williamson who said that what is taught in undergraduate macroeconomics has nothing to do with what real macroeconomists do.    So, I suppose I shouldn't worry too much that Romer believes that these "real" macroeconomists have gone off the rails.  

Still, I think Romer goes to far.

Romer calls out several famous economists by name.   His strongest criticism is for Prescott, though Lucas and Sargeant get some heavy criticism too.    What is Romer's problem with Prescott and the rest?   It seems mostly aimed at real business cycle theory.

I think real business cycle theory is a bit of an oxymoron.   Of course, if business cycle theory is supposed to explain fluctuations in real output around trend, then what I would prefer to call "supply-side" shocks must be taken into account.     From that perspective, real business cycle theory has done a service in correcting a view that potential output is on a continuous three percent growth path and any deviation of real output from that growth path should be understood as being due to shifts in aggregate demand--spending on output--imperfectly accommodated by changes in inflation of money prices and wages.

When the obvious is recognized, that there is little reason to expect potential output to always grow at a constant rate and that resource availability and productivity should be expected to at least grow at somewhat variable rates, then the problem of macroeconomic coordination is better understood--real output should grow not at three percent or some other "target" but rather at a rate that varies with potential output.

While slower than three percent growth in real output is entirely plausible, "supply-side" explanations of recessions--decreases in real output--are a more of a stretch.   However, it is actually quite easy to think of disasters that would have that consequence.   Natural disasters or man-made disasters like civil war would be examples.   And there are public policies that could also result in reductions in production.   These could be just foolish anti-capitalist policies.   But efficient policies could have that effect as well.   For example, even an efficient institution for protecting the environment could result in decreases in measured real output if starting from a highly polluted condition.   I think that a reduction in the production of various goods and services would be highly significant and worth measuring even if some more inclusive measure of human welfare increased on net.

The reason I think of real business cycle theory as an oxymoron is not that "real" recessions are impossible, it is rather that they are not interesting.   After a country suffers a major nuclear attack, it will produce less output.  Yes.   And aside from trying to make sure that doesn't happen, why is that interesting?

Now, I will grant that having slower growth in resource productivity cause reductions in output rather than just slower growth is interesting, though I doubt that it is at all likely.

The puzzle of recession is that even though we live in a word of scarcity, there are occasional periods where there is widespread idleness of scarce resources resulting in reduced production of many types of scarce goods and services.   These recessions are nearly always associated in broad-based reductions in sales of goods and services.   That is, many firms in many industries report what they perceive as weak sales and respond by curtailing production.   In other words, the problem to be explained is fluctuations in aggregate demand as well as the reason why these do not simply result in changes in money prices and wages so that scarce resources remain employed producing scarce goods and services.

What are sometimes called "growth recessions" would be a similar phenomenon.   Sales grow too slowly for firms to use all of their scarce resources to produce scarce goods and services, though the amount they do produce is greater than what they did before.   Real output grows, but less than potential output.   Since it is quite possible for potential output to grow more slowly, it is difficult to distinguish a failure of output to grow as fast as potential with a situation where real output remains equal to a more slowly growing potential output.

However, the real problem with real business cycle theory isn't that it has nothing interesting to say.   It is rather the research program of seeking to show that aggregate demand does not matter at all and that real output is always equal to potential output.   This is closely associated with the "new classical" emphasis on "market clearing."   Prices and wages are assumed to be sufficiently flexible that any shift in aggregate demand results in changes in prices and wages so that all scarce resources remain fully employed producing scarce goods.    Observed fluctuations in real output, employment, and unemployment around trend therefore must be due to optimal responses to real, or supply side, shocks.    Potential output?   Why have a special term for that?   Real output is potential output.  Or do you just mean trend?   It is that view that is the problem.

Romer's focus then is on the opaque methods real business cycle theorists have used in pursuit of this program.    In particular, their empirical work hides assumptions that makes unobserved real factors supposedly cause general fluctuations in output and employment.

One problem with Romer's essay is that the leading macroeconomists today are not the followers of Prescott but rather Woodford.   Where are the leading new Keynesians in his story?    They most definitely recognize the importance of aggregate demand and monetary policy.

Perhaps one issue is that the real business cycle approach has not been sufficiently stamped out.   I guess that there are still PhD dissertations accepted and papers published in major journals in this vein.   Romer seems to be arguing that this should be treated as so much trash.   Less of it should be published and it should be treated less seriously.

But I also think Romer believes that the bad technique generated by that wrongheaded approach has infiltrated into the mainstream of new Keynesian macroeconomics.    If an idea cannot be characterized within a rigorous and calculable DSGE model using rational expectations, then it isn't worthwhile.    The mechanism for sticky prices (or wages) must be sufficiently rigorous and allow for a calculation of results in a rigorous model.   Why?   Because that is the standard insisted upon by Prescott and company, when really, according to Romer, their approach was fundamentally fraudulent.

Further, if the model implies that aggregate demand has only small and transitory effects on real output, then real business cycle theory must be mostly correct and monetary policy really doesn't matter.   I think Romer's point is if the Calvo model of price-stickiness doesn't result in large fluctuations in output, then the problem is in the Calvo model and not a reason to think that monetary policy doesn't matter much in the real world.

Market Monetarists favor a stable growth path for spending on output.    If this were accomplished perfectly, then there would be no problem with fluctuations of aggregate demand.   That doesn't mean that there would be no fluctuations in real output.    The fluctuations would be due to supply side factors.   In such a world, researches would hopefully find that all fluctuations in real output were caused by "real" factors.   Would that mean that aggregate demand and monetary policy does not matter?   Not at all.   It would rather be that monetary policy was perfect and stabilized aggregate demand.  

Further, what would researches discover about the quantity theory of money?   Well, it is likely that the quantity of money would grow as would nominal income over the long run.   However, a careful consideration of short run fluctuations would show appreciably no relationship between the quantity of money and inflation.   Instead, the quantity of money would be inversely related to velocity and systematically related to anything that causes changes in velocity--perhaps real interest rates.  Changes in inflation, on the other hand, would be almost entirely shown to be determined by the same real factors causing fluctuations in real output.     But to conclude from such evidence that a new monetary institution that involved rapid exogenous growth in the quantity of money would not generate more rapid inflation would be foolhardy.

Sunday, September 4, 2016

The Constitution Party: An Alternative?

Libertarian critics of the Johnson/Weld ticket sometimes suggest that the Constitution Party's candidate, Darrel Castle is a "more libertarian" alternative.   I certainly disagree with that evaluation.

Conservative critics of Trump have proposed that Castle is a better alternative for them than Johnson/Weld.   They have a stronger argument than the libertarian critics, though I would suggest that they stay away from Castle as well and seriously consider Johnson.

The key problem with Castle is that he is plainly a candidate of the paranoid conspiratorial far right.   His campaign platform focuses on the dark fantasies of the John Birch Society.     Many years ago, the John Birch Society claimed that communists held key positions in the U.S. government and they were working on behalf of their foreign masters.   There was an element of truth to this claim.   There were plenty of communists in the U.S. in the forties and fifties who were taking orders from Stalin's Russia and some of them were in senior government positions.  

The John Birch Society went wrong by first claiming that pretty much every center-left politician and bureaucrat in the U.S. was taking orders from Stalin, and then going further and claiming that the same was true of center right politicians like President Eisenhower and Nixon    Before long, if you didn't agree with the John Birch Society, you must be part of the international communist conspiracy.  

And if that wasn't crazy enough, by the sixties, it was no longer the KGB and the Soviet Union giving the orders, but rather it was a secret cartel of "globalist" bankers giving orders to both the Soviet leadership and pretty much all U.S. politicians conspiring to impose one-world big government.

Key issues in Castle's campaign platform are the struggle against the United Nations and Agenda 21.   The problem isn't that the United Nations is particularly valuable or that there is something good about Agenda 21.   It is rather that these are big red flags that Castle is not connected with reality.   They have no place as key issues facing the U.S. today.

Interestingly, one of the negative aspects of Trump's campaign has been his close ties to conspiracy theorists and really, what seems to be a willingness to take them seriously.   That is one key reason why Castle will not get much traction as a practical matter and why it is not desirable that he get any traction.

From a libertarian perspective, the best parts of Castle's campaign platform are his call to abolish the Fed and his support for the U.S. Constitution.   The section of his campaign platform that calls for the abolition of the Fed is pretty good.   It emphasizes allowing people to use alternative monetary instruments, including Bitcoin.   It mentions in passing that dollars would be redeemable in gold.   While I think a gold or silver standard is a mistake, many libertarians strongly support a return to the gold standard.   

The problem is the audio file linked by Castle to this text that explains why he favors abolishing the Fed.   He rapidly heads into bad economic analysis that has a long pedigree in far right conspiracy theory.   The Federal Reserve is private.   Our money is based on debt.   This creates problems because there can never be enough debt-money to pay the interest on the money.   Wrong, confused, and paranoid.  

Personally, I am more interested in reforming the Fed than abolishing it, though if I had a magic wand, I would abolish it.   In the broader libertarian movement, support for reforming the Fed by constraining it with rules has had many important advocates--like Milton Friedman.    (I favor replacing the Fed with a rule-constrained monetary authority, so for me the difference between reform and abolition is a matter of a fresh start.)

Castle's devotion to the U.S. Constitution is a positive.   I certainly support constitutional restraints on government, and the U.S. Constitution is what we have.   But the dominant approach in the modern libertarian movement has been to seek to strengthen the U.S. Constitution, rather than hold it up with an almost religious devotion.   And that relates to a fundamental problem with the paranoid right.   In their view, the fundamental problem is that the communist (or globalist) traitors have not kept their oath to follow the U.S. Constitution and that is the source of all of our problems.    It is part and parcel of their conspiracy theory.   Libertarians, on the other hand, have mostly understood that the mainstream of U.S. politics have driven through massive loopholes that were always part of the U.S. Constitution.  

Now, in the sixties, the dominant voices in the libertarian movement were all for closing off the loopholes in the U.S. Constitution and providing more express language to protect economic and personal liberties.   Later, largely due to the influence of Murray Rothbard, opposition to the U.S. Constitution became more important.   Rather than holding up pro-Constitution founders like Madison, other pro-Constitution founders like Hamilton were attacked as advocates of "big-government."   Constitution-skeptics among the Founders, the "anti-Federalists" like Patrick Henry, were more in favor.   And then there are the anti-Constitution abolitionists of the nineteenth century, chiefly Lysander Spooner that were held up as libertarian heroes.   The "radicals" in the libertarian party were strongly influenced by "anarcho-capitalism" and so critics of the general project of constitutionally limited government.    These perspectives on the U.S. Constitution remain today as important strains among libertarian scholars and intellectuals.

The tremendous success (by libertarian standards) of Ron Paul's Presidential primary efforts in 2008 and 2012 has greatly strengthened "pro-" U.S. Constitution rhetoric and approach within the libertarian movement.   That is because Ron Paul always emphasized his support for the U.S. Constitution.   As someone who supported Congressman Paul in those efforts, there is no doubt that there was both a libertarian wing and a conspiracy wing among campaign volunteers.

Is Darrel Castle more libertarian than Gary Johnson?   I don't think so.   I must admit that Ron Paul's approach has been somewhere between that of Castle and Johnson.  Is Ron Paul closer to Castle than to Gary Johnson.   I think it depends on what parts of Ron Paul's message you find most important.

Another of Castle's key platform positions is his anti-abortion stance.   He shares that view with Ron (and Rand) Paul.   Johnson is "pro-choice" on abortion, though he has supported leaving the issue to the states and as a state leader supported some restrictions on late term abortions.   In my opinion, Johnson comes closer to the libertarian mainstream on the issue.   The Paul's are outliers as are those libertarians whose views on the issue are similar to Clinton.

So, Castle isn't much of a libertarian and while he is a conservative of sorts, I think sensible conservatives should steer clear of the paranoid conspiracy nonsense.

Is the Constitution Party something that should be supported?   Not by libertarians, though perhaps some conservatives might find it compatible with their views.

The Constitution Party has seven principles on its website.   The first is anti-abortion.   In many ways, the Constitution Party has historically been focused on opposition to abortion.   There is, of course, a relationship to the U.S. Constitution, since the Supreme Court blocked states from outlawing (or hardly regulating) abortion based upon a Constitutional "right to privacy."

Now, on the whole, libertarians would like to see the Supreme Court protect more liberties, both personal and economic.   Still, many libertarians are critical of Rowe vs. Wade.   My view is that "grey areas" like abortion are the last place the Supreme Court should be overturning state and local government action.

The second principle is described as liberty and includes personal and religious liberty.    It is quite good.   Interestingly, it does not speak to so-called "religious liberty" statutes.

The third principle is about the family and is plainly inconsistent with any kind of libertarian approach.   Here the Constitution Party plainly states that the the laws should be based upon Christian (and Jewish) scripture.   In particular, marriage is ordained by God to be one man and one woman.   They claim that state and local governments have the right to restrict offensive sexual behavior.   Of course, this is more or less what some conservatives (say Ted Cruz) ran upon, so this might be a positive for some conservatives considering the Constitution Party.  (At least the Constitution Party does not support federal legislation to persecute gay people.)

The fourth principle is private property rights.   It mostly involves 4th and 5th Amendment protections.  In my view it is quite good.   Though I am not sure that privacy legislation to prevent private entities from requiring social security numbers is really a priority.

The fifth is interpretation of the U.S. Constitution according to the intentions of the Founders.  That is good.  The link on the website is broken.

The sixth is states rights.   It is a strong statement regarding the 10th amendment.    I like it, though I don't like the term "states rights," given its use by advocates of slavery and segregation.   I think "federalism" is the better term.   And, like many libertarians, I agree with Ayn Rand's statement that states don't have rights, only individuals have rights.   Rather than speak of "state's rights," I would say that the U.S. Constitution provides for federalism, which is a good way to protect individual rights.  

The seventh principle is American sovereignty.   Here there is a very strong support for nonintervention in foreign affairs.   It also proposes the withdrawal of the U.S. from just about every international agreement, organization, or treaty.    I imagine this goes a bit far for most conservatives, though many libertarians would have no problem with anything in this section.   It is too "isolationist" for me.  I prefer Rand Paul and Gary Johnson's foreign policy realism in general.   And I think some international treaties and agreements are desirable--that is why the Constitution expressly allows the Senate to adopt them.   I am not worried much about international organizations.  To me, the Constitution Party's focus on them shows paranoid worries about the secret international global conspiracy to imposes one world government.  

If you go to the Constitution Party Platform, there are plenty of problems, making it unacceptable for any libertarian.  For me, one deal killer is:

"Article I, Section 8 provides that duties, imposts, and excises are legitimate revenue-raising measures on which the United States government may properly rely. We support a tariff based revenue system, as did the Founding Fathers, which was the policy of the United States during most of the nation’s history. In no event will the U.S. tariff on any foreign import be less than the difference between the foreign item’s cost of production and the cost of production of a similar item produced in the United States. The cost of production of a U.S. product shall include, but not be limited to, all compensation, including fringe benefits, paid to American workers, and environmental costs of doing business imposed on business by federal, state, and local governments."

Talk about protectionism!   This implies that tariffs must be used so that there is no specialization based upon comparative advantage.   The tariffs on bananas sure will be high.   Is it based on the cost of operating a banana plantation in south Florida or growing them in hothouses in Alaska?
It goes on:

"Tariffs are not only a constitutional source of revenue, but, wisely administered, are an aid to preservation of the national economy. Since the adoption of the 1934 Trade Agreements Act, the United States government has engaged in a free trade policy which has destroyed or endangered important segments of our domestic agriculture and industry, undercut the wages of our working men and women, and totally destroyed or shipped abroad the jobs of hundreds of thousands of workers. This free trade policy is being used to foster socialism in America through welfare and subsidy programs.We oppose all international trade agreements which have the effect of diminishing America’s economic self-sufficiency and of exporting jobs, the loss of which impoverishes American families, undermines American communities, and diminishes America’s capacity for economic self-reliance, and the provision of national defense.We see our country and its workers as more than bargaining chips for multinational corporations and international banks in their ill-conceived and evil New World Order."

I told you it was conspiracy nonsense.  The "ill-conceived and evil New World Order," and capitalized!   Economic self-sufficiency?   It all started going downhill after the repeal of Smoot-Hawley.  Yikes!
And, of course, there is immigration:
"We affirm the integrity of the international borders of the United States and the Constitutional authority and duty of the federal government to guard and to protect those borders, including the regulation of the numbers and of the qualifications of immigrants into the country.Each year approximately one million legal immigrants and almost as many illegal aliens enter the United States. These immigrants – including illegal aliens – have been made eligible for various kinds of public assistance, including housing, education, Social Security, and legal services. This unconstitutional drain on the federal Treasury is having a severe and adverse impact on our economy, increasing the cost of government at federal, state, and local levels, adding to the tax burden, and stressing the fabric of society. The mass importation of people with low standards of living threatens the wage structure of the American worker and the labor balance in our country.We oppose the abuse of the H-1B and L-1 visa provisions of the immigration act which are displacing American workers with foreign.We favor a moratorium on immigration to the United States, except in extreme hardship cases or in other individual special circumstances, until the availability of all federal subsidies and assistance be discontinued, and proper security procedures have been instituted to protect against terrorist infiltration."
The immigrants are going to take our jobs and lower our wages.   For libertarians, this is all just wrongheaded.   Of course, many conservatives probably support this.
The Constitution Party is all in favor of banning gambling, drug abuse, and pornography.   Though they thankfully seem to understand that it is up to state and local governments to carry it out, though the Federal government is going to keep drugs from entering the U.S.   This is all anti-libertarian.   Of course, conservatives may like this better than libertarian tolerance.
The platform also calls for outlawing fractional reserve banking.   Thankfully, it does no more than mention in passing that the Federal Reserve is private before calling for it to be banned.   They call for a debt free and interest free monetary system.    While not anti-libertarian like banning fractional reserve banking, it is plainly pointing to bad monetary theory as Castle also discusses in his audio file.   
As for taxes, they are all about the "tax patriot" nonsense, expressly claiming that the 16th amendment does not do what it plainly was meant to do--allow for a personal income tax.  They support a corporate income tax.  Why?  More tax patriot nonsense.   Is such a tax good?   Who cares?  The Supreme Court decision allowing such a tax plays a role in the wacky theories that wages are not subject to income tax.
Frankly, when I read the Constitution Party website, I begin to wonder if Donald Trump hasn't been reading it too. 

Saturday, July 30, 2016

Governor Johnson on Religious Liberty

Governor Johnson strongly favors religious liberty, but he does not favor federal legislation to protect Christian business people who wish to boycott gay weddings.    Such legislation would use federal government power to carve out an exception to anti-discrimination laws enacted by some state and local governments that prohibit discrimination based upon sexual orientation.

Governor Johnson has not made this a major issue of his campaign.   "Vote for Johnson to protect  gay people from the religious right's effort to restrict their right to have wedding cakes or photographers. "    

And while Ted Cruz ran on a platform of ending gay marriage along with getting the Federal government behind the boycott, he lost the primary.   The nominee of the Republican party, Donald Trump, is pro-gay marriage.

So, what is the issue?   It is just a line of attack Trump supporters are using against Governor Johnson to keep religious conservatives in line.

Gary Johnson is not Ted Cruz.   Get over it.

This attack was started in the Libertarian nomination contest.   Johnson favors existing civil rights laws.    His hardcore opponents argue that businesses should be allowed to discriminate on whatever basis they choose.  For example, Ford Motor Company should be able to initiate a "whites only" hiring policy.   

One of his opponents asked if anti-discrimination laws would require a Jewish baker to bake a cake for Nazis.   Johnson said yes it has that implication and went on to express concerns that a public utility might refuse service to a Muslim.  

Later, Johnson said that the first amendment protects Jewish bakers from baking pro-Nazi cakes.  

It is dishonest to take Johnson's passing remark, "yes it has that implication," and transform it into the view that Johnson wants to force Jews to bake cakes for Nazis.   It is rather that the prospect of that happening is not enough to convince him to favor the repeal of all laws against private discrimination based upon race, color or creed, or even to provide an exception to those laws based upon religious conviction.

If the Libertarian Party had nominated one of Johnson's opponents, we probably would be hearing next to nothing about the candidate.   However, I prefer having a candidate who will not get trapped as did Senator Paul into criticizing the 1964 civil rights act.   Senator Paul wisely backtracked on his public skepticism about the prohibition of private racial discrimination.    

My own view is that churches should be free to insist on whatever criterion they wish for marriages--that includes both the clergy and places of worship.   I am sure Governor Johnson agrees and he should state that every time this comes up.  

I believe that Christian bakers and photographers should joyfully serve gay couples.   Even if gay marriage is contrary to God's Law and sex outside of heterosexual marriage is a sin, Christian merchants should be out in the world, not cloistered away.   Our Lord provided the example and had no part in shunning sinners.   Witness the Word.   If you feel that preparing a cake or even going to a wedding to take photos would be a trial, it probably won't be too much of a problem in practice if you start with, "I will be glad to have your business, but perhaps you should know that I believe the only real marriage is between a man and a woman and that any sexual activity outside of marriage is a grave sin.  Now that we have that out of the way, how can I help you?"   

I also believe that gay couples should not try to compel people who don't approve of them to participate in their weddings.  If some vendor says they don't want your business, why not find someone who does?   This seems especially relevant if you are looking for a personal service from a small business.     It is hard to avoid the impression that these anti-discrimination cases regarding gay marriages are less about getting services and more about punishing people for their political views.   Is that really what you want to do?   Isn't it better to live and let live?

I strongly agree with Governor Johnson that public utilities, even when privately owned, should not be able to discriminate--especially when they have an exclusive franchise monopoly.   But I think it is worth considering whether modifying anti-discrimination laws to allow an exemption for small businesses involved in personal services is the least bad option. 

I don't think that there should be some kind of rush to get federal legislation to overturn state and local discrimination laws as applies to vendors with religious objections to gay marriage.  I am glad that Governor Johnson has not jumped on board that religious right talking point.   But it is possible to be a bit more nuanced in opposition.  I certainly wouldn't make sweeping claims about the dangers of discrimination.

I don't favor federal legislation to prohibit discrimination against gay couples seeking wedding cakes or photographers for their weddings.    I wish Governor Johnson would not imply that he does.

In my view, there are many important issues before the United States.  I don't agree with Gary Johnson on everything.   But he is by far the best candidate seeking the Presidency.

Friday, July 1, 2016

A Scarcity of Rents?

One common fallacy is the notion that jobs are scarce and so it is important to protect jobs.

Labor is scarce, so there are more than enough jobs for people to do.

If labor is to be used to produce as much as possible of whatever it is that people consider most important, then sometimes what labor is used to produce must shift due to new opportunities.

In a command economy that would occur by people being transferred from less important tasks to more important tasks.

In a market economy, what happens is that people lose jobs and have to find new ones.   It isn't that they have done anything wrong.  And it is unlikely that that their old jobs producing nothing of value at all.  It is rather than their time can be better spent doing something else.

Fortunately, the long run trend has been for labor to be compensated by more and better goods and services.   Unfortunately, for some workers sometimes, there might be a set back and they end up in new jobs that provide less than the old jobs, at least for a time.  

And while this could be a consequence of competitive markets, it might sometimes be the result of a loss of rents.  

For example, suppose the steel industry is unionized.   The steel workers earn rents mostly at the expense of those who use products that include steel.   Somewhat fewer of those products are purchased, less steel is produced than otherwise, and fewer steelworkers are employed.   Displaced steelworkers find other work, slightly depressing wages in the rest of the economy.   That extra labor results in more production of other products and slightly reduced prices of those goods and services that utilize less steel.   Steelworkers earn higher real incomes and a less efficient allocation of resources results in slightly lower real incomes for everyone else.

Now, suppose foreign steel producers begin to expand their market share.   Domestic steel production and employment contract.   The displaced workers find other jobs and produce more.   More steel and more other goods and services are produced increasing total economic well being.   But some of the steel workers have lost their rents.  

Suppose the rents collected by the steelworkers makes it profitable to introduce labor saving technology--something that would be too expensive if steelworkers earned a competitive wage.   More steel is produced and the unionized steel workers that are displaced find other jobs and produce other goods and services.   Total output and income increase.   But some of the steelworkers have lost their rents.

So, labor is scarce.  Jobs aren't scarce.  But perhaps rents are scarce.

Monday, June 6, 2016

Kimball's Reading List on Negative Interest Rates

Here is a reading list on negative interest rates developed by Miles Kimball.

He responds to Stiglitz here.

Stigliz provides a series of arguments against low interest rates here.

My framing of monetary institutions and interest rates is far different from Stiglitz and Kimball.   In my view, their framing is too much dependent on the current fashions of central bankers--setting "the" interest rate to manipulate economic growth/unemployment and inflation.    Even so, Kimball hits the right notes--twisted just the right way, his arguments can be seen as being about what is needed to maintain monetary equilibrium.   Stiglitz just goes deeper and deeper into is dirigisme.   Keep interest rates high so that firms won't substitute capital for labor?  Wow.

In my view, if the supply of short and safe assets is low and the demand is high, the prices of those assets should be high and the yields low.   If negative nominal yields are necessary to clear those markets, then negative nominal yields are best.