Tuesday, November 23, 2010

The Secession Party

The Secession Party

Mitchell Langbert, Ph.D.*

The United States of America has become too large and needs to be broken in two. As well, New York and other states that have an urban-rural split ought to be split. The nation has become too large to manage, as today’s Congress attests. This would be so even if ideological differences did not divide the nation and the states. The nation should be broken up into a red nation and a blue nation and New York should be broken up into upstate and downstate.

The Secession Party would aim to dissolve the union, undoing the work of Abraham Lincoln and reasserting the aims of the anti-Federalists, who opposed the scope and extent of federal power that came to pass under Washington.

When the United States was established in 1789, there were approximately four million Americans and 65 members of the House of Representatives. That is 60,000 Americans for every Representative. Today the nation’s population is 310 million and there are 435 members of the House of Representatives, 713,000 Americans for every Representative. Only special interests and financial donors have full access to Representatives. Increasing the number of Representatives would be administratively difficult because a House as representative as it was in 1789 would have 4,800 Representatives.

Historical Precedent

One nation in western history has been equal to the United States in terms of its power: Rome. By the late third century Emperor Diocletian established a rule of four, whereby two senior and two junior co-emperors oversaw a quarter of the Roman Empire each. He also began a shift of power from Rome to other cities. Ultimately, Byzantium, later named Constantinople, survived the western Roman Empire by nearly one thousand years. Diocletian could not have anticipated that quartering the Empire would allow part of it to survive. I claim that halving the United States into free and social democratic halves would allow the free half to survive as the social democratic half sinks into a dark age.

American Decentralization

The forces that encouraged Diocletian to think in terms of decentralization are at play here. Management theorists recognize that there are limits to rationality. The way to run a large firm is to break it into operating divisions. Likewise, the Founding Fathers or Federalists, including Alexander Hamilton and James Madison, believed that the federal government needed to be combined with decentralized states. Under the Constitution the states are responsible for much administration. Part of the reason is that the states are better able to represent their citizens. Large scale leads to complexity which makes management and representation difficult from the center. The federal government suffers from centralization without representation.

The Civil War began an assertion of federal power that has escalated past the point of diminishing returns. The Civil War’s cause, prevention of the expansion of the “slave power” was just. But a side effect of the Civil War was squelching of important aspects of states’ authority. It was not and is not clear that states do not have the right to secede or to nullify their participation in the union.

Progressivism a Form of Insanity

Recently, I had a discussion with an attorney who believes that regulation is desirable. I pointed out to him that workers’ compensation does not work. He agreed. I pointed out that the Employee Retirement Income Security Act of 1974 (ERISA) has not worked well. He did not know much about it, but he was willing to agree. I pointed out that the Sherman Anti-Trust Act, which was meant to limit monopoly, has had the effect of expanding the size and power of big business. I pointed out that the Federal Reserve Bank has massively subsidized the wealthy at the expense of the poor. I pointed out that Social Security turned out to be a wealth transfer vehicle from the 21st century’s workers to the 20th century’s retirees. He offered no meaningful counter-arguments, only to say that the sub-prime crisis was due to the repeal of the Glass-Steagall Act. But he could not explain how, after 75 years of securities regulation Wall Street is more destructive than it was in the 1920s.

Despite the long list of regulatory failures, the left-wing attorney believes that regulation must be increased. He suffers from a religious mania with which it is impossible to argue.

A recent study found that about two or three percent of government agencies are ever terminated. In contrast, 80 percent of businesses fail within their first five years. People who believe that government programs, no matter how destructive, cannot be terminated are incapable of rational discussion.

Since there is no common ground between those of us who believe in freedom and those who believe in socialism, there is no longer common ground required for a single nation. The United States was founded on a belief in freedom. But half the nation believes in the slavery of social democracy, in tyranny of the majority. The union is no longer tenable.

Large Scale Has Advantages

Large scale has advantages. These include the ability to support a strong military and to permit large scale economic activity. However, there are limits to these kinds of advantages, and there is no reason why independent units cannot permit large scale economic activity across borders.

The advantages of large scale have limits as do the advantages of small scale. There needs to be balance. But under the influence of New Deal Democrats and Rockefeller Republicans the nation has discarded the notion that small scale offers any advantages. When government employees are paid 40 percent more than private sector employees, it is just in the centralizers’ opinions. When private sector firms innovate, it is greed and must be regulated. No degree of centralization is sufficient for America’s big government mono-maniacs.

Party System Committed to Large Scale

Left-wing Democrats and the Rockefeller Republicans claim to hate each other. But both favor large scale. The Democrats have ritualized regulation. The Republicans have ritualized big business. The fact is that big business would not exist without big government, and vice-versa. Just as regulation has repeatedly failed even as the Democrats mindlessly chant its mantra, so has big business repeatedly failed as the Republicans chant its mantra.

Need for a Pro-Secession Party

The election of Barack H. Obama has proven that American democracy no longer functions. The nation is too large to represent its citizens. Smaller units are needed now. The two party system is too corrupt to permit the decentralizing impulse. A new, pro-secession movement needs to energize America.

*Mitchell Langbert is associate professor of business at Brooklyn College. He blogs at http://www.mitchell-langbert.blogspot.com/.

Brooklyn College Student Named Rhodes Scholar

I received this e-mail from Brooklyn College Provost and Vice President for Academic Affairs William A. Tramontano

Dear Faculty, Students and Staff,

On behalf of President Karen Gould and the entire campus community, I am extremely pleased to announce that Zujaja Tauqeer has been selected as a 2011 Rhodes Scholar. Rhodes Scholarships are considered the oldest and most renowned award for international study available to American college graduates. The scholarship provides expenses for two to three years of study at the University of Oxford in England.

Tauqeer, a member of the Macaulay Honors College, is a history major who minors in political science and participates in the Coordinated B.A.-M.D. Program with SUNY Downstate College of Medicine. She is the third Brooklyn College student to be chosen as a Rhodes Scholar—a feat accomplished by only one other CUNY institution.

According to the faculty, her brilliance is evident both in and out of the classroom. She has overcome significant personal hardship in the pursuit of higher education, and I cannot imagine a more worthy recipient of the Rhodes award. Obtaining her master’s degree in the history of medicine at Oxford University before returning to her medical studies at SUNY Downstate will undoubtedly make her an even finer physician.

 I am also grateful to all the members of the college community, especially the staff of the Scholarships Office, who spent many hours assisting Tauqeer with the process.

In addition to her scholarly work, Tauqeer volunteers with the Brooklyn College Emergency Medical Squad, the New York State Office of Mental Retardation and Developmental Disabilities, and the Sunset Park Family Health Center.

Please join me in congratulating Zujaja Tauqeer and wishing her luck in her future endeavors. 
William A. Tramontano
Provost and Vice President for Academic Affairs

Monday, November 22, 2010

Hidden Inflation: The Cost of Spoiled Food

I have noticed in recent days that the rate of near-spoiled food  that I have purchased in delis, supermarkets and restaurants has increased. A Reuben sandwich at a Kingston diner was gamy; several items purchased in a local deli were either near-spoiled when we bought them or became so within a couple of days; and pork chops that I had purchased from a local supermarket that had a date stamp of 11/23 were extremely ripe when I opened them tonight and I threw them away.  I am somewhat fussy because I have been stricken with food poisoning many times, but I don't think I'm unrealistic.

The increased rate of near-rancid food may reflect slower traffic due to reduced credit or it may reflect pressure on supermarkets due to increasing food prices that the markets have yet to pass on to consumers. Or it may be just coincidence. 

I wonder if the Bureau of Labor Statistics includes percentage of food spoiled in its food price inflation statistic.  My food bill has been significantly increased in terms of quality (the gamy Reuben sandwich)  and cash outlays because I have discarded the pork chops, a specialty rice dish and lamb sausage purchased from a deli. All have occurred in the past seven days.

This also scares me because of food supply issues. The increasing centralization of the food supply means that one tainted side of beef can infect tons of hamburger meat.  

At UCSD Crackpot Faculty Run Wild

This video (h/t The Blaze and Contrairimairi) excerpts interviews of two UCSD professors, Micha Cardenas and Ricardo Dominguez, who advocate the dissolution of the United States. Professor Dominguez states that he won tenure at UCSD by designing a GPS system for aliens illegally entering the country. He offers that information as proof of the GPS system's worth. He includes poetry that he wrote in the GPS system so that those crossing the border may benefit from his mellifluous verse while they steer clear of the border patrol.

Cross-Posted at the NAS Blog.

Sunday, November 21, 2010

Who Said We Need A Fed?

Mitchell Langbert, Ph.D.

In early July of this year, Representative Maurice Hinchey, who had co-sponsored a bill that aimed to require an audit of the Federal Reserve Bank, voted against the bill that he had co-sponsored.  According to Representative Ron Paul, 114 congressional Representatives flip-flopped on an elementary requirement of transparency for an institution that affects you every single day.  Representative Hinchey and so many of his colleagues flip-flopped because the bill threatened powerful banking and Wall Street interests.  Hinchey deferred to Wall Street. 

No issue is of greater importance to you than the Federal Reserve Bank. Yet, there is scant discussion of it in the Democratic Party media.  If you believe the media and university economists, the Fed is, to quote Churchill, “a riddle, wrapped in a mystery, inside an enigma.”  Churchill so described the Soviet Union, and he said that the key to understanding it was the USSR’s national interest.  The key to understanding the Fed is Wall Street’s and the money center banks’ financial interests.  Once you recognize that the Fed does not serve you and does not serve the United States but serves commercial banks, Wall Street and hedge funds, you can begin to understand the Fed’s function.  It is not to cure unemployment or to cause or reduce inflation (it generally causes inflation).  Rather, it is to transfer wealth from you to financial interests. Representative Hinchey stands on the side of the Fed, not on your side.


In the nineteenth century there was much debate about a national bank.  In the 1820s and 1830s workers opposed it.  In his classic, Pulitzer Prize-winning book, Age of Jackson, Arthur M. Schlesinger describes the Loco Focus and the Workingmen’s Parties of the period.  These were parties of workingmen who opposed banking “monopolies”, that is, banks as we know them.  President Jackson disliked the Second Bank of the United States because he had lost money in a speculative venture and knew that there is a tight link between central banks and financial bubbles.  That was true in the days of the South Sea bubble following the creation of the Bank of England and is true today with the Fed and the stock and real estate bubbles of the past 75 years (since 1935 there have been recurring bubbles in the stock and real estate markets, and they have become more extreme over time).

In the mid to late nineteenth century some farmers and “Progressives” advocated re-adoption of a central bank.  Farmers are in part real estate investors, and the central bank (the Fed) aids real estate.  Historians tend to overlook this motivator for western agriculture’s late 19th century support for a central bank.  But in his Age of Reform and elsewhere Richard Hofstadter notes, when not discussing the sensitive and partisan issue of banking, that farmers were in large part real estate speculators.  Twentieth century American historians, loyal to the New Deal, saw farmers as real estate speculators when not discussing the central bank, but saw them as needy debtors when discussing Populist support for the central bank.

Characteristics of Deflation in the Gilded Age

If you read Democratic Party newspapers you have probably heard that deflation (falling prices) is bad.  But common sense tells you to look for lower prices.  Although there was debate at the time, the long deflation during the late nineteenth century (known as the Gilded Age) had these attributes:  

  1. There was a heavy immigration into the country as foreigners, such as my own ancestors from Austria-Hungary and Russia, heard that the streets of America were “paved with gold.”  In fact, America had a gold standard and workers were becoming wealthier.
  2. The real hourly wage, the best indicator of the average worker’s welfare, what they can buy based on an hour’s work, increased at a two percent per year pace.   Workers were saving more and living better than ever before in 1890.  
  3. There was rapid technological, economic and business innovation. The economic historian and, under Lincoln, first head of what is now called the Internal Revenue Service, David Ames Wells, detailed the innovation in his 1889 Recent Economic Changes.  Just a handful of the thousands of innovations and inventions during that period were: the electric light; motion pictures; the phonograph; the telephone; the basic technology for radio and television (1897); the Alternating Current that powers all of your home appliances; remote control; and the mass production of automobiles.
  4. Asset prices were NOT increasing.  Deflation meant that real estate values fell. Stocks in 1935 were selling for about the same price as they had in 1885.  In the late 19th century Wall Street’s influence was diminishing.

Inflation Not a Wonderful Life

Contrast the innovation in the Gilded Age with today’s business world. Companies increase profit by moving out of the country to seek low-wage labor in China and Indonesia. There is little interest in doing things better, only more cheaply.  Fundamental innovation began slowing soon after the establishment of the Federal Reserve Bank in 1913. Progress since the 1920s has capitalized on ideas that had been established in the Gilded Age.  These include Tesla’s wave concepts that led to radio, television and wireless.  Post 1980 innovation has been more rapid than during the New Deal era, but has been much slower than in the 19th century.

Similarly, the real hourly wage has not increased since 1970.  Inflation has eliminated the growth in the real hourly wage.  At the same time, stock and real estate prices have shot up.  This has resulted in income and wealth inequality as the beneficiaries of inflation have seen their stock holdings rise while the losers from inflation, workers, have seen their real wages frozen.  

The Democratic Party and Rockefeller Republicans blame income inequality on Ronald Reagan. But they overlook the decline in the real hourly wage that occurred in the 1970s, years before Ronald Reagan took office and directly following Richard M. Nixon’s elimination of the gold standard.

The Fed Has Caused Manufacturing to Exit

Recent history has seen manufacturing exit the nation.  As the Fed has expanded the money supply it has worked out a deal with foreign central banks to buy US bonds.  As a result, the dollar is propped up, making it stronger. The effect is that Fed policy has encouraged firms to exit the US. 

The reason is that every currency has value relative to every other currency.  For instance, a dollar is currently worth an exchange rate of 83 Japanese Yen. Let’s say a huge number of firms decide to move to Japan.  Demand for Yen would increase as the firms invest in Japan, while demand for dollars would decrease as the firms stop doing business here.  The lower demand for dollars would cause the value of the dollar to decrease.  That would make Yen more expensive relative to the dollar.  The firms moving to Japan would see their goods become more expensive in the US because of the low value of the dollar. Many dollars would be needed to buy Yen. Japanese goods would become more expensive.  That would end the migration to Japan.

The Fed and its sister central banks have not allowed that to happen. Firms have exited the US, reducing demand for dollars, but the dollar did not get weaker. The reason is that the Fed has made deals with the other nations’ banks for them to buy dollar-denominated assets, Treasury Bonds, artificially creating demand for dollars.  The result is that American workers have lost their jobs but foreign goods remain cheap. 

In response, university-based economists and Wall Street “experts” complain that there is “deflation” because of the cheaper foreign goods. The response is to advocate that the Fed print more money.  The printed money is placed into the hands of commercial banks and then hedge fund operators and Wall Street, who buy foreign commercial paper and profit from the spread between the interest rates here and in Japan and elsewhere. Income inequality is increased as wealth is transferred to wealthy Wall Street and hedge fund interests.  University-based economists hunker after appointments and Wall Street consultancies.

How the Fed Works

There are many good books on the Federal Reserve Bank, such as Murray N. Rothbard’s What Has Government Done to Our Money? and his Mystery of Banking, which are available online from the Ludwig von Mises Institute.  Rothbard makes clear that the basics of the Fed and banking are no mystery.  The kind of banking that America has is called fractional reserve banking.  It is so called because bankers can lend out ten dollars for every dollar that is deposited in the bank. The reserves are fractions of the deposits.  There is also banking that is not fractional reserve banking.  Were fractional reserve banking illegalized there would be reduced harm to the environment caused by over-development of real estate; the business cycle would be eliminated; stocks and real estate would fall in value; and over time innovation would increase as firms competed on the basis of ideas rather than access to credit.

The Fed has the power to create money out of thin air. It does this by buying US Treasury bonds.  Contrary to some recent claims in videos, government debt is not essential to the Fed’s money creation power, although in practice it is closely linked.  The Fed can print money and use it to buy automobiles.  But in practice it uses the counterfeit it creates to purchase treasury bonds from banks.  When the Fed deposits the money it creates out of thin air in the bank’s account at the Fed, the bank can then lend up to 90% of that deposit.  The borrower deposits his loan in his bank. That deposit then serves as a reserve for a further loan of up to 90% of the 90%, or 81%.   The process continues.  Ultimately, the banking system can lend $10 for every dollar the Fed creates.  Both the commercial banks and the banking system are legally allowed to counterfeit money.  The Fed counterfeits the reserves and the commercial banks counterfeit up to ten times the reserves.

A large share of this process occurs in New York City in money center banks. In turn, banks like Citigroup lend to Wall Street.  Much of Wall Street’s business, such as mergers and acquisitions, depends on the counterfeit money.  If Wall Street is good at what it does, it profits from the counterfeit.  If it is poor at what it does, it loses (as we saw with the sub-prime crisis).  In either case you get poorer because of the Fed’s printing money.

The reason you get poorer is that the Fed increases the amount of money in existence so that your money is worth less. Unless you’re one of the people who gets the hot new money, you lose.  In practice, the money goes in part to home buyers and small business but it goes disproportionately to Wall Street and corporate America.  As the money circulates food and housing prices are bid up because there is more money in circulation.

Stock Market’s Gain Is Your Loss

The Democrats say that they favor the poor but they were the party that created the Federal Reserve Bank under Woodrow Wilson and the first party to give the Fed unfettered power under Franklin D. Roosevelt.  The Republicans followed suit, with Richard M. Nixon finally abolishing the gold standard respecting international payments, the last restraint on the Fed’s ability to counterfeit.  There has been a 75 year bull market in stocks since Franklin D. Roosevelt abolished the gold standard.  Because of the Fed, financial interests have grown rich to a degree unimaginable in the 19th century. With one or two exceptions, such as John D. Rockefeller, the hedge fund operators of today dwarf the “robber barons” of that era in terms of wealth. Unlike the robber barons, today’s hedge fund operators produce nothing of value.

The Democrats’ and Rockefeller Republicans’ decades-long support for the Fed belies their claims that they serve the poor.  Only the wealthy, people like George Soros, Michael Bloomberg and Mrs. Paul Pelosi, can afford to own large amounts of stock. By expanding the money supply the Fed supports the stock market.  This occurs because the additional money reduces interest rates. Lower interest rates make the value of future dividends worth more.  At one percent interest a divided of $1 paid in one year is worth about 99 cents today, while at ten percent interest a dividend of $1 paid in one year is worth about 90 cents today.  By expanding the money supply the value of future dividends from stocks is raised. This causes the stock market to rise.  

Because of the New York Times Democrats and Rockefeller Republicans, the stock market has risen to unprecedented heights.  But the value of the new money diminishes.  The Fed, realizing that Wall Street might be harmed by a declining stock market, has drastically increased the amount of money it is printing, so-called Quantitative Easing or QE-2.  As the Fed revs up the printing presses, the American Republic starts to look like the Weimar Republic of 1920s Germany.  This has been a century-long process that Austrian economists such as Ludwig von Mises, Friedrich Hayek and Murray Rothbard have been predicting for the past 85 years.   

Mitchell Langbert is associate professor of business at Brooklyn College. He blogs at http://www.mitchell-langbert.blogspot.com.