Debt limit nonsense

The sky’s the limit

Some things are stated as fact which are nothing of the kind. Right up until the Congressional deal raising the debt ceiling news anchors were parroting that without it the United States government would default. This is nonsense.

Over the next year the US government will take in around $3 trillion in taxes. The interest payments on its $16.9 trillion debt in that period are estimated at around $240 billion. As long as its income is greater than its debt repayments there is no reason whatsoever why the US government should default on those debt repayments.

It may choose to do so, deciding to anger China rather than domestic recipients of Federal money, but there is nothing automatic about it. But at some point the US government will default on somebody.

Since 2002 US government debt has risen from $6 trillion to nearly $17 trillion, a rise of 183%. Under George W. Bush it increased at $625 billion a year, and in 2008 Senator Obama was moved to declare “That’s irresponsible. It’s unpatriotic.” Under President Obama that debt has increased by $900 billion a year. It now stands at around 73% of GDP, or $131,368 for every man, woman, and child in America. Even with record low interest rates, by 2015 repayments on this debt will come to $50,000 a year for each American family [1].

And the situation is forecast to get worse. The Congressional Budget Office’s September 2013 Long-Term Budget Outlook warns that government spending is set to outstrip revenues in each of at least the next twenty-five years with the gap opening from 2% of GDP at its narrowest point in 2015 to 6.5% of GDP at its widest in 2038, “larger than in any year between 1947 and 2008”. As a result, after a slight improvement between 2014 and 2018, Federal government debt as a percentage of GDP is projected to rise from about 75% to around 100% in 2038.

The CBO identifies the drivers of this increased spending and debt as “increasing interest costs and growing spending for Social Security and the government’s major health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies to be provided through health insurance exchanges)”. Spending on the “major health care programs and Social Security”, the CBO writes, “would increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years” and “The federal government’s net interest payments would grow to 5 percent of GDP, compared with an average of 2 percent over the past 40 years”.

The CBO’s conclusion is stark; “Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past”. Sadly for the taxpayers of 2038 these are just the changes President Obama and Congressional Democrats steadfastly refuse to consider.

But a refusal to see reality doesn’t make that reality go away. These sorts of figures are unprecedented in peacetime and unsustainable and as the saying goes, ‘If something can’t continue it won’t’. The essential problem is that the US government, as with other western governments, has made spending commitments its tax base cannot support. And a promise that can’t be kept won’t be kept. Drastic change will come to Medicare, Medicaid, and Social Security, not because of ‘evil’ or ‘heartless’ Republicans, but because of math, because there isn’t the money to pay for them.

The desperately sad truth is that Uncle Sam won’t keep his current promise to pay pensions, pay for medical care for the poor or the elderly at a given level because he won’t be able to. This will amount to defaulting on elderly and sick Americans, the only question is whether it happens through some entitlement reform (whether the Democrats want it or not) or through meeting these commitments with devalued dollars (over to you Janet Yellen). Either way, if ‘default’ means a repudiation of a promise of payment this will be America’s default. The US government has a choice about ‘default’ now, it won’t in the future.

[1] The Telegraph, 8 October 2013.

This article originally appeared at The Cobden Centre

Gold vs Silver – The 1896 US Presidential election

A photographic negative of recent election results

To the south are the debtors. With their incomes slumping and debt burdens rising they demand that the monetary authorities act, wanting a little inflation to ease the load. To the north are the creditors. Anxious that the rising wages from their manufacturing output will buy tomorrow what it will buy today they, by contrast, demand monetary discipline.

This is an apt description of contemporary Europe. It is, in fact, a description of the United States in the late 19th century. For the PIIGS we have the indebted farmers of the south and Great Plains demanding the inflationary coinage of silver. For the Germans, protecting the principle of (relatively) sound money, we have the bankers and industrial workers of the north-eastern states urging sound money and adherence to the gold standard.

The United States Constitution gave Congress the power “To coin Money, regulate the Value thereof, and of foreign Coin” and a Coinage Act was passed in 1792. This provided for the free coinage of silver and gold, a bimetallic system, with silver being coined at the rate of $1 for 371.25 grains of pure silver and gold at 24.75 grains of pure gold, a ratio of 15:1. This held while this mint ratio matched the market price ratio. But when, as was likely, they diverged then the metal undervalued at the mint flooded out and the other became the de facto monometallic money. After 1792 gold was undervalued and a de facto silver standard came about; after an alteration of the mint ratio in 1834 silver was undervalued and a de facto gold standard came about.

Messy and protracted attempts to restore convertibility after the Civil War inflation culminated in the fateful Coinage Act of 1873. Considering the controversy it would subsequently generate this Act passed rather unremarked but it was a clear break in American monetary affairs. While it allowed for free coinage of gold to resume in 1879 it said nothing about silver. This de jure demonetising of silver was little noticed as it had been de facto demonetised since 1834.

Two things returned the monetary question to prominence. One was a rise in the gold/silver ratio from around 16:1 in the early 1870s to 30:1 by 1896 owing to an increased international demand for gold and supply of silver. Another was agricultural hardship. Between 1872 and 1895 on a US Farm Average wheat prices fell by 59%. The price of cotton fell by 55.5% between 1881 and 1890. This crippled heavily indebted farmers in the south and Midwest.

There were two explanations for this. One credited dramatic agricultural productivity increases which saw cotton production increase by 111% and wheat production by 446% between 1859 and 1919. The activist Edward Atkinson wrote “[T]here is not a single commodity which has been subject to a considerable fall in price since 1873 or 1865, of which that change or decline in price cannot be traced to specific applications of science or invention…either to the production or distribution of that specific article without any reference whatever to the change in the ratio of gold to silver”

The other, favoured in agricultural areas, blamed a deflationary shrinkage in the money supply following the 1873 demonetisation of silver, which ‘Silverites’ called ‘The crime of 1873’. Figures emerged showing that money per capita in circulation had fallen from a peak of $31.18 in 1865 to $20.00 between 1875 and 1896. “Money in the business world and blood in the body perform the same functions and seem to be governed by similar laws” commented Illinois governor John Peter Altgeld, “When the quantity of either is reduced the patient becomes weak and what blood or money is left rushes to the heart, or center, while the extremities grow cold”

A succession of organisations arose seeking the remonetisation of silver at 16:1, a de facto silver standard. The most successful was the Populist Party under whose pressure the Democrats adopted a free silver policy in 1896. Both parties nominated Nebraska’s William Jennings Bryan for president that year. Bryan, gifted orator to his supporters, demagogue to his opponents, thundered famously at the Democratic convention in Chicago “You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold”. To Bryan his opponents were “creditors; they hold our bonds, and our mortgages, and as the dollars increase in purchasing power, our debts increase and the holders of our bonds and mortgages gather in an unearned increment”.

The Republicans raised the gold standard with little enthusiasm, their traditional economic panacea was protectionism. Their nominee, Ohio’s William McKinley, had made his reputation on the tariff issue. Unlike Bryan, he won the nomination thanks to diligent preparation. While Bryan stumped 18,000 miles round the country McKinley, reasoning “I might just as well put up a trapeze on my front lawn and compete with some professional athlete as go out speaking against Bryan”, stayed in Canton, Ohio. There he pushed the themes of the protectionism and sound money; “We know what partial free trade has done for the labor of the United States. It has diminished its employment and earnings. We do not propose now to inaugurate a currency system that will cheat labor in its pay”.

McKinley won. Just as silver had a popular constituency so did gold. It was found among industrial workers, many of them German immigrants, who saw their real wages increase by 18% between 1879 and 1889. When, in previously Democrat and heavily German Milwaukee, the Democratic candidate said that “gold, silver, copper, paper, sauerkraut or sausages” could serve as money Milwaukee went Republican.

And almost as soon as the election was over prices began to rise as new gold discoveries increased the money supply. Whether this was due to luck or equilibrating tendencies in the gold standard is still disputed.  And here, if not before, the historical analogy breaks down. There is no such light at the end of the Euro-tunnel.

This is an early draft of an article which appeared in The Salisbury Review

Cyprus: The ghost of the West yet to come

Get used to it

When the European Union (with German money) mounted its most recent bailout of Greece, one of the conditions was a 75 percent write down of Greek government debt. For the Cypriot banks, which had made loans to the Greek government totalling 160 percent of Cyprus’s GDP, this was disastrous.

With their capital bases smashed the Cypriot government felt obliged to bail them out. Lacking the funds to do so (in 2011 the IMF reported that the assets of Cypriot banks totalled 835 percent of GDP) it turned to the European Union (in reality Germany again) for a bailout.

The Germans are reluctant to lend money without conditions. If the terms of the bailout are accepted by the Cypriot parliament, in return for the €10 billion corporation tax will rise from 10 percent to 12.5 percent and interest on bank deposits will be subject to a withholding tax.

But the most controversial aspect is the proposal that bank deposits will be subject to a one off “solidarity levy”, amounts under €100,000 at a rate of 6.75 percent and those over €100,000 at 9.9 percent.

This is the eurozone crisis at its most extreme but it only differs from events in Ireland, Greece, Spain, Italy, and Portugal, by degree. And in as far as  government eventually has to tailor its outgoings to suit its income it is really just an extreme version of the situation which will also eventually face Japan, Britain, and the US, probably in that order.

So what lessons does Cyprus hold for those who still have all this to come?

The first concerns the relationship between banks and our politicians. Over the last few years politicians elected to represent the people have rarely missed an opportunity to dump debts on those people in the interests of saving banks and other financial institutions which have hit trouble. We have been told that banks occupy a unique position in our economy such that the laws of economics don’t apply to them as they apply to Woolworths or Blockbuster. They are too vital, we are told, too big to fail.

Functioning banks certainly are a key part of a modern financial system but why should the same be said of the toxic zombies who are blundering round the current financial landscape?

And how did these rotten banks get so big in the first place? It’s because governments and central banks prop them up. Bad banks rarely go out of business, they just lumber on, soaking up and destroying more wealth. Goldman Sachs and JP Morgan were bailed out five times in the 20 years before 2008.

The second lesson is that there really is no such thing as private property. In extremis the government considers itself entitled to any amount of your property it desires even if, as in the Cypriot case, it means revoking its own commitments to protect bank deposits.

But then this is the logical outcome of taxation. If you think that a shortage of government revenue can be solved by the government simply helping itself to someone else’s revenue you really can’t have a philosophical problem with this. If you believe in the 50p tax rate this is where you end up.

The third lesson is the limits of democracy. The Cypriot Prime Minister, Nicos Anastasiades, ran at the last election on a promise to protect depositors. Now he stands behind a lectern explaining why he cannot protect depositors. The greater a country’s debts the fewer are its options and in the euro, with no possibility of devaluation, this problem is exacerbated.

The Cypriots will probably feel much as the Irish or Portuguese did to have their economic policy decided by the Troika of the EU, the International Monetary Fund, and the European Central Bank. They may feel a touch like the Spanish or French did when they elected an anti-austerity candidate only to find that they get some measure of austerity anyway. They may end up feeling like the Greeks or Italians who skipped these intermediary steps and went straight to having their governments foisted upon them by the European Union.

This isn’t just a lesson for eurozone members. Labour currently lead in British opinion polls, appealing to soft-headed types who think that we can back to the big spending and even bigger borrowing days of Gordon Brown if only we tick the right box on a ballot slip. In the United States Barack Obama won re-election last year on the promise that the Chinese will continue to lend the US the money to live it up.

British and American voters might not have been slapped in the face with reality in the same way as the bottom half of the eurozone has thanks to their ability to trash their currencies, but it will come. Sooner or later they will be faced with the fact that a country cannot indefinitely live beyond its means and that voting for snake oil salesmen who tell you there is, is a sure fire recipe for disappointment.

The final lesson though, and perhaps the scariest, is that those in charge are no smarter than the average bloke in the street. It is difficult to find the words for the stupidity of trying to shore up Cypriot banks with a policy which will cause a run on those very same banks.

Cyprus offers a grim glimpse of a possible future for the wider western world: politicians who will sacrifice the people for banks, the expropriation of private property to pay for it, the diminishing options offered by the political process, and idiots in charge. Let’s hope they aren’t coming to a crisis near you.

This article originally appeared at The Commentator

No, he can’t

Not a great slogan when there’s a pile of crap up ahead

November 6, 2012 gave generations of American history students yet unborn a new standard exam question: how did one of the most ineffectual presidents in US history get re-elected?

Across the OECD countries since the financial crisis hit in 2008 incumbents have had a tough time. Britain, Spain, France, Italy Greece and Ireland have ditched leaders. How did Barack Obama buck this trend?

The pattern has been that economic realities have forced big-spending, heavily-indebted Western governments of whatever stripe to adopt some measure of spending restraint. Even when, as in Spain and France, parties have been elected in opposition to so-called austerity they have been forced into it once in office by the remorseless reality of economics.

Electorates haven’t liked this. They still appear to believe, as the current travails of Britain’s coalition and plummeting popularity of President Hollande show, that there is a magic money tree somewhere, that plenty can return and cruel financial reality be banished simply by ticking a different box on a ballot paper.

Whereas other elections since 2008 have pitched an “austerity incumbent” against a “fantasyland challenger”, in America the roles were reversed. Obama, the incumbent, peddled fantasy; his challenger, Mitt Romney, offered some semblance of reality. Looked at this way the post-2008 pattern was maintained: the fantasy candidate won.

But it won’t make any difference. The people who celebrated Obama’s victory, thinking they had saved entitlement programmes like Medicare, Medicaid and Social Security from Republican cuts, are deluding themselves. America’s unfunded liabilities, including these programmes, rose by $11 trillion last year to $222 trillion. To put that in context, the entire US economy is just $15 trillion, of which $3 trillion a year is paid in tax. If you expropriated all the wealth of the richest 400 Americans, as some Obama supporters appear to suggest, the $1.7 trillion you would get wouldn’t make a dent.

Those programmes will not be saved by Obama’s waffle. They will die because there is no money to pay for them and there won’t be, no matter which box you tick. That is the lesson of the last few years and it is one the US is going to learn. The laws of economics have a habit of being enforced with the doggedness of Inspector Javert and the merciless brutality of Dirty Harry.

This article originally appeared in Standpoint

Obama’s economic failure


For a man famed for his rhetoric the tweet was simplicity itself: “Four more years”. Indeed, I thought, four more years of high unemployment and economic stagnation.

For the second time Barack Obama had beaten an opponent who understood more about economics than he did. In 2008 John McCain admitted he didn’t “really understand economics” yet in June that year he said,

“We are borrowing from foreign lenders to buy oil from foreign producers. In the world’s capital markets, often we are even borrowing Saudi money for Saudi oil. For them, the happy result is that they are both supplier and creditor to the most productive economy on earth. For us, the result is both dependency and debt. Over time, in interest payments, we lose trillions of dollars that could have been better invested in American enterprises. And we lose value in the dollar itself, as our debt portfolio undermines confidence in the American economy”

Intuitively, McCain had grasped that America could not keep swapping devalued dollars for foreign goods and services.

Obama, meanwhile, gave a speech saying

“I’m not talking about a budget deficit. I’m not talking about a trade deficit. I’m not talking about a deficit of good ideas or new plans. I’m talking about a moral deficit. I’m talking about an empathy deficit”

So Obama had named five deficits, only three of which were real, and he was going to talk about the two that weren’t. This was typical of the sort of overripe guff soaring rhetoric which enraptures Obama’s supporters. It makes you feel good as long as you don’t try to figure out what it means.

And again, this year, Mitt Romney gave a speech saying

“I met with (former head of Goldman Sachs and the New York Federal Reserve John Whitehead), and he said as soon as the Fed stops buying all the debt that we’re issuing—which they’ve been doing, the Fed’s buying like three-quarters of the debt that America issues. He said, once that’s over, he said we’re going to have a failed Treasury auction, interest rates are going to have to go up. We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.” It’s just made up money, and this does not augur well for our economic future.”

Romney was dead right about the parlous state of US finances but, in the same speech, he made his remark about ‘the 47 percent’ and this was drowned out.

Obama, meanwhile, released an ad saying

“Now Governor Romney believes that with even bigger tax cuts for the wealthy, and fewer regulations on Wall Street, all of us will prosper. In other words, he’d double down on the same trickle-down policies that led to the crisis in the first place

Obama thinks this despite the fact that Bush’s deficits were driven by spending increases and not tax rises. There is no mention of loose Federal Reserve monetary policy. There is no mention of political action which pushed banks to lend to marginal borrowers.

Obama’s faulty prognosis follows from his faulty diagnosis. America, he believes, can tax and spend its way back to prosperity.

Well, he tried the spending. In February 2009 the $831 billion American Recovery and Reinvestment Act came before Congress. If the ARRA was passed, President Obama promised, unemployment would peak at 8 percent in late 2009 and would fall to a little over 5.1 percent by October 2012. He painted a doomsday scenario if the ARRA wasn’t passed; unemployment would peak at 9 percent in 2009 and by October 2012 would still be at 5.5 percent.

The act was passed. Unemployment peaked at 10 percent in October 2009 and in October 2012 was 7.9 percent. In other words, even with Obama’s $831 billion package, unemployment peaked later, peaked higher, and remains higher than in the doomsday scenario he said would befall America if the ARRA wasn’t passed. Unemployment was wedged above 8 percent for 43 consecutive months, the longest period since the Great Depression. The American economy underperformed even Obama’s own worst case scenario.

But even these dreadful figures might not tell us the whole story. America’s unemployment figures are notorious for their unreliability. Those who just stop looking for work are not counted as unemployed. So many Americans lost hope of finding a job in Obama’s America that in September 2012 the Labor Force Participation Rate fell to its lowest since 1981. If the LFPR was the same as when Obama took office unemployment would be a staggering 10.6 percent.

And even this might understate matters. If unemployment was measured now the same way it was in the 1930s, today’s level would be higher than in any single year of the Great Depression. That is why Obama didn’t run on his record; it’s awful. Instead his pitch was ‘Give a guy a second chance’ like some desperate ex-boyfriend.

And now he’s going to try taxing. But here’s the problem: last year the Federal government’s unfunded liabilities, which includes Social Security, Medicare, and Medicaid, all programs Obama has no plans to reform, increased by $11 trillion to $222 trillion. To put this in context, the entire American economy is just $15 trillion. If you expropriated the entire wealth of the richest 400 Americans and left them on food stamps you would take $1.7 trillion – it wouldn’t make a dent. All Americans will face huge tax rises.

F. Scott Fitzgerald said that there are no second acts in American lives. Obama must hope he was wrong. As Jay Leno put it, “Economists say we’re heading for a fiscal cliff and we elected a guy whose campaign slogan is ‘Forward!’” Barack Obama: the Thelma and Louise President.

This article originally appeared at The Commentator

Bernanke stuck in a bunker

…QE4, QE5, QE6…

At a celebration of Milton Friedman’s 90th birthday in 2002, Ben Bernanke, then a newly appointed member of the Federal Reserve Board of Governors, said “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again”

Bernanke thought Milton had been right about the Great Depression. Until the early 1960s the common interpretation of the Depression was the Keynesian one, such as that put forward by Peter Temin, where a switch in “animal spirits” had caused aggregate demand to collapse. Then, in 1963, Friedman and his colleague Anna Schwartz produced a radical new interpretation in A Monetary History of the United States, 1867 to 1960.

In this mammoth, exhaustively researched book, Friedman and Schwartz argued that far from money being “neutral”, as was thought at the time, fluctuations in the money supply were closely linked to fluctuations in output. So, if you wanted to stabilise output you had to stabilise the money supply. Monetarism was born.

But the book’s centrepiece – so much so that it was released separately as a book in itself – was that covering the onset of the Depression, “The Great Contraction”. Here, Friedman and Schwartz claimed that a common or garden down turn (brought on by the tightening of monetary policy from 1928 which, they said, had triggered the Wall Street Crash) was turned into a Depression by the Federal Reserve allowing the money supply to shrink by a third between 1929 and 1933.

This, it was argued, had increased the real debt burden of businesses and individuals. As the money supply fell so did prices, this was deflation. Anyone who had debt to service had to service debts of fixed nominal amounts which had grown in real terms as the deflation set in, with money which had shrunk in value at the same time.

Though Friedman subsequently became linked with the fight against inflation he was also concerned about deflation. Friedman argued that a money supply which neither shrank nor grew too fast was needed to bring about the monetary stability which he saw a necessary precondition for economic stability.

So while, in the 1970s, Friedman advocated slowing the increase in the money supply to tame inflation, in the early stages of the Depression, he and Schwartz argued, the Federal Reserve should have fought deflation by expanding the money supply.

That the Federal Reserve didn’t do this was, to Friedman, the cause of the Depression. It was the supposed truth of this insight that Bernanke was acknowledging in 2002.

Ben Bernanke spent his academic career studying the Depression from a Friedmanite perspective, producing a dull but worthy book on the subject. When he took over from Alan Greenspan at the Federal Reserve in February 2006 the Great Moderation was still in full swing but when the downturn came in 2008 it would have been hard to find a more qualified man to have at the helm. It was a case of cometh the man cometh the hour.

In September 2008 Lehman Brothers collapsed, banks everywhere looked vulnerable and began hoarding cash. The US broad money supply collapsed. Bernanke acted quickly to apply the lessons of the Depression he had learned from Friedman. As one reviewer of his book put it, “He is practicing today what he preached in his book: Flood the system with money to avoid a depression.”

The Fed Funds rate, which had already been reduced from 5.25 percent in early 2007 to 2 percent when Lehman tanked, was cut further to a range between 0 percent and 0.25 percent by the end of 2008 where it remains today. Still, the money supply contracted.

In November 2008 Bernanke launched QE1. Changes in the Fed Funds rate are facilitated by the buying and selling of short term dated securities to alter short term interest rates. Quantitative Easing works the same way except via the purchase of long term dated securities so as to bring down longer term interest rates.

QE1 was an unprecedented attempt to infuse tottering banks with liquidity and shore up the money supply. By the time it came to an end in March 2010 the Federal Reserve had bought $1.75 trillion of mortgage-backed securities.

But still the money supply kept falling so in November 2010 Bernanke initiated QE2 which involved the purchase of $600 billion of Treasury securities. By the time QE2 docked in June 2011 the money supply had stopped shrinking. Indeed, it had returned to fairly brisk growth. Bernanke had made the moves straight out of Friedman’s playbook and staved off deflation.

But, apart from the Federal debt, the money supply was all that was experiencing brisk growth. GDP was slowing and unemployment remained stuck over 8 percent. Bernanke, with a theory of fighting inflation, was now coming under pressure to boost growth and employment.

He took over a year to arrive at his decision but last week Bernanke rolled the dice on QE3, an open ended commitment to spend 40 billion newly created dollars a month on mortgage backed assets until, well, until something turns up.

If you are going to do a job you need the appropriate tools. QE and the mass monetary intervention executed so far by Bernanke were designed to stop the money supply contracting. Eventually it did. But the money supply is not now contracting, it is growing. QE is totally inappropriate now even on Monetarist grounds.

In desperation, with the economy stagnating and fiscal policy at its capacity, Bernanke, to the great relief of the Obama administration, is deploying a policy tool conceived and designed to achieve stability of the money stock, to boost the real variables of output and employment. Increasingly Bernanke resembles a golfer with one club. He’s stuck in a bunker and all he has is a driver.

This article originally appeared at The Commentator

Barack Brewster’s Millions

Who ya gonna call in November?

Films have often been vehicles for communicating complex ideas and philosophies in coded parables. The dreary films of Marxist filmmaker Ken Loach aren’t much more fun than ploughing through all three volumes of Das Kapital but they do, at least, take less time.

When, in The Shootist, John Wayne’s character, J B Books, says “I won’t be wronged, I won’t be insulted, and I won’t be laid a hand on. I don’t do these things to other people, and I require the same from them”, he was saying roughly what it took Robert Nozick 300 pages to say in Anarchy, State, and Utopia.

But I wasn’t expecting any such heft when I sat down to watch Brewster’s Millions at the weekend. As a child of the 1980s I might have seen this film around 20 times but this time I noticed something new in it; it is a parable for Keynesian economics.

It tells the story of washed up baseball player, Montgomery Brewster (Richard Pryor), who is left $300 million by an eccentric relative. There is one catch: first he has to spend $30 million in 30 days with absolutely nothing to show for it; “you’re not allowed to own any assets. No houses, no cars, no jewelry. Nothing but the clothes on your back!”

Brewster uses a raft of tricks to spend this money, some of which will be oddly familiar to anyone who has been watching economic policy making over the last few years.

Brewster’s first act is to go on a hiring spree offering vastly inflated wages. No, not public sector employees, but a team of security guards. Later he gets into his very own crackpot environmental, or ‘green tech’, scheme when he buys an iceberg with the aim of floating it to the Middle East to bring relief to supposedly drought stricken Arabian farmers.

“What thirsty Arab farmers?” his friend Spike (John Candy) asks, “There aren’t any, because there aren’t any farmers in the desert!” If only John Candy had been on hand before Barack Obama blew $535 million on Solyndra.

Finally he hosts an expensive exhibition game between his old team, the Hackensack Bulls, and the New York Yankees. The Bulls are kitted out in new uniforms and flown in by helicopter. Brewster should, of course, have re-designated some of the major roads in New York as special lanes for his game; then he could have wasted as much money as the London Olympics.

If it sounds fanciful to see any economics in this flurry of pointless spending, consider the words of John Maynard Keynes himself:

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is”

A different attitude to wealth creation is on display in one of the classics of 1980s cinema, Ghostbusters.

Three government employees spend their days trying to seduce their students with phony experiments and running away from ghosts. When this dismal level of productivity proves too low even for the public sector they are sacked and go private, though not without misgivings.

As Ray Stanz (Dan Aykroyd) warns Peter Venkman (Bill Murray), “Personally, I liked the university. They gave us money and facilities. We didn’t have to produce anything! You’ve never been out of college. You don’t know what it’s like out there. I’ve worked in the private sector. They expect results.”

Spotting a gap in the market (“We are on the threshold of establishing the indispensable defense science of the next decade. Professional paranormal investigations and eliminations. The franchise rights alone will make us rich beyond our wildest dreams”) the three borrow some money and set up the Ghostbusters.

Soon they are raking in $5,000 a night, getting coverage from Larry King and Time magazine, and taking on a black member of staff, no affirmative action needed.

Then up pops Walter Peck of the Environmental Protection Agency. “I want to know more about what you do here” he demands. “Frankly, there have been a lot of wild stories in the media and we want to assess for any possible environmental impact from your operation, for instance, the presence of noxious, possibly hazardous waste chemicals in your basement. Now you either show me what’s down there or I come back with a court order!”

With Venkman an unlikely John Galt the government steps in, shuts down the thriving private sector enterprise, and the town is flooded with ghosts.

Where Brewster’s Millions is an object lesson in the wasteful uselessness of Keynesian economics, Ghostbusters is one of the most pro free market films ever made, a hymn to the genius of capitalism and the clumsy damage wrought by government.

Or, to quote another economist, Milton Friedman, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand”

These differing attitudes are on display in the US Presidential election. With the American economy slowing to stall speedthe question each of the candidates must answer is “Where is the growth going to come from?”

With his background in law and ‘community organising’ it’s no surprise that Barack ‘Brewster’ Obama doesn’t know, pinning his hopes on ever more government spending of the Solyndra sort.

Mitt ‘Venkman’ Romney, by contrast, is at least paying lip service to private sector led growth of the Bain Capital sort. The difference is that Bain made money and Solyndra went bust. Do Americans want their economy run by Monty Brewster or the Ghostbusters? That will be the question this November

This article originally appeared at The Commentator

America needs a president who prioritises growth over redistribution

“1 million, 2 million…er…”

I’m not a Mitt Romney supporter. He’s certainly less objectionable than other Republican contenders like Rick Santorum or Newt Gingrich but it’s hard to get enthusiastic about a guy when, as the joke goes, he’s managed to be on both sides of every big issue in recent years.

Indeed, if I was asked to name the most impressive thing about Romney his luxuriant hair would be close to the top of the list. But the last week or so I’ve felt a little sorry for him. Yes, I’m feeling a little sorry for one of the richest 0.006 percent of Americans.

In the run up to the South Carolina primary a desperate Gingrich brought up the tax status of front runner Romney. Immediately the pressure was on for Romney to release his tax records. When he did the press screamed “Wealthy Romney reveals 14 percent taxes” What better example of greed?

Except it wasn’t actually true. Ever since billionaire investor Warren Buffett claimed that his tax rate was lower than that of his secretary there has been much debate about the ‘effective tax rate’ faced by the rich. But this ‘effective’ tax rate is made up of apples and oranges. As such it is a meaningless concept.

Romney, like Buffett, pays the top rate of income tax on his salary income, 35 percent. But, like Buffett, Romney derives much of his total income from capital gains, the profits made by investments, which are taxed at 15 percent.

The two types of income, wages for labour (yes, working for Bain Capital classes as labour for tax purposes) and income from investments, are very different. When you labour you are guaranteed your salary come what may. Even if your employer goes bust you are a preferential creditor; any wages owing to you will be paid out of whatever is raised by asset sales before other creditors see a penny.

Investment income is different; as the small print says, investments can go down as well as up. The risk of not receiving a return or income from your investment is much greater than for labour. It follows that if any investment is to be undertaken at all the reward must be high. Not only that, but the investment income that Romney pays 15 percent tax on comes from the profits of companies which have already paid 35 percent in Corporation Tax.

This is why income from labour and income from investment are taxed differently; they are different things. To lump them together and call it an ‘effective’ tax rate is useless.

But there is a deeper point here. From the dawn of man there have only been two ways to increase your wealth. One approach is to supply a good or service which someone else is willing to trade you for, and with both parties benefiting from the transaction everyone’s wealth increases. This is wealth as a positive sum game.

The other is simply to take the wealth generated by someone else; one only gets better off as another gets worse off. This is wealth as a zero sum game.

The obsession with Romney paying ‘only’ $6.2 million in taxes last year (more than 97 percent of Americans) shows that the second approach is gaining popularity. To some extent this is the predictable outcome of economic stagnation. When wealth is growing you don’t worry so much that guy next door is richer than you because you will be richer tomorrow anyway. But when your wealth is shrinking or stagnating, the difference between you and the guy next door becomes a yawning chasm.

Historically the belief, which grows in times of economic hardship, that wealth is a zero sum game and can only be obtained by taking it off somebody else, has led to disaster. In the last century the Germans, Soviets, and Ugandans, to name just a few, all came to think that the Jews, the Kulaks or the Asians had wealth that rightly belong to them and that they would become rich if only they could get their hands on it.

Comparing rich Americans like Romney to those persecuted groups will sound a little shrill, even distasteful to many. But if we become obsessed with who gets what sized slice of our shrinking wealth cake we might forget to just go and bake a bigger one. What America and other countries need is not destructive zero sum envy but growth. And they need real growth, not the unsustainable debt based fantasy of recent years.

There are many who will tell you that further growth is impossible, that the planet is ‘maxed out’. They have been making this prediction since at least Thomas Malthus wrote his Essay on Population in 1798. These people consistently underestimate the one truly inexhaustible resource at humanity’s disposal; its ingenuity.

President Obama said recently that “This is the defining issue of our time” He is right but he is on the wrong side of it. His recent State of the Union speech was heavy on plans to divide wealth up, but lighter on ideas of where this wealth might come from in the first place. And wealth has to be generated before it can be redistributed.

We must hope that the politics of growth wins out over the politics of envy. With his background in community organising and politics, roles all about the spending of money generated by others, it is not surprising that Barack Obama prioritises redistribution. With his career turning round failing businesses Mitt Romney, however imperfectly, leans towards growth.

America needs a president who prioritises growth over redistribution so that the social balm of increasing wealth can work its magic; so that, as an earlier eloquent Democrat put it, a rising tide can lift all boats.

This article originally appeared at The Commentator

A roundup

Snowed under

Its been a busy few weeks. Christmas and new year saw me in the States and since I got back I’ve been hard at work (round the job) on a project. Watch this space and all that…

Ive scribbled a couple of things though which have sort of fallen between the old blog and here. The Commentator, for which I’m Contributing Editor, has carried a couple of my articles this month. First was The economic reality of 2012, a look at the prospects for the global economy in the coming year. Its grim reading but then I think it will be a grim year.

Next up came an article on the coalition government’s attempts to cap the amount of benefits a family can receive to the level of the average national wage. This is such a no brainer in terms of fairness that you wonder how anyone has the gall to oppose it but there you are. I should add that The Commentator have changed the title of every item I have ever sent them. Not this time though, so read up on Why Britain is f*****

I also occasionally contribute to Global Politics and with the US Presidential race revving up I pondered the tricky question of the foreign policy of my favoured candidate, Congressman Ron Paul. Reading is most recent book I found myself wincing at times but I can put that to one side this election because the big question is not whether the US should bomb Iran but whether it will be able to afford to. Anyway, you can read all about it in the unimaginatively named Ron Paul and Foreign Policy

I enjoy writing for Middlebrow Magazine under a non political pseudonym. I try and steer clear of the sorts of topics I cover elsewhere and cover other interests like film, drama, music etc. But my article Animal spirits, Asymmetries and Austrians is a run down of some of the most popular of the spate of recent books on the economic crisis.

That’s all for now. More old rubbish is on the way so, in the words of Shaw Taylor, keep ’em peeled.


9/11 – Ten years on

I was back from university for the summer and working in my local pub. I worked in bars at uni so I’d been given the responsibility of going in at 10am to get the place ready for opening at 11am. It was quiet. The pub had been my regular for a few years and I was always struck by how different the old 16th century building could be when the only noise was the low, soft hum of the fridges and the clanking cleaners bucket.

It was, everyone remembered afterwards, a beautiful, bright clear autumn day. I carried the pub billboard onto the pavement out front and looked around the benches scattered around the town centre. Everyday from about 10:45am onwards they would be occupied by the regulars waiting to come and assume their usual perches at the bar at the stroke of 11 o’clock. Today was no different.

The regulars were all in that day. A retired gardener everyone called ‘Greengrass’ who never bought his own drink, a guy who had one day a week with his kids and would bring them in and plomp them in the corner with a coke while he drank with his pals, two old ladies who drank half a pint of Stella with a dash of lime each.

Around 2pm another regular came in, Rocky they called him because he looked like Neil Morrissey in ‘Boon’. He was a postman just off his rounds. “Pint of four X” he asked before saying “And turn the tele on, there’s been a plane crash in New York, it was on the radio in the van”

I flicked on the big screen we used for sports. It went straight to BBC 1 and I was about to switch to a news channel when I saw that they were already covering it. Whatever had happened was big.

There, billowing smoke silently on the screen was one of the Twin Towers in New York. Behind me, at the bar, the regulars shifted on their stools for a view, except for Greengrass who was wondering where his next pint was going to come from. “Fucking hell” I remember all of them saying. They fell silent when the shot changed and showed the second tower also pouring smoke into the clear sky.

Speculation started immediately. One suggested rockets, another that one plane had hit both towers. Soon the TV news showed both wrong. As two separate planes were shown hitting each tower in turn we all realised that this was an attack.

While I had been working, while the regulars had been drinking, 3,000 people had been murdered in New York City.

A decade has passed since then. It’s been a decade which has seen more murders committed in the same cause that drove the 19 killers of 9/11. In Madrid, Bali, Mumbai and London, fanatics have seen fit to murder people who never harmed them to further their own agendas.

It’s been a decade which has seen military action on a scale few expected to see again after the end of the Cold War. In the immediate aftermath of 9/11 a broad coalition of countries went with the United States into Afghanistan to topple the Taliban government which had sheltered the inspiration for the attack, Osama Bin Laden. At the end of that decade many of those countries are still there.

In 2003, with the war in Afghanistan still going, the United States led a smaller coalition, including Britain, into Iraq to topple Saddam Hussein. Less clearly justified by 9/11 this was always more controversial.

It has been a decade where, until the financial crisis hit, the attacks of 9/11 and the responses of the various actors defined the political landscape. Your attitude to terrorism and the ‘war on terror’ were the standard against which your politics and your personality were judged.

What have we learned in this decade? Not as much as we should have. People are generally rather good at learning the lessons they wanted to learn. For the neo cons who had been speculating on intervention in the Middle East even before 9/11 the lesson was that they should intervene in the Middle East. For the left, which had always opposed anything the United States had done, the lesson was to oppose anything the United States did.

The one undeniable lesson was that in the 21st century mans capacity for cruelty to his fellow man remained as great as ever. But it also taught that his capacity for compassion for his fellow man and for sacrifice remained as great as ever.

Consider a man like Pat Lyons, a fire fighter from Brooklyn who left his heavily pregnant wife to go to work that morning. When the call came he selflessly ran into the burning North Tower to save the lives of total strangers because it was his job. Pat Lyons never saw his son, Patrick, who was born on October 7th 2001. He was one of the 343 New York fire fighters who died at the World Trade Center.

Compare this to the cruel and selfish actions of Mohammad Atta, murdering to get his hands on 72 virgins. But there were more of the selfless than the selfish, more fire fighters than hijackers, more heroes than villains even on that awful day.

On that morning ten years ago today as I worked at the Swan Geoffrey Campbell went to a conference hosted by a publishing company at the World Trade Center. A couple, Dinah Webster and Neil Cudmore, who were planning to marry, were working alongside each other there. So were brothers Andrew and Tim Gilbert. Vincent Wells who worked for Cantor Fitzgerald on the 104th floor of the North Tower was celebrating his 23rd birthday. Christine Egan went to visit her brother Michael who worked on the 100th floor of the South Tower. Graham Berkeley was on United Airlines flight 175 from Boston to Los Angeles. All of them were British.

They all died that day. In total 67 Britons died in lower Manhattan on September 11th 2001 making it the deadliest terrorist attack in British history.

This wasn’t an attack on America it was an attack on a way of life. 9/11 wasn’t about blowback, Imperialism or Israel. It was about people like us living like we live who were killed out of the clear blue sky. Remember them today.