Global warming alarmism fizzles: what's the NEXT NEXT thing big government must solve before society implodes?

Global warming alarmists will have to find another excuse to justify begging big government to rescue human society.  I see in OWS another alternative:  the idea that rising wealth inequality risks the implosion of modern society. 

Shouldn’t the government do something to fix rising wealth inequality.  Isn’t wealth inequality bad??!!? 

Wealth inequality isn’t bad or good per se.  it is a natural feature of all market economies.  THat isn't to say wealth inequality can never be stretched to a point that becomes a serious social and economic problem.  we see social and economic stresses from excessive income inequality in Latin America and increasingly in China and of course in the US.  The cause of income inequality, however, is NOT the free market.  the market doesn't DO anything.  the market facilitates specialization and division of labor and free exchange which makes everyone wealthier.  As people specialize labor and accumulate wealth, income inequality naturally results in a health economy.   The cause of unhealthy income inequality IS NEVER THE FREE MARKET.  the free market can't favor some over others.  

The rich get richer and the poor get poorer when the government gets in the game of choosing winners and losers.  the market can't determine winners, but the government can!!!  we can blame the evil market for failing us when income inequality rises, but the cause of whatever is "excessive" income inequality (beyond what is the natural rate of inequality) must be some well intended government intervention.   regulations, redistribution schemes, central banking (easy money) are all ways that government funnels power and wealth to politically connected special interest groups. 

So hear it is one more time:  the cause of what i would call "exaggerated" wealth inequality (like we see in LATAM or China or the US) isn’t caused by the “free market.”  The free market will always result in wealth inequality.  That is a fundamental nature of markets.  people with different skills pursue comparative advantage are going to end up with different income levels and wealth accumulation.  but the market system increases EVERYONEs standard of living over time by driving sustained productivity gains!!!   you can't get sustained productivity gains without division of labor and private property.  if you start with division of labor and private property you will end up with a society that has some natural wealth income inequality distribution.  Wealth inequality is not a market failure.  

Wealth inequality is a market feature.  Wealth inequality only becomes a problem when the government starts to intervene in the economy ostensibly to fix other market failures, but really to accumulate power via currying favor with special interest groups.  the more power government accumulates, the more it is able to funnel wealth and power to special interests ... and so on in a never ending cycle of government gaining power and sharing it with special interests.  special interests have special access to rent seeking activities --- and wealth inequality goes up.  

the market doesn't fail us.  WE FAIL THE MARKET  when government interventions ostensibly aimed at fixing a market failure -- BUT REALLY aimed at currying favor with special interest groups -- create systemic distortions.  

there are no free lunches in life except through free trade.  the sort of free lunches promised by government (e.g. free education, universal health care, free cradle to grave safety nets, level playing fields, stable markets, etc, etc.) are Utopian fantasies;  there are only trade-offs and hard work.   

society doesn't get to enjoy the benefits of free trade (standard of living increases driven by productivity gains) without the natural features that come along with free trade.  free trade / capitalism naturally results in industrial pollution, creative destruction, income inequality, asset bubbles and other "negative" features.  but these features SHOULD NOT be mistaken for market failures.   NAtural disasters such as hurricanes are features of the earth biosphere;  we cannot get rid of hurricanes any more than we can get rid of wealth inequality.  

If we want more income inequality there is going to be a net negative trade off for society.  the government would have us believe the fantasy that since excessive income inequality is bad for the economy, then if we reduce income inequality via government intervention, we can kill two birds with one stone:  we can reduce a bad thing (income inequality) and improve the economy at the same time.

The real world doesn't work like this.  that is the same sort of logic that people use to support government subsidies for green energy.  we are supposed to believe that green energy is a win/win for society.  YEs, green energy is win/win WHEN THE outcome results from free MARKET processes.  As soon as the government gets involved with investment subsidies and new regulations promoting some new standard, the win/win result from market exchange turns into lose/lose. 

Government can't magically reduce income inequality or pollution or business cycles and it can't offer "free health insurance" and free education without also causing and triggering a massive wave of unintended consequences that overwhelm the well intended policy with negative results.

we've seen the result of public education:  it is a disaster for those from most disadvantaged households.  the poor are held hostage in a dysfunctional government monopoly.  why do liberals hate private monopolies but they love public monopolies.  the fact is monopolies can't survive in the private sector without some government mandate or support or barrier to entry.  public monopolies are insidious destroyers of public resources.   public education is designed to succeed by ostensibly well meaning public servants, but the result of any public monopoly is certain failure given the lack of feedback between success and failure in a system designed around a public monopoly.

Government can’t solve macro social problems.  As soon as government comes in to solve macro social or economic or financial problems, what happens next is that big labor, big business and/or big finance come in and hi-jack big government for their own selfish purposes. 

 Big government will always end up in bed with Big biz.  That is the nature of the two headed beast.  Trying to use big government to help protect the little guy is a contradiction in terms.     This is why OWS is so upside down.  OWS condemns the big government / big finance nexus on Wall Street, but then in the same breath OWS screams for big government to provide free education, free healthcare, more income equality …  Big government cannot deliver such Utopian wishes.  Big government ends up fueling the very income disparity and unfair playing field most condemned by the OWS crowd.

Should we throw our hands up at social problems?  Of course not.  We should pitch in and help on a local micro level.  We should contribute our time to a soup kitchen or help build a house or contribute time to a charity or become a big brother or a coach or help with a local fund raiser.  But, do not let government pass a law that commands society wide results or promises to eradicate poverty or that promises to reduce income inequality or that promises any other macro outcome. 

the best government can do is protect fair treatment under the law.  it cannot guarantee "fair" outcomes.  social justice is a myth.

As soon as we put government in charge of determining macro outcomes, we set in train a series of unintended consequences that – by definition – end up resulting in a net welfare decline for society as a whole.  Even worse, the  very so called "disadvantaged groups" that big government aims to help are the most vulnerable to unintended consequences of well intended policy.  the rich and politically connected will always be better off from well intended government policy while the poor suffer more, one way or the other. 

as they say, the road to hell is paved with good intentions.  that is where we are headed as long as we look to government for answers.

NOVEMBER 29, 2011

The Great Global Warming Fizzle

The climate religion fades in spasms of anger and twitches of boredom.

·         By BRET STEPHENS

How do religions die? Generally they don't, which probably explains why there's so little literature on the subject. Zoroastrianism, for instance, lost many of its sacred texts when Alexander sacked Persepolis in 330 B.C., and most Zoroastrians converted to Islam over 1,000 years ago. Yet today old Zoroaster still counts as many as 210,000 followers, including 11,000 in the U.S. Christopher Hitchens might say you can't kill what wasn't there to begin with.

Still, Zeus and Apollo are no longer with us, and neither are Odin and Thor. Among the secular gods, Marx is mostly dead and Freud is totally so. Something did away with them, and it's worth asking what.

Consider the case of global warming, another system of doomsaying prophecy and faith in things unseen.

As with religion, it is presided over by a caste of spectacularly unattractive people pretending to an obscure form of knowledge that promises to make the seas retreat and the winds abate. As with religion, it comes with an elaborate list of virtues, vices and indulgences. As with religion, its claims are often non-falsifiable, hence the convenience of the term "climate change" when thermometers don't oblige the expected trend lines. As with religion, it is harsh toward skeptics, heretics and other "deniers." And as with religion, it is susceptible to the earthly temptations of money, power, politics, arrogance and deceit.

This week, the conclave of global warming's cardinals are meeting in Durban, South Africa, for their 17th conference in as many years. The idea is to come up with a successor to the Kyoto Protocol, which is set to expire next year, and to require rich countries to pony up $100 billion a year to help poor countries cope with the alleged effects of climate change. This is said to be essential because in 2017 global warming becomes "catastrophic and irreversible," according to a recent report by the International Energy Agency.

Yet a funny thing happened on the way to the climate apocalypse. Namely, the financial apocalypse.

The U.S., Russia, Japan, Canada and the EU have all but confirmed they won't be signing on to a new Kyoto. The Chinese and Indians won't make a move unless the West does. The notion that rich (or formerly rich) countries are going to ship $100 billion every year to the Micronesias of the world is risible, especially after they've spent it all on Greece.

Cap and trade is a dead letter in the U.S. Even Europe is having second thoughts about carbon-reduction targets that are decimating the continent's heavy industries and cost an estimated $67 billion a year. "Green" technologies have all proved expensive, environmentally hazardous and wildly unpopular duds.

All this has been enough to put the Durban political agenda on hold for the time being. But religions don't die, and often thrive, when put to the political sidelines. A religion, when not physically extinguished, only dies when it loses faith in itself.

That's where the Climategate emails come in. First released on the eve of the Copenhagen climate summit two years ago and recently updated by a fresh batch, the "hide the decline" emails were an endless source of fun and lurid fascination for those of us who had never been convinced by the global-warming thesis in the first place.

But the real reason they mattered is that they introduced a note of caution into an enterprise whose motivating appeal resided in its increasingly frantic forecasts of catastrophe. Papers were withdrawn; source material re-examined. The Himalayan glaciers, it turned out, weren't going to melt in 30 years. Nobody can say for sure how high the seas are likely to rise—if much at all. Greenland isn't turning green. Florida isn't going anywhere.

The reply global warming alarmists have made to these disclosures is that they did nothing to change the underlying science, and only improved it in particulars. So what to make of the U.N.'s latest supposedly authoritative report on extreme weather events, which is tinged with admissions of doubt and uncertainty? Oddly, the report has left climate activists stuttering with rage at what they call its "watered down" predictions. If nothing else, they understand that any belief system, particularly ones as young as global warming, cannot easily survive more than a few ounces of self-doubt.

Meanwhile, the world marches on. On Sunday, 2,232 days will have elapsed since a category 3 hurricane made landfall in the U.S., the longest period in more than a century that the U.S. has been spared a devastating storm. Great religions are wise enough to avoid marking down the exact date when the world comes to an end. Not so for the foolish religions. Expect Mayan cosmology to take a hit to its reputation when the world doesn't end on Dec. 21, 2012. Expect likewise when global warming turns out to be neither catastrophic nor irreversible come 2017.

And there is this: Religions are sustained in the long run by the consolations of their teachings and the charisma of their leaders. With global warming, we have a religion whose leaders are prone to spasms of anger and whose followers are beginning to twitch with boredom. Perhaps that's another way religions die

dear john letter #6 -- read this book "The Folly of Elastic Money"

John,

Read this book and you will understand why all of the well intended government regulations and policies in the world can’t fix what ails our system.  First we have to come to grips with the fact that every problem we see isn’t fixable with government policy.  markets require division of labor, free exchange and protection of private property rights, which naturally leads to market features like wealth inequality and pollution and business cycles and creative destruction and unfair outcomes.  It is utopian to assume otherwise. 

When the government tries to fix what modern economics erroneously calls “market failures” it makes things worse.  The best example of this is central banking, which was invented ostensibly to protect the little guy against business cycles. In actual fact, the Fed was established in 1913 by a secret conspiracy (uncovered only decades latter) between a wealthy senator and his Wall Street buddies at a resort call Jekyll Island in North Carolina.  It is a classic case of big government and big finance getting in bed for mutual benefit while promising benefits for the little guy….  Sound familiar???  the rich Wall Street bankers wanted a bail out mechanism when the economy turned against them.  We’ve had a symbiotic relationship between big govt and big finance ever since.  The idea that government will police big Wall street finance is an absolute joke.  Wall Street gives more to Dems than GOP.  the foxes are guarding the hen house!!!! 

Yes, you guessed right: the fundamental disease causing systemic risk, systemic greed, excessive power and wealth concentration, historic financial boom and bust are all related to the underlying easy money disease promoted by the Federal Reserve.  Do yourself a favor and read this book.  It will help you get past all of the anger you have at the GOP for screwing everything up. 

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown [Hardcover]

Detlev S. Schlichter

Detlev S. Schlichter (Author)

 

Editorial Reviews

From the Inside Flap

The recent financial crisis has exposed the instability of our financial system. While there is plenty of talk of reform, few commentators are yet willing to consider that the root cause could be the transition from commodity money to limitless paper money, although the track record of paper money systems is uniformly discouraging: Throughout human history, all paper money systems have either collapsed in chaos, or society has returned to commodity money (usually based on gold) before a total currency disaster occurred. This book shows why this was the case and why this is also the choice we are facing today.
Drawing upon ground breaking new research, Paper Money Collapse conclusively demonstrates why paper money systems—those based on an elastic and constantly expanding supply of money, as opposed to a system of commodity money of essentially fixed supply—are inherently unstable and why they must, by their very nature, lead to economic disorder.
These highly controversial findings clash with the general consensus that elastic state money is superior to inflexible commodity money, and that expanding money is harmless or even beneficial as long as inflation remains contained.
In an engaging style based on extensive study and analysis, this compelling new book exposes the fallacies of mainstream macroeconomics and debunks erroneous conventional wisdom. It explains why many people working in financial markets, in the media, and in policy establishment positions are unable (and often unwilling) to fully appreciate the underlying problems with elastic money and the danger it presents.
Paper Money Collapse shows in the starkest terms that the recent crisis is far from over and that the solutions presented by the advocates of paper money around the world are misguided and inherently flawed, in particular the current policy of accelerated paper money production to "stimulate" the economy. If these policies are continued, a complete currency catastrophe will be inevitable.
An absolute must-read for economists, individual investors, and anyone with an interest in finance, Paper Money Collapse will change the way you think about our financial system—and about how to take control of your own financial future.

government managed post office and health care: a race to the bottom

If you want to see into the future what the fiscal position of universal health care will look like in 10 years (or sooner), enjoy this blurb about US Post office (copied below).   A large and complex sector of the economy that is turned over to the government for central planning cannot (by definition) be sensitive to changing market dynamics.   It is a fact that no expert or group of smart bureaucrats can design or manage a massively complex sector of the economy in a dynamic, sustainable fashion.   Government management of health care does not mean better allocation of national resources, more efficiency and social justice.  Govt management means a combination of higher prices, lower productivity, less innovation, forced rationing and/or chronic fiscal deficits. 

Just because the US spends more of GDP on health care than countries with socialized health care like France does not mean the market is failing in the US.  we have failed the market by injecting massive subsidies and regulations into the health care system.   We spend so much on health care because the government provides massive subsidies for individuals to be over insured, which artificially increases demand for health care.  We use health care we don’t need!!! That is the result of government policy, not the market. 

The market suffers from a garbage in garbage out problem.  if you feed the market distorted signals (like subsidies for health insurance), you will get garbage outcomes.

50+ years of massive govt subsidies for private health insurance has manifested in an inflation and access crisis in US health care.  the market cannot deliver a perfect result, but the market result will always be better for society than a government planned result. 

Otherwise, we could imagine money growing on trees and free-lunches provided by government.   Intelligent people don’t believe in fairy tales … do we???  Why do we believe in free lunch promises by politicians??    

Return to Sender: Reforms for the Failing Postal Service

By R. Richard Geddes | National Research Initiative
NOVEMBER 3, 2011

The US Postal Service is facing a fiscal crisis. The demand for its core activity of mail delivery has collapsed, and further declines are likely. The Postal Service has exhausted all of its $15 billion borrowing capacity from the US Treasury, and is expected to run out of cash in the middle of 2012. Given the Postal Service’s fiscal crisis, and the need to adjust to market realities, it is time to put the Service on a course toward meaningful structural change that will give it the ability to adjust to demand for its core activity of delivering physical mail.

Gerald O;driscoll (who is one of my favorite thinkers on the economy) says in WSJ article copied below:  “The underlying dilemma [in the EZ] is that governments have promised their citizens more social programs than can be financed with the tax revenue generated by the private sector. High tax rates choke off the economic growth needed to finance the promises. Economic activity gets driven into the underground economy, where it often escapes taxation ...  The sad fact is that there is not enough money in the EU to pay off the public debts incurred by the governments. Most countries have long since squeezed as much tax revenue from their citizens as they can. That is why they have toyed with a tax on financial transactions, the one remaining untaxed activity in all of Europe.”

Do we really want to see how high we can raise taxes in the US before we end up like Europe???  Is there any coincidence that   

O’Driscoll argues that the US is for all practical purposes already there (i.e. building an unsustainable social welfare state);  for one we are linked to the woes of EZ via banking and financial linkages. EX woes are our woes.  Second, and even more important …  “the U.S. has its own large and growing public debt burden. We have not gone as far down the road to entitlements, but we are catching up. If you want to know how the debt crisis will play out here, watch the downward spiral in the EU.”

>>>>

We are in a global recession caused by the aftermath of an easy money credit bubble that went bust.  The US government reduced private debt exposure but merely off loaded private debt onto the public balance sheet thus creating a public debt sustainability crisis.  We are told by the experts and pundits in mainstream media that we need a bipartisan solution that includes higher taxes to return to a sustainable fiscal path.

But how do you raise taxes into a recession, especially a "recession" (period of sub normal growth) that is supposed to last many years (as indicated by the Fed yesterday in their latest report).

The answer cannot be higher taxes and more government interventions in the economy.

As I see it the only realistic answer to the current chronic low-growth, high leverage, high financial risk economy and financial markets is to reduce the regulatory and tax burden on the private sector. 

Only then will we get a rebound in growth which is necessary to facilitate and speed-up the organic private sector creative destruction process.   we need a massive boost to growth to offset the contractionary effect of de-leveraging. 

if we use either fiscal or monetary stimulus to reduce the negative impact of deleveraging, what we do is prevent the market from adjusting to a new sustainable growth dynamic. 

fiscal and monetary stimulus DISTORTS markets by definition.  how are we going to fix the market with new distortions.  it makes no sense, but we are told by all of the experts that if the Fed wasn't such a party pooper, we would be on our way to higher inflation and recovery.

the government can't provide any such free lunch to society via fiscal or monetary stimulus. 

we have learned this lesson over and over and over again through history, but we keep trying anyway to fix government created problems with more government. 
 

As one of the great (but far from perfect) American Presidents said:  government isn’t the solution, it’s the problem.

The “law of no free lunches” (combined with the related “law of unintended consequences”) prevents government intervention in the economy from resulting in win/win outcomes for society.  Whatever good the government tries to do with interventionist policy (e.g. increase transparency and reduce risk in financial sector via regulation, or reduce business cycles via central bank, or reduce income inequality via highly progressive income tax) the result is a predictable constellation of negative unintended consequences that MORE THAN off-set any intended positive gains.

Government intervention is win for the few but lose for the many.   it must be that way.  otherwise the government would gradually take over every key sector of economy -- which it seems is the case today -- and yet the MARKET gets blamed for screwing everything up.

every key sector of US economy is massively distorted via government subsidies.  the idea that the US economy is a wild west model is a total myth.  Europe has its social welfare model.  at least they admit government intervention. 

We have our Subsidy Welfare Model that appears to be more more because subsidies are channeled into ostensibly private firms.  Consider these industries:  housing, banking, education, health, food processing, farming, military industrial complex.  you name it.  the government is massively involved and causing massive distortions.  

it is no coincidence the most subsidized sectors of economy display the worst inflation:  education and health.  We are told the government needs to fix the inflation because private firms are greedy and taking advantage of consumers.  this is silly.  government regs and subsidies drive prices up in health and education -- and then we blame the market and add more government to the equation, which will lead to an even worse outcome.  you might get lower prices (but probably not)  -- but if you do get lower prices the cost will be some combination of lower quality, lower output (forced rationing)  and likely also operating losses funded by tax payers.  look at post office for a perfect model of government managed business. 

lower quality:  check  (compare to FedEx)

forced rationing:  check.  (long lines and no delivery on weekends happening soon)

chronic losses paid by taxpayers:  check  (US post office is making multi billion dollar annual deficits)

the same will happen in any universal healthcare system dreamed up by the experts and do gooder nanny state geniuses who know how to fix social issues if only the idiotic conservatives would get out of the way...

It is no coincidence that there was never a global economic boom and bust cycle like the Great Depression until AFTER the Fed was established in 1913 ostensibly to eliminate such cycles!

The idea that there was large de-regulation (or lack of enforcement of regs) by GW ahead of the financial crisis is a myth.    The very markets that are MOST regulated were the worst impacted in the post Lehman collapse period, including mortgage and banking.  The least regulated financial industries, including hedge funds, were NOT coincidentally the least affected.    New regs fix the previous problem not the new problem that will happen next time.  policy makers ALWAYS fight the last war, and not very well at that!

Higher marginal tax rates have been used throughout world history including US history as a means to reduce income inequality and   it never works.  I would like someone to show me a correlation between highly progressive income tax rates, income equality AND robust sustained economic growth.  If you want income equality, the easiest thing to do is raise taxes high enough to kill the economy and thus make everyone equally poor.  actually, when countries have done this in practice, there remains a tiny political elite who remain fabulously wealthy, while the rest of e country suffers.  Consider Soviet russia or North Korea.  Large countries with sustainably low income inequality are very rare.  Japan is one such country.  The cost of low income inequality is 20 years and counting of continuous near recession growth.   Europe has less income inequality than US but also a massive public debt problem that might sink the entire enterprise!!!!

To the extent income inequality causes social tensions, what I can say is that the cause of such exaggerated  income inequality is NOT the market.  the cause of the sort of stretched income inequality that is socially de-stabilizing is well intended government intervention that ends up hurting the poor and favoring the wealthy!!! 

Central banking is a perfect example.  Easy money flows first to asset markets, the rich get richer as their 401k and house value goes up, the poor pay higher rents and get poorer.  Next easy money flows to commodities (gas and food).  The Fed says gas and food inflation is not core inflation, so the easy money policy is maintained while the poor are let to suffer with higher costs and lower disposable income ... all the while the easy money bubble builds up even further.  the rich also have access to cheap credit in order to leverage asset purchases.  The rich get even richer.  This process causing the rich to get richer and poor to get poorer has nothing to do with any inherent evil in the market.

the market is subject to the "garbage in garbage out" problem.  if distorted signals are fed into the market via government intervention (e.g. easy money), the result will be distorted outcomes.  THis is no fault of the market.  The market doesn't fail us, we fail the market.

in fact the market doesn't "do" anything.  the market emerges naturally when free people exchange goods and services and specialize their labor.  it is that simple.

the so called "economy" that emerges from such free trade and specialization is NOT perfect.  free traders who claim the market can solve every problem are dead wrong.

the market is no more perfect than humans.

Raising taxes on a system that is already distorted by easy money will not reduce income inequality.  Higher taxes will merely make the system more distorted, dysfunctional and less able to generate wealth for society over all.

Let me repeat:  There is no such thing as a market failure.  There are only market “features.”  Some features are good and some are bad.  All natural systems (inlcuding we humans) have good and bad features.   Just like life.  yin and yang.  good and evil.  There is no way to eliminate the bad features of the market via government regulations because government regs also inherently possess both good and bad features. 

In the case of free markets, however, the good features by definition outweigh the bad.  Yes there is income inequality in a market.  income inequality is a vital feature of robust and dynamic economies.  Get rid of income inequality and get rid of the market.  perfect equality only occurs when an economy is effectively dead, when everyone is equally poor.  once trade and division of labor occurs, this is when society enjoys the win/win result of higher productivity. 

Everyone “wins” in a free market except some win more than others.  that is a fact of markets.  income inequality isn’t bad per se.   income inequality is no more a failure of markets than hurricanes are a failure of earth weather systems.   We live with and adapt to natural disasters, we don't eliminate or control them.  ( i read recently that scientists are trying to reduce the impact of hurricanes by injecting aerosols into them.  that is going to work about as well as central banking.  doing this might reduce individual storm activity, but in the end the energy will be disippated through more storms or some other channel.) 

The economy is a natural system of exchange just like the earth biosphere or weather systems or any other complex natural system of energy/material exchange.  The key to understanding the economy is not that it is made up of artificial goods and man made services.  the economy does appear to be made up of artificial “stuff” like i-pads.  But, if you look past the artificial goods and services and infrastructure and buildings and cars and airplanes that make up the modern economy what you see is a massive system of exchange.  the natural part of the economy is the exchange part. 

The only way to understand the economy is to understand it not as a pile of man made stuff that is put together by humans in some enlightened design aimed at maximizing social justice and human welfare.  NO.

"The economy" is not planned.  There are centrally planned parts of the economy (e.g. big companies, families, government), but these are component parts that exchange and interact with the larger economy.  the economy is a natural system of exchange.

The process of free trade (=exchange) and division of labor supported by an underlying “natural” system of private property rights (e.g. common law) leads naturally to a totally natural ecosystem we call “the economy.”  The economy is a totally natural (and spontaneously organizing) sub system of the larger earth system.  all sub systems of earth are seemlessly coordinated via ironclad laws of nature.

We cannot engineer outcomes into the economy.  we can’t inject virtue into society.  Government cannot level the playing field -- at least not without causing negative unintended consequences that are togehter worse than the original problem. natural complex systems that spontaneously organize (like the weather and economy) don’t work according to cause and effect rules.  The natural ecosystem pattern that we call “the economy” spontaneously emerges as a result of free trade.  It really is that easy.  Anything that reduces free trade will cause negative unintended consequences for the system as a whole.  Therefore if “we” try to reduce income inequality – via interventions that reduce the freedom of individuals to trade how they want and intend – then this requires a trade off in the form of some constellation of unintended consequences.

No free lunches!!!  The market is not perfect, but it is the best we can do.  if we want to improve the market, we need to think in terms of trade offs.  Lower income inequality = lower growth.  lower income inequality doesn’t mean higher growth as many progressives / liberals claim.  The experts claim that high income inequality is bad, so fixing it must be good.  that is NOT correct.  Income inequality is natural to markets.  what we see as income inequality leading to social stress is not “natural” and it is not a “market failure” that needs to be fixed via new govt intervention.  NO. 

large income inequality can only result from a set of previous well intended (or selfishly motivated) government rules, regulations, taxes and other assorted interventions.  All markets MUST lead to income inequality.  When markets breach some level of income inequality beyond the “natural rate” then this is not the result of market failure, but must be a result of some human intervention (well intended or selfish). 

The solution to reducing income inequality in America is not to increase marginal taxes on the rich or to subsidize education or level the playing field or any other well intended intervention.  The solution is to unwind the non-market causes of income inequality, number one of which is easy money.  Get rid of the Fed and get rid of all subsidies aimed at leveling the playing field. 

these two proposals are unlikley to get traction of course because politicians don’t want to get rid of easy money because easy money pays for all of the interventions and subsidies the politicians say are necessary to fix market failures (but which are really just convenient ways to pay off special interest groups).

Until we get rid of central banks, we will always be stuck in a self defeating cycle of more govt interventions implemented to fix the unintended consequences of some previous interventions.  This is the Road to Serfdom described by FA Hayek.

• NOVEMBER 2, 2011

Why We Can't Escape the Eurocrisis

EU and U.S. debt are interlinked through the banking system.

By GERALD P. O'DRISCOLL JR.

When is a bailout not a bailout? When the bailor is short of funds. The recently announced debt plan in the European Union comes up short in almost all respects.

The debt crisis is not just an EU problem, but a trans-Atlantic financial crisis. The overwhelming debt problems on either side of the pond are interlinked through the banking system.

First to the EU. The underlying dilemma is that governments have promised their citizens more social programs than can be financed with the tax revenue generated by the private sector. High tax rates choke off the economic growth needed to finance the promises. Economic activity gets driven into the underground economy, where it often escapes taxation.

Nowhere is this truer than in Greece, which has a long history of sovereign defaults in the 19th and 20th centuries. There is a bloated public sector, and competitive private enterprise is hobbled by regulation and government barriers to entry. Successive Greek governments ran chronic budget deficits, and the Greek banks lent to the government. Banks in other EU countries, such as France, lent to the Greek banks.

In Greece and elsewhere in the EU, the banks support the government by purchasing its bonds, and the government guarantees the banks. It is a Ponzi scheme not even Bernie Madoff could have concocted. The banks can no longer afford to fund budget deficits, yet they cannot afford to see governments default. Governments cannot make good on their guarantees of the banks.

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Details differ by country. In Ireland, problems began with an overheated property sector that brought down the banks. The economy went into depression, which threw the government's budget into deficit. Further aggravating the deficit was the government's decision to guarantee bank deposits, converting private, financial-sector debt into public-sector debt. The details differ from Greece, but the linkage between the government and the banks is the common factor.

France's growth is weak to nonexistent. Germany's economy has performed well since the recession, but concerns are growing regarding its banks' exposure to greater EU risk. And U.S. banks and financial institutions are exposed to EU banks through funding operations, issuance of credit default swaps and unknown exposure in derivatives markets.

The Federal Reserve has engaged in currency swaps with the European Central Bank to support the dollar needs of EU banks. The ECB deposits euros (or euro-denominated assets) with the Fed and receives dollars in return. It promises to repay dollars plus interest.

The Fed maintains they cannot lose money because the ECB promises to repay the swaps in dollars. And yet, with the world awash in greenbacks, it is unclear why the Fed and the ECB even needed to engage in these transactions—except that it suggests funding problems at some EU banks. And if neither EU banks nor the ECB can secure enough needed dollars in global markets, there is a serious counterparty risk to the Fed. The ECB can print euros but not dollars. Sen. Richard Shelby (R., Ala.), ranking member of the Senate Banking Committee, was correct to raise concerns about the Fed's policy last week. Losses on the Fed's balance sheet hit the U.S taxpayer, not EU citizens.

The sad fact is that there is not enough money in the EU to pay off the public debts incurred by the governments. Most countries have long since squeezed as much tax revenue from their citizens as they can. That is why they have toyed with a tax on financial transactions, the one remaining untaxed activity in all of Europe.

Greece is the first of other sovereign defaults to come. With last week's bailout, the EU leaders might have bought time, perhaps a year. But at some point, the ECB will cave and monetize the debt, leading to euro-zone inflation.

The debt calculus changed dramatically this week with the announcement of a Greek referendum on the bailout agreement next January. If voters reject the agreement, the ultimate outcome is unpredictable.

Americans must not be smug about the suffering of Europeans—our financial system is thoroughly integrated with theirs. Moreover, the International Monetary Fund will most likely be involved in the event of future bailouts and will likely need large funds from its members, which ultimately means the taxpayers.

And, of course, the U.S. has its own large and growing public debt burden. We have not gone as far down the road to entitlements, but we are catching up. If you want to know how the debt crisis will play out here, watch the downward spiral in the EU.

Meanwhile, expect more volatility in financial markets. U.S. traders in particular simply have not grasped the enormity of the EU debt crisis.

Mr. O'Driscoll, a senior fellow at the Cato Institute, is a former vice president of the Federal Reserve Bank of Dallas and later Citibank.

neither the left or right is willing to talk the language of trade offs

Ken Rogoff is right on when he diagnoses the current cycle as a Great Contraction, not a Great Recession.   (see must read article copied below). 

 Having said that, Rogoff is still stuck with the silly idea that policy makers can fix  macro problems with fiscal and/or monetary policy.  Rogoff  argues money printing (i.e. increasing the Cpi target to 4 - 6% for several yrs) will solve the current debt deleveraging problem.  Easy money doesn’t and cannot create national wealth.  If it did we could just print money and all live happily ever after. 

The only realistic solution to a debt deleveraging cycle (caused by an easy money cycle previously) is economic stimulus in the form of supply side reform.  Supply side reform encourages entrepreneurial risk taking, which is the engine of any robust and dynamic economy capable of delivering sustainable “high” growth. 

Money printing and fiscal stimulus are two sides of same insidious “easy money” coin.  Printing money ultimately means borrowing growth from the future.  Fiscal stimulus also means borrowing growth from the future in the form of economic activity paid for with debt. 

Professional mainstream economists  are in the business of figuring out what I call “free-lunch” policy options.  They “sell” their services to policy makers and politicians (on both the left and the right) who are in the business of getting elected by convincing the public they can implement free lunch policies as long as the public votes for them.   Policy makers and professional economists are in a mutual symbiotic relationship because professional economists design free lunch policies (that can’t work in the real world because free lunches don’t happen in the real world) and politicians sell these bogus policies to a gullible public. 

The real world works according to hard and fast trade-offs. 

Neither the government or the market is a silver bullet.  Neither the government or the market can magically provide free lunch solutions to social problems.

Let us start with the premise that life isn’t fair and the government can’t level the playing field.  Let's also understand that the "market" cannot miraculously fix poverty or fill in all of the pot holes in streets or provide universal health care. 

The market also can’t work if it is infected with central bank fiat money printing.  The political right loves the central bank printing press just as much as the left.  The right is hypocritical for claiming to be a friend of the market when it also supports a central bank printing press.  The right needs the central bank to pay for a massive military industrial complex and to provide a back stop bailout mechanism for big finance. 

Obviously, the left supports the central bank because it helps facilitate debt financing for social welfare programs.

Neither the political left or right is willing to talk the language of trade-offs because to talk trade-offs means upsetting special interest groups. 

Bottom line:  the government can't fix social problems.  if we want the government to solve  macro level social and economic "problems," we MUST accept lower economic dynamism and a lower rate of GDP growth.  Politicians promise higher sustainable growth AND lower income inequality AND less poverty AND universal healthcare if only the government got involved in green energy, education, technology R&D development, etc. etc. etc.

Sorry to pop the bubble .... "IT" doesn't work that way.  if government  gets involved then quality must go down and/or price must go up and/or rationing must be implemented.  You don't get better quality at lower price if government takes over.  sorry.  no free lunches.

if you want universal health care and other trappings of a European welfare society, then you have to admit that the system will eventually blow up as the EZ is blowing up under the weight of duel burdens of low growth and high public debt. 

of course the political right nearly took us over the cliff by supporting central bank financing of a guns and butter policy redux from the 1960s while simultaneously claiming the market should be allowed to work.  De-regulation doesn't work when the market is distorted by massive injection of central bank facilitated easy money. 

Sound money is the only policy anchor that forces politicians to consider trade offs.  which is why we've been told sound money can't work in a democracy.  the public doesn't want to be told it has to live by trade offs and politicians don't want to be held accountable to telling the public it can't have its cake and eat it too.

i don't agree.  i think the public is smarter than that.  i believe the public can understand in the concept of tradeoffs because that is the way real life works. 

The Second Great Contraction

Kenneth Rogoff

2011-08-02

The Second Great Contraction

CAMBRIDGE – Why is everyone still referring to the recent financial crisis as the “Great Recession”? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy.

The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.

A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.” Carmen Reinhart and I proposed this moniker in our 2009 book This Time is Different, based on our diagnosis of the crisis as a typical deep financial crisis, not a typical deep recession. The first “Great Contraction” of course, was the Great Depression, as emphasized by Anna Schwarz and the late Milton Friedman. The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.

Why argue about semantics? Well, imagine you have pneumonia, but you think it is only a bad cold. You could easily fail to take the right medicine, and you would certainly expect your life to return to normal much faster than is realistic.

In a conventional recession, the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend.

The aftermath of a typical deep financial crisis is something completely different. As Reinhart and I demonstrated, it typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. So far, across a broad range of macroeconomic variables, including output, employment, debt, housing prices, and even equity, our quantitative benchmarks based on previous deep post-war financial crises have proved far more accurate than conventional recession logic.

Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession.” But, in a “Great Contraction,” problem number one is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.

For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries.  For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.

Is there any alternative to years of political gyrations and indecision?

In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning.

Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.

The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were.

Acknowledging that we have been using the wrong framework is the first step toward finding a solution. History suggests that recessions are often renamed when the smoke clears. Perhaps today the smoke will clear a bit faster if we dump the “Great Recession” label immediately and replace it with something more apt, like “Great Contraction.” It is too late to undo the bad forecasts and mistaken policies that have marked the aftermath of the financial crisis, but it is not too late to do better.

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.