Failure of Cain Nomination Underscores Need to Drop Mainstream Republicans

The Wall Street Journal reports that Mitt Romney (R., Utah), Cory Gardner (R., Colo.), Lisa Murkowski (R., Alaska) and Kevin Cramer (R., N.D.) oppose the nomination of Herman Cain to the Federal Reserve Board.  Their opposition underscores the gulf between President Trump and mainstream Republicans, and it also underscores the meaning underlying the term deep state.   In a 2012 op-ed in the Journal Cain came out in favor of the gold standard. The gold standard is anathema to Wall Street and its pro-deep state shills. For instance, "journalist" Michael Hiltzik writes an uninformed piece in the LA Times.

Using insulting language, a habit increasingly characteristic of a media that has lost its moorings, Hiltzick makes the factually false claim that the gold standard led to instability in the interwar period.  As Friedman's history shows, the Fed's paper money policy led to the Great Depression. In turn, the mismanagement of the paper money banking system was multiplied by Herbert Hoover's jawboning about wage cuts and the Smoot-Hawley tariff. A master of nonsequitor, Hiltizck writes: 

If the economy of one country ebbed relative to another, preserving the gold standard meant that something else would have to give — laborers thrown out of work or wages brought down. 

This reflects a misunderstanding of what an economy is, what the subject of economics studies, and how paper money works. Paper money does not repeal the laws of supply and demand, Hiltzick's claim notwithstanding. The gist of the paper money system is that wages are systematically brought down through money illusion, a point that is lost on Hiltzick (but not the Keynesian economists to whom he refers). 

Hiltzick's discussion of Friedman's Capitalism and Freedom overlooks Friedman's points that the Fed caused the Great Depression and that Friedman's idea of a fixed monetary rule, which turned out to be a complete failure, could mimic a gold standard. True, following the failure of his fixed monetary rule Friedman remained a member of the helicopter crowd--a term Friedman himself first applied to monetary creation. Those who do not do good service to Wall Street do not win Nobel Prizes.

Hiltzick cites a group of Keynesian and monetarist economists hired by investment banker-financed Ivy League universities (see my piece in Industry and Higher Education) without Hiltzick's grasping that far worse instability has occurred since 1913 than before and that gold was at most an indirect cause of the Great Depression; mismanagement of the paper money system was the chief cause, along with ham-handed fiscal and trade policies. These economists are unapologetic in their advocacy of instability-causing policies, one outcome of which was the failures of 2008.

The two-pronged issue that is most important to the deep state is its control of money and its ability to direct the economy through credit.  There are two categories of gold standard opponents: The first knows that it is a servant of power and of increasing income inequality. The second doesn't know, actually believes the nonsense taught in basic economics classes, and is useful to Goldman Sachs and Mitt Romney.

That Trump would consider a gold standard advocate means that he is better than I thought in 2016. In making donations to Republicans, I will be careful to donate to PACs that oppose the deep state. I will avoid the likes of Romney, Gardner, Murkowski, and Cramer.

Universal Basic Income

I had assigned five potential readings for extra credit: Atlas Shrugged, Economics in One Lesson, Capitalism and Freedom, The Anticapitalistic Mentality, and "The Use of Knowledge in Society." One of my students sent me a video of an interview about the idea of universal basic income. Many of the points the interviewee makes are fallacies discussed in the readings, especially Economics in One Lesson and Capitalism and Freedom.  I hence sent the following email to my three online classes:

One of your classmates showed me a video about universal basic income. This is one of the ideas invented by Milton Friedman in Capitalism and Freedom. However, the proposal made today involves a sharp expansion of welfare benefits, which Friedman would have opposed were he alive today.  The issues in the video are among the current issues that overlap with several of the extra credit readings I have made available, so I thought I'd send my response to you. If you're not interested, skip this email as this material is not relevant to the exam.

The student wrote this:

Hi Professor,

I saw this a few weeks ago. What do you think about UBI?

https://youtu.be/cTsEzmFamZ8

My response is as follows:

Andrew Yang's fallacious claim that technology destroys jobs is hundreds of years old. It goes back to 17th century England.  Some of the Luddites in the 19th century destroyed textile machinery as a form of protest.  Eleanor Roosevelt made similar claims in the 1940s. The claim that technology destroys jobs has always been false. This is something discussed in Economics in One Lesson, which I recommend to you to understand why Yang misunderstands the implications of technology.  Market-based technology increases wealth. Hence, there is demand for new kinds of jobs as increased wealth finds new markets and new outlets.

However, this isn't working well today because today's technology and investments are not market based; they are created by government fiat and monetary expansion.  That is, the Fed and the banking system expand the money supply; the expanded money supply reduces interest rates to nearly zero; then, the banking system makes the artificially created money available to powerful borrowers at low or zero rates.  The low rates create bad investment or malinvestment in projects that would not exist under free market conditions. The bad investment initially stimulates employment, but over time it  substitutes capital for labor. The reason is that low interest rates reduce the cost of capital to a greater degree than they reduce the cost of labor.

The manufacturing jobs that have left the country have disappeared neither purely because of technology nor purely because of low overseas wages.  When capital leaves a country, its currency falls, and further overseas investment is curtailed because the currency becomes weak.  For the past 40 years, plant relocations have been subsidized by low or zero interest rates that the Federal Reserve bank creates artificially coupled with the reserve currency status of the dollar. Because countries around the world hold dollars, the dollar does not decline, so firms borrow at artificially low interest rates to relocate plants, but the dollar does not fall because it is held by firms and central banks around the world.

If capital costs are minimal or zero, then there is minimal or  zero cost to substitute capital for labor. Hence, capital investment in plant relocation has cost firms little, and plant relocation has exceeded the market level. The same is true of investment in technology. Because interest rates are low, it is cheaper for firms to borrow to invest in technology and replace labor with technology.   Today, technology is nearly costless because interest rates are nearly zero.  As a result, the economy has become distorted in favor of capital investment. To correct all this will be hard, but to distort it further by creating more money and inducing men to stop working so that they have free time to create militias is insane.  The end result will escalate the decline of the economy because of misallocation of resources --the subject of the novel Atlas Shrugged.

That said, Milton Friedman in Capitalism and Freedom, which I also recommend (along with Economics in One Lesson and Atlas Shrugged), is the one who created the idea of the  negative income tax, which is what Yang is talking about. Friedman's idea was to simplify the myriad welfare programs by replacing welfare, Social Security, and all other programs and treating welfare as an extension of the income tax in one simple program. That would reduce bureaucracy costs.  That is one of the chapters in Capitalism and Freedom. That is probably a good idea. However, an expansion of welfare is not a good idea because it will encourage people who would otherwise attempt to cope with the economy by finding jobs that may not be as good as would exist in a market setting to instead go on welfare.  The result will be more disenfranchised Americans who live lives of hopeless welfare dependency--and more monetary expansion at a time when government is heavily in debt.  Antfa will go on steroids.

The current federal debt level is 106% of gross domestic product, but that doesn't include unfunded Social Security liabilities, unpaid student loans, unfunded future Medicare and Medicaid liabilities, and unfunded future public sector pension costs . The actual indebtedness may be closer to 200% of GDP.  Japan has sustained indebtedness at this level, but an expansion of welfare will push US indebtedness higher still.  You will notice that recent graduates in Japan have suffered since the 1990s, and the same will happen to you.

According to a  research paper by Kenneth Rogoff, when indebtedness exceeds 90% of the GDP it slows growth.  An opposing,  recent theory called the Modern Monetary Theory claims that government can expand the money supply indefinitely without consequences.  The answer to this is that there is no evidence in history of this working, just as there is no evidence in history of socialism working. Because the dollar is a reserve currency, an aggressive monetary expansion to  cover infinite indebtedness will potentially cause withdrawal of foreign central banks from the dollar.  This may result in a dollar collapse, and the reverse of what Yang and other advocates hope for.

The economic fallacy that Andrew Yang is making in the video is that it is easy to see the jobs disrupted by technology , but it is difficult to see how demand will evolve because of additional wealth due to the technology. In 1875, if you had asked someone what the effects of the automobile's disruption of the horse-and-carriage market, the person would have said the same thing that Yang is saying. The problem with much of the technology now, such as social media, is that it is interest rate rather than market driven.  The result is that many tech jobs are not value producing and should not exist. (The same can be said of professors' jobs, which would not exist without student loans, many of which will not be paid off.)

Hence, to help address Yang's fallacies, I suggest reading both Economics in One Lesson and Capitalism and Freedom as extra credit assignments. Atlas Shrugged paints a dramatic, dystopian picture of the direction in which economic fallacies, including this one, are taking us. 

Educational Vouchers for the Onteora School District

I just sent this letter to Paul Smart, editor of the Olive Press.

Dear Editor:

A local government official has revealed a shocking statistic to the Town of Olive Republican Committee.  The average cost of education in the Onteora school district is currently $31,000 per enrolled student.  The official who revealed this number compares Onteora's $31,000 per student tuition to a national average of $10,259 per enrolled student and a New York State average of $17,200.  New York's public tuition is the highest in the nation, according to the official, but Onteora's is 44% higher than the state's average.

Assuming the $31,000 per student cost number is accurate, let us see how Onteora's costs compare to private schools'.  Nationally, in 2008 the average private school tuition was $8,549, 27% of Onteora's.  Nonsectarian secondary schools averaged $27,302 while Catholic elementary schools averaged $4,944.  Many of the nonsectarian secondary schools are elite schools that cater to the wealthy.  According to one survey Northfield Mount Herman in Massachusetts is the top ranked private elementary school.  The tuition for day students, according to its website is $31,700, roughly the same as Onteora's cost per student.  The UN International School, one of the best private schools in Manhattan, charges $24,350 per year, 21% less than Onteora.  The Beekman School in Manhattan has tuition of $28,500. The Rudolf Steiner School, with a 1:8 faculty-student ratio charges $29,468. Beekman calls itself "the tutoring school" and offers customized schedules, university-level classes in math, science, humanities and English, an average class size of eight (8), and one-on-one tutoring in concentrated subject areas.  Beekman has a one-on-one college placement program (one guidance counselor to one student) with continuous follow up conferences to refine college choices.  Guidance counselors guide students through the college application process. Specialized classes with three (3) students may be formed if requested, such as for advanced placement.  Tutoring is available once or twice per week. The school provides eight written evaluation reports in addition to four quarterly report cards.   98% of Beekman students go on to college. 

What is the college attendance rate for Onteora High? Given that the three Onteora schools are more expensive than Beekman, do they provide similar services? Are class sizes limited to 8 students? Is there intensive career guidance?  If a student wishes to study acting, is a course set up to cater to them?  If not, where is the $31,000 in teacher jackpot money going? 

It is going to keeping an extra school open. Moreover, the Onteora School district puts students far down on its list of its priorities. The $31,000 per student cost is a pretext to fund teachers' salaries, pensions and administrative bloat.  Teachers are more interested in indoctrinating students ideologically than in teaching the three r's. The Democrats are loyal to the teachers' unions, and could care less about your children. This is because of the dominance of academic certification organizations like the National Council for the Accreditation of Teacher Education (NCATE), which could care less about the three 'rs and exclusively emphasize political correctness.

In his book Capitalism and Freedom,  Professor Milton Friedman came up with an ingenious idea.  Give school budgets to parents in the form of vouchers, and let them decide the school to which they send their children. Schools would compete for students just as automobile manufacturers used to compete for customers. Onteora would have to compete with Beekman and the UN School, and provide an education of a comparable standard to Beekman's for the same price.  Since the taxpayers of Olive have magnanimously chosen to spend like a rich person on behalf of the Town's children, it is foolish to squander the money on subsidies to Onteora's unproductive school administrators as the Democrats have chosen to do.  We Republicans believe that if we are spending as much on education Olive's children ought to be given the same educations that rich people's children receive.  It is true that this arrangement would likely mean lower salaries and pension benefits for teachers, less administrative bloat, and fewer make-work jobs, which is why the teachers hate libertarians and the GOP but love the tax-and-spend Democrats.  But there is little doubt that your children would be better educated under a voucher system.  Perhaps it is time to ask the Onteora School district to compete with Northfield Mount Herman, the UN School and Beekman, and to end the festival of waste in the Onteora School District.

Sincerely,

Mitchell Langbert
Town of Olive Republican Committee

Pro-Freedom Republicans versus Roosevelt-Rockefeller-Bush Republicans

I have been active in my town's Republican Committee for the past few months and I have noticed that a meaningful contingent here supports freedom. By freedom I mean (1) limitation on government and (2) belief in rights to engage in business as well as to live, speak and write freely. The two, economic and civil freedom, are intertwined, as Milton Friedman makes clear in Capitalism and Freedom. We have seen this recently. Following Obama's election, left wing propagandists have called for curtailment of speech, specifically speech that favors libertarian political candidates or criticizes President Obama, which they claim is "hate speech" and, in their view, susceptible to regulation. So speech which criticizes the left becomes hate speech and in the left's view, illegal. Meanwhile, the state has the right to dispose of your earnings, not you. What is especially irksome is the chronic stupidity and incompetence of the advocates of big government. The fact that they are willing to use state violence to implement ideas that do not work does not trouble them. They cry for ever greater exactions and ever greater extensions on the power to coerce, to tax, to regulate and to imprison. Thus emerges totalitarianism.

Excessive taxation (by which I mean above the amount to cover public safety and stability) and freedom are incompatible. If you do not have the freedom to dispose of half of your income, as we do not today, we are not free. Similarly, excessive power granted to judges and government bureaucrats and freedom are incompatible. Judges are not neutral actors, and as often as not they're corrupt and biased. Recent scandals surrounding Clarence Norman in Brooklyn confirm that judicial corruption is as alive today as it was in the nineteenth century.

The ideas of Milton Friedman and Judge Richard Posner offer a version of the freedom philosophy that differs from one of limiting government. This is more true of Posner than of Friedman, who was primarily a libertarian but diverged in one key way: he advocated a central bank despite considerable historical evidence that banking in its present form does not work. Friedrich Hayek, Ludwig von Mises and Murray N. Rothbard rejected the claim, a claim that lacks empirical evidence, that banking in its present form contributes to social welfare or is necessary to an optimal economy.

The dispute over banking is political. However, there is economic evidence that (a) banking involves economic redistribution and (b) that it is the primary cause of the business cycle, of booms, busts, recessions, depressions and bubbles. Many economists claim otherwise much as many sociologists favor the 1960s welfare system. "Progressive" economists favor welfare for Wall Street while "progressive" sociologists favor welfare for those disinclined to get a job.

Friedman did not claim that central banking has worked. He wrote a monumental book on the subject, Monetary History of the United States, and says in Capitalism and Freedom that the persistent failure of central banking should give its advocates pause. Nevertheless, Friedman advocated a "fixed monetary rule" by which the Fed would print a percentage increase of new money each year and no more. Friedman was one of the few people to see his ideas implemented. This idea, the fixed monetary rule, did not work because the mechanics of money creation are too complicated for it. The amount of money depends on choices that bankers make as well as new reserves, hence the Fed cannot know in advance how much money to print. Friedman's idea was tried by the Carter Fed (note that the ones to try monetarism were Democrats and that Republicans Nixon, Reagan and Bush were all practitioners of Fed activism) and continued into the early years of the Reagan administration. It was then rejected because it did not work on a practical level.

Although his idea was rejected, Friedman did not conclude that the Austrians were right. He continued to support centralized banking. The result is that Friedman's ideas provide marginal improvement to big government but show that less is more. That is, despite his belief that government can be curtailed based on logical argument, the more Friedman's ideas have been adopted during the 1980s and 1990s the bigger government has become. Unless the money creation power of the central government is curtailed, totalitarian control will march forward. While Friedman is right in many details, and his imagination is wonderful, overall his ideas have failed to induce a more libertarian society.

Judge Richard Posner (a federal judge in Chicago and Professor at the University of Chicago) is more elaborate in his defense of centralized economic planning. He believes that it is best accomplished through the judiciary. In his textbook on "Law and Economics" Posner claims that judges have the ability, and historically have, made judicial decisions that optimize efficiency. Thus, the legal system has defended capitalism and ensured that economic growth can optimally occur. This view reflects utilitarianism, the idea that there can be optimization of the greatest good for the greatest number. But note that Posner believes that rational judicial planning, not spontaneous markets, achieves the utilitarian goal.

There is a problem with the maximization of efficiency by judges. It assumes that judges can know what decisions maximize efficiency. But unless they are gods they cannot. This is because no one can know what direction technological development can take. Thus, Posner's view is a reassertion of the belief system of the ancient Roman state. The Romans believed that their model of development was efficient and applying it through military violence to ever wider areas would make them better off. Similarly, in nineteenth century America many came to the conclusion that economies of scale are the dominant source of economic progress. In fact, this is not true. Experimentation is the dominant source of economic progress. And unless judges are experimenters, inventors or entrepreneurs, they cannot possibly know what will be efficient. But they can enforce scale at the expense of experimentation. Posner believes that efficiency means violent enforcement of scale and other big business practices that appear to be efficient in the short run. Posner's ideas lead to the belief that big business requires defense and that the brute violence that judges can enforce works better than spontaneous markets and technological advance.

Hence, Posner's utilitarianism is a euphemism for prenatal socialism. Socialism claims that central economic planners predict in advance what the optimal course of the economy will be. Claiming that the Fed can know what's best, as Friedman does, is very closely linked to that idea. Claiming that judges know has the additional vice of arrogating power to one of the less competent and more corrupt institutions--the courts. But Friedman's advocacy of giving power to the Fed is no less absurd. Indeed, outside of universities, I can think of few less functional boondoggles than the courts and the Fed. That the Chicago School of Economics devolved to claiming that these two failures function optimally suggests a fundamental error in utilitarianism: its emphasis on the infallibility of human rationality.

The question I have raised is whether those who believe in freedom can do business with big government Republican types. Milton Friedman represents the best of Progressive Republicanism. Although he is in many ways sympathetic to libertarianism, his support for the Fed leaves the back door open to Progressivism, and this has been the effect of his ideas.

Recently, a Forbes article quoted Posner as supporting the bail out. This is not surprising because the belief in judicial rationality and infallibility leads to a belief that planners are smarter than markets. Likewise, Friedman's and Posner's ideas suggest that government support for business (via the Fed and the Courts) is preferable to freedom. Hence, there is a insuperable gulf between Progressives and pro freedom Republicans.

At the local level free market Republicans are preferable to Democrats, and I am proud to be an active supporter of the Republican Party. At the national level, the utilitarianism of Progressive Republicans leads inexorably to socialism. The bail out is Progressivisim at its ugliest, most insipid and most incompetent.

I am not convinced at this point that I can support any Republicans who engineered the bail out. But the bail out's supporters include all of the nationally known Republicans. I am not certain that a Democratic President like Obama is worse than a Republican who follows Posner's ideas or who supports the Fed. Progressive Republicanism is insidious because it leads to socialism while claiming to reflect free market ideas. This debases the freedom philosophy and makes debate impossible.
I should not have to defend the market against socialist perversions like Enron or Wall Street.