"What Faculty Unionism Really Accomplishes

My op-ed "What Faculty Unionism ReallyAccomplishes" appears today on The John William Pope Center for Higher Education policy Commentaries website at

http://www.popecenter.org/commentaries/article.html?id=3343

Radio Interview on Redeemer Broadcasting

I was interviewed for one-half hour about local economic development on 88.3 FM WFSO (Olivebridge, NY), 105.3 FM (Kingston, NY), 101.1 FM, (Catskill, NY), 90.3 FM (Newburgh, NY), WNEQ 90.3 FM (Taylortown, NJ), and 80.7 FM WXMD (California, MD.). The interview airs on March 26, 2016 at 10:00 am. 

"Neil Gross's Plantation Theory of the Academic Labor Market"

My article "Neil Gross's Plantation Theory of the Academic Labor Market" just went online in Academic Questions  (29:1, spring 2016).   A draft version is available here. In the piece I argue that Gross's theory about why academics tend to be social democrats is riddled with statistical errors and historical inaccuracy.

Thoughts on Professor Codevilla's "America's Ruling Class"

A friend sent me Professor Angelo M. Codevilla's excellent American Spectator article "America's Ruling Class." I recommend reading it with careful attention. Unfortunately, I’m not sure that Professor Codevilla’s hope that a country party that  represents pro-freedom Americans is possible. The reason, as Professor  Codevilla points out, is that the potential members of a country party are diverse, spread out, and difficult to organize.  Moreover, he romanticizes the electorate, which is more corrupt today than earlier in my lifetime.

I literally live in the country and have gone door to door in my rural Catskills community, which has gone from Republican to Democratic over the past 40 years.  A large segment of the voters is preoccupied with government programs that secure them jobs in areas like nursing or education. An almost-as-large segment is comprised of welfare recipients who have been attracted to Kingston, NY by subsidized, public-and-private-partnership housing that has enriched developers at the expense of taxpayers, who are increasingly saddled with the cost.  Yet, the voters themselves are clients of the politicians, for 51% of the county works for government.  In other words, I don’t think a country party politician is electable in my part of the country at this point.  

Professor Codevilla unearths historical processes that have led to current problems. His implicit model is of a unitary elite.  There are elites, but they are more pluralistic than he assumes.  Also, he is vague about how the unitary elite is constituted.  Are they conscious that they are a unitary elite?  I don’t believe so—there is not a conscious conspiracy, although there are a number of old boys’ clubs.  He is right that education has homogenized the elite. At the same time, I don’t believe that the most powerful are fixated on social or religious issues. 

Investment and commercial banks play a bigger role in formulating economic policy than he says.  They constitute an interest group that likely trumps the others--especially in the economic realm.  At the same time, interest groups ranging from the professions to the pharmaceutical industry to agribusiness have identifiable interests that collide with the socialist and anti-religious objectives of Northeastern academics.  The array of interests collaborates in many ways, but they are also at loggerheads some of the time. The Republicans attract diverse special interest groups, which enables them to ignore their own rank-and-file. Thus, as Professor Codevilla suggests, the Republican Party is a me-too party that is at war with its supporters. I agree that there has been an attack on Christianity and on freedom, but I’m not sure that every section of the elite array is represented in those attacks.  At the same time, his analysis of the role of universities is on the money.

His analysis of why the Democratic Party is dominant is brilliant, but it begs the question as to why no Republican who represents the majority has stepped forward. First, I regret to say that given my small amount of experience with politics I am not optimistic about the intelligence or morality of voters, whom Professor Codevilla idealizes.  Second, my guess is that rank-and-file Americans have been bought with a $25,000 Social Security benefit and Medicare. That seems to me to be selling  freedom cheap,  but as Professor Codevilla--along with de Tocqueville--implies, democracy leads to the impulse to enhance one’s specialness or individuality by claiming privileges at others’ expense, and I believe that rank-and-file Americans have been convinced that government programs do that for them, so they identify with the elite power structure to a greater degree than Professor Codevilla admits. 

In other words, the people of the country party are as much to blame for their loss of freedom and opportunity as their leaders are.  How else did all the political goofballs get elected?  I briefly campaigned to be on the town’s Republican committee.  I got elected, but some of the people I met still give me nightmares.  When I listen to political conversations among the Democrats at the Kingston YMCA, I get a similarly queasy feeling.

A related story is this:  Two of the most conservative people in Ulster County, a guy who runs a fruit stand and a guy who runs a newspaper, for which I wrote for several years, both went on a warpath to defeat the Democratic county executive because he would not renew a subsidized lease to a tourist railroad.  When I suggested to them that a government subsidy to a tourist railroad is not a particularly freedom-oriented cause, the fruit-stand owner said that a private firm could not buy the property and run a private tourist railroad because it costs $25 million; therefore, government needs to do it.  

 Country party, maybe. Freedom oriented—I don’t think Americans know what the word means anymore. 

 Professor Codevilla Responds  

Dear Mr. Langbert   

Thank you for your thoughtful reading of my article.   Of course, I never suggested anything like a ruling class conspiracy. but near uniformity based on common mentality, experience and interest is even more solid.   Is the ruling class motivated by social issues? I suggest that it identifies itself in those terms. Animus and disdain seldom come from mere interest. Its common interest comes from its other defining feature - connection with government?   Why no serious Republican opposition? Why does not the moon slip its orbit from the earth? Just look at what the mass of Republican satellites are trying to do to Cruz, and why they do it. They are comfortable as satellites.   You are quite correct about the country class’s corruption. Yes, the country class is likely to take power carrying all that corruption with it. (vide Trump)

---

Best wishes

Angelo Codevilla

 

Stock Market Predictions

Year to date the S&P 500 has returned -8.77%, but its average price-earnings ratio is still 19.3, which is unappetizing. My investable portfolio is down about 4.5% for the year (and down about 6% from its 2015 high versus the S&P 500's being down 14% from its 2015 high).  I'm currently about 25% in stocks.  My bet is that the market will continue to fall further this year, rebound this year, then fall again next year, so I will continue to keep much of my money out of the market until I see a correction closer to an average of S&P 15 times earnings (versus the current 19). That implies a fall of 21% from here unless earnings improve.  If stocks fall another 15% or so, I'm probably at least partially back in. If  the market does rebound from here, I will miss the rally, but better to be able to retire with my current portfolio than risk a 40% decline.  With my current asset level I can retire, but I cannot retire if it falls by 40%.

The Fed seems to have painted itself into a corner: It is running out of ammunition.  The world economic picture and aging boomers militate against a strong-demand economy.  Because of its obsession with demand and with growth rates, the Fed may overstimulate. If it doesn't, there will be declining stock prices and a slow economy.   

Moreover, we are at an ambiguous point in the commodity cycle.  Both oil and gold may have touched bottom, but that's unclear.   I had read that a bottom of $25 is likely for WTI crude price, and today's bounce to $29 seems to be consistent with that claim.  Today's bounce was painful for my oil short, but overall my investable asset portfolio is down year to date  less than the S&P 500 because I had removed much of my investment assets into cash.  I'm not sure that I still believe that $25 is the bottom for oil.

One thing I've learned is that low p-e ratios are not indicative of short term positive returns.  I didn't do better because of my poor timing on a couple of oil shorts and because my stock investment choices have been dismal.  These included falling into a value trap whereby I bought financial stocks because their valuations were fairer than the market average, yet the low-priced stocks underperformed the market this year.  Low valuation is not the only measure for short-term performance, and in today's market I'm not sure that low valuation doesn't signal poor momentum rather than the market's overlooking a good buy. It is probably true, as Morningstar points out, that in the long run the financial stocks will overcome their association with oil lending and outperform, but I don't believe that the market for oil or stocks will stabilize for the next couple of years.

Gold has taken me by surprise, but I'm not convinced that its positive performance will continue unabated. I am getting ready to go long again on gold, but I suspect that there will be renewed easing that will complicate commodities prices for a while longer. 

De Tocqueville on Progressivism and Presidential Power

I have been rereading Alexis de Tocqueville's Democracy in America; the translation is by Harvey C. Mansfield and Delba Winthrop.  It isn't light reading, but it is accessible, and every American should read it.  Following his 1831 visit to the United States, de Tocqueville published it in two volumes, which appeared in 1835 and 1840.  Many of de Tocqueville's insights about America are accurate today, often eerily so.

On page 128 de Tocqueville questions whether the framers of the US Constitution were right or wrong to permit the president to be reelected. This is a fascinating question because I can think of a number of abuses that have occurred in connection with presidential reelection during my lifetime, especially during the administration of President Richard Nixon. Indeed, statistics show that the stock market routinely rises during presidential election years, for the party in power manipulates the Federal Reserve Bank in its favor.  De Tocqueville points out that a president who seeks reelection views laws and negotiations as electoral schemes that redound to his or her, rather than to the nation's, benefit. "The principle of reelection therefore renders the corrupting influence of elective governments more extensive and more dangerous. It tends to degrade the political morality of the people and to replace patriotism with cleverness." 

De Tocqueville adds that all forms of government are associated with a natural vice, and laws that enhance the vice are undesirable.  The founding fathers limited the whims of the majority by state governments' electing senators and the electoral college's electing the president.  De Tocqueville notes, "In introducing the principle of reelection [of the president], they destroyed their work in part. They granted a great power to the president and took away from him the will to make use of it."

Progressivism worsened this result because the Seventeenth Amendment, a 1912 product of Progressivism, made the election of senators direct. Moreover, the replacement of party conventions with primaries and the diminution of the influence of the electoral college have made the president ever more likely to be tempted to manipulate public policy to gain reelection.

De Tocqueville writes:

Each [form of] government brings with it a natural vice...the genius of the legislator consists in discerning it well...[E]very law whose effect is to develop this seed of death cannot fail in the long term to become fatal, although its bad effects may not be immediately perceived.

The effect of Progressivism was to pass a series of such laws that enhanced the majoritarian principle without concern for checks and balances.  The power of banks and the Federal Reserve Bank interact with the tendency of the president to manipulate public opinion in his--and the banks'--short-term favor.  The result has been misallocation of credit and other resources and resultant economic instability that, in turn, has resulted in increasing cries for government intervention and socialism.  The public is unable to perceive that their economic insecurity is the direct result of governmental manipulation of credit to the short-term advantage of politicians and banking, real estate, business, and investment interests.

My thought is that the United States would be better with a president elected for one six-year or even four-year term rather than for two four-year terms.  

My Article in Econ Journal Watch

Econ Journal Watch just published my study of 920 industrial relations (IR) researchers.  Mine is one of the first times an association has been shown between (a) Democratic registration and political contributions and (b) the ideological orientation of a field’s published research.   I found that when I scored papers in the leading IR journals for ideological orientation without knowing the authors’ information and then looked up the authors’ information in a party registration data base there is a statistically significant association between the ideological orientation expressed in the articles and the authors’ political registration or contributions.  In other words, the exclusion of scholars with alternative views mirrors the balance of views expressed in the published research in the leading IR journals.  Nevertheless, none of the journals states that they advocate an ideological orientation.

 

As well, I found that the exclusion of non-leftists becomes more intense as one moves up the academic hierarchy.  While individual academics associated with the IR field have a D:R ratio of 8 to 1 (mainstream economists have a D:R ratio of 3 to 1), those who contribute twice or more (e.g., publish two papers over five years or are both an editor and an article author) have a D:R ratio of 11 to 1. Editors at the two leading IR journals, Industrial and Labor Relations Review and Industrial Relations, have a D:R ratio of 43 to 1.  Thus, in the study I emphasize person roles rather than individuals. (That is, if someone is both an editor and an author they count twice.)  The overall D:R ratio for academic person-roles is 10 to 1, but that includes the Journal of Labor Research, which the Olin Foundation specifically funded to permit alternative views in the IR field.  Without JLR, the registration ratio is 13 to 1. The political contributions ratios are even more extreme.

 

The article appears here:

 

http://econjwatch.org/issues/volume-13-issue-1-january-2016http://econjwatch.org/issues/volume-13-issue-1-january-2016

 

The summary is as follows.

I show that the field known as industrial relations (IR) leans overwhelmingly to the political left. I investigate the voter registration and political contributions of IR researchers, showing overwhelming Democratic Party favor. I construct a data set of participants in the IR field, which contains 920 U.S.-based person-roles (deriving from 709 actual persons). Included are the authors of the 539 research articles published in four periodicals 2009–2013: (1) the annual meeting proceedings volume of the Labor and Employment Relations Association (LERA), (2) Industrial and Labor Relations Review, (3) Industrial Relations: A Journal of Economy and Society, and (4) the Journal of Labor Research. I also include the editors of the periodicals, the officers of LERA, and a sample of LERA’s ordinary members. The data suggests that the ratio of Democratic-to-Republican voter registration among participants in IR is roughly 10 to one. I find a similar ratio when looking at those who have made contributions to Democratic and Republican candidates for office. I also show that Democratic lopsidedness at the three mainstream IR journals becomes more extreme at the higher stations (officers and editors, as opposed to ordinary members and authors). Also, I analyze the content of the 539 articles for union support and regulation support; the mainstream IR journals are overwhelmingly pro-union and pro-regulation.

 

 

Alfie Kohn's Authoritarian, No-Bathroom Theory

I am reading Alfie Kohn's book Punished by Rewards, which assaults incentive systems, bonuses, pay for merit, praising children, and any other extrinsic reward. Rewards are extrinsic when they arise outside a task. If I blog because I enjoy it, then the reward is intrinsic, but if I blog because of the great fame it brings me, then the reward is extrinsic.

Kohn's is a no-bathroom theory.  That is, if I hire a contractor to build me a bathroom, and I tell him that his reward will be intrinsic rather than extrinsic, then I will get no bathroom.  A more primitive example is a cave dweller who works harder than his neighbor to bag two mammoths instead of one.  The second mammoth is his reward.  He is not punished by the reward, for his family is better fed and may live longer. His hungry neighbor may spend his time on intrinsically rewarding tasks like drawing on cave walls, but the neighbor's family goes hungry.  The industrious cave dweller is rewarded, and the reward is natural.

Mark Twain's Tom Sawyer convinced his friends to whitewash a picket fence because it was fun. Most of the time, though, my offering merely intrinsic rewards to contractors will not result in a contract. Modern economies are based on contracts, hence they are based on rewards, incentives, and bonuses. 

I do not doubt the gist of Kohn's book: Experimental evidence developed by social psychologists in laboratory conditions shows that interest in tasks wanes when rewards are introduced.  Nevertheless, the real world differs from laboratory conditions.  No one goes to work without an incentive, namely, a paycheck. "If any would not work, neither should he eat," (2 Thessalonians, 3:10).

The phenomenon of incentives' causing declining interest in a task is related to the theory of cognitive dissonance.  Absent a reason for doing something, the mind invents a reason: I am doing it because I believe in it or because it's interesting. If we are doing something because we have decided that we believe in it, we will tend to be better at it because we believe in it.  Pay introduces dissonance: We do not believe in what we are doing; rather, we are doing it because of pay. That may make us less attentive because the pay rather than the task is our reward. 

However, without pay and without rewards many tasks will not be done because the reality, absent psychological manipulation, is that we do not care enough to do most work. The cave man did not invent the automobile not because he would not have benefited from the automobile but because he could not imagine it. We imagine not only because of intrinsic interest but also because of rewards. We would not have most of today's conveniences--cars, electronics, and the like--without the financial and social incentives that benefited the inventors. That can be seen in the lack of invention in societies in which rewards are absent--India and the USSR, for example.  They have not been innovative because of their socialistic systems.  America became increasingly socialistic after 1900, so innovation has gradually slowed from the 19th century rate.

Kohn attempts to deflect these points by differentiating between objectively determined rewards and those dependent on others' will--a distinction he mostly avoids when talking about gainsharing plans and stock options.  On page 183 Kohn writes this passage, which is among the most realistic in his book:

When someone contacts me about giving a lecture or writing an article, I ask how much is involved and often negotiate for the maximum amount that seems to be fair and that the organization can afford to pay. Then, assuming we have come to an agreement, I do my best not to think about the money again.  I do this because I fear the consequences of construing what I am doing in terms of what I am being paid: eventually I might find myself thinking, "A is paying me twice as B, so I'd better do twice as good a job for A. If I ever reach that point, my integrity will be gone, and my intrinsic motivation will have fled along with it. 

What I attempt to do, in other words, is decouple the task from the compensation.  Since I am self-employed, this is largely a matter of how I think about my work--what I attend to, and when, and how. But for people who do not work for themselves, it is imperative that the act of decoupling be facilitated by the organization. This is done mostly by avoiding certain practices--specifically, anything that encourages people to become preoccupied with what they will get for what they are doing. 

In other words, Kohn finds financial incentives amenable when he receives them because he believes that he is intelligent enough to decouple the reward from the task, but he has no such faith in workers, whom he sees as lacking his ability to put things in perspective because they need employers to do their thinking for them. Kohn applies similar elitist reasoning to students. He claims that students study for grades because the system has inculcated in them a belief in incentives. He does not believe that students can think for themselves, as he believes he can, and develop interest in a subject.

Kohn's lack of faith in students' ability to think for themselves falls apart with respect to their cheating. Despite being told over and over that cheating is wrong, many students still cheat. Kohn seems to think that it is impossible for students to think for themselves and develop interest in a subject because schools give rewards for study, but it is possible for students to think for themselves and cheat even though schools give punishment for cheating.  Why is developing an intrinsic interest in the face of rewards more difficult than cheating in the face of punishment? Both are subject to external incentives. 

Kohn's elitism is familiar to those who have thought about professionals' privileged roles in America's authoritarian economic system.  Kohn himself has garnered rewards such as consulting contracts with major corporations, writing for the Harvard Business Review, and appearing on CNN.  Why would such capitalist institutions be  interested in supporting a radical, which Kohn claims he is? 

Although Kohn claims to be opposed to rewards because they are, in his view, authoritarian, Kohn's solution set is authoritarian--and in many ways to the liking of authoritarian corporate bailout recipients.  He sees no problem in using authoritarian, violent methods to ban products that do not match his personal tastes (p. 192):

But what interests me are the unpleasant jobs that do not have to be done in order for society to function, those whose existence reflects the premise of our economic system that if something sells, it has value by definition and should be produced.  Should convenience foods or luxury appliances be made available if the human costs of preparing or assembling them are severe? Our answer may be yes, but the question needs to be asked. If the issue is rarely addressed, it is partly because many people are forced to choose between working at such jobs and not working at all--a choice framed not by "life" but by our economic system.  These people are expected to be grateful that any employment is available, regardless of the psychic and physical toll of doing such work.

In other words, if Kohn feels that convenience foods are unnecessary, then Washington should send federal agents to force the producers to stop making those foods in the name of the producers' supposed authoritarianism in rewarding their employees.Violent federal agents are presumably not authoritarian in Kohn's world.

In fact, few workers earn an adequate wage.  Incentives are a way for workers to improve their wage. Such improvement is possible on large scale only in a free economy. It exists nowhere else in the world other than in free market economies (including Sweden's relatively free one).  It exists to a greater degree in countries that have freer economies than the US, such as Singapore, Hong Kong, and Switzerland, and it does not exist in countries where there are no incentives like North Korea and Cuba.  

Why is Kohn popular among big business-related interests like CNN and the Harvard Business School?   This point has been addressed by historians, such as Martin Sklar, who have studied the Progressive era.   Big business has a lot to gain from not paying incentives to workers and from centralizing authoritarian control, where it can illegalize any business that it and Kohn find  offensive.  By avoiding incentive pay, corporations can save lots of money. Plus, they can put their competitors out of business by using government controls to shut down those that do.  

 

The Liberal Arts Can't Fix Higher Education

My essay "The Liberal Arts Can't Fix Higher Education" appeared at Minding the Campus on December 28, 2015. What can fix higher education? Better attention to basic skills, including memorization of the multiplication tables, reading-and-writing practice, writing correction, math correction, and grammatical skills are a start.  These need to occur at the K-12 level, but they also need to occur at the college level when they are needed. Liberal arts is problematic because it's not done well.  The liberal arts tradition was rooted in Latin, Greek, and Hebrew, but today's college students often cannot write English.

Indeed, the claim of today's colleges that they encourage diversity is belied by many students' (also here) getting no exposure to a language.  Indeed, I very much doubt that most faculties can teach from diverse perspectives because they are trained in narrow specialties and mostly do not have broad education. As well, few are interested in improving the skills needed to study liberal arts, including writing.

What Do Falling Oil Prices Tell Us about the Dollar?

I recently blogged about my bearish positions on the oil and gold markets.  Today, the Wall Street Journal observes that oil prices are falling on the Saudi oil minister's statement that despite falling prices Saudi Arabia won't change its output.  Despite prices that are below most US producers' break even points, the US producers are covering their variable costs.  The journal writes:  "U.S. oil stockpiles remain near levels not seen for this time of the year in around 80 years."  Stockpiles' rising to record levels will further pressure ]oil prices.  In the short run the situation is bearish, but in the long run it is bullish.

What does this tell us about the dollar?  America's Keynesian and monetarist economists, Democrats and Republicans, have created a monetary system whereby the dollar serves as a reserve currency; governments, central banks, and citizens around the world hold dollars; and the dollar is backed by the full faith and credit of the government that fought the Iraqi War in order to eliminate weapons of mass destruction. The rationale for this system is that the sovereign dollar holders will act rationally.

Nevertheless, the sovereign producers of oil are also the sovereign holders of dollars.  As producers of oil, many are now producing at a loss.  If there can be a glut in the oil market, how can these sovereign producers assume the mantle of rationality when it comes to holding dollars?

The famous game theory model of the prisoner's dilemma predicts that when two parties do not share information the solution to the problem of choosing whether or not to collude tends to be suboptimal.  Of course, central banks speak to one another--much as European governments spoke to one another before a millennium of wars. 

Trump versus Sanders

The Wall Street Journal blog reports that Bernie Sanders aims to win Donald Trump's supporters' votes, for they are anxious about the economy, whose decline Sanders blames on greed.  Greed, of course, has always existed, and there is no evidence that there is more greed now than there was in the free market period of American history, when real wages grew at 0.5% to 2.5% per year.

Mr. Sanders is right: There is little difference between Mr. Trump and him. Both are big government advocates. Mr. Sanders sees government redistribution as the cure to greed, an absurd, impossible plan, and Mr. Trump sees government immigration restrictions as the cure to job loss, an equally absurd non-sequitur.

While Hitler, like Trump, was a racist, he was also, like Sanders, a national socialist. The twenty-five-point Nazi plan of 1920 contains much overlap with Mr. Sanders's views, albeit Sanders's Brooklyn Jewish background may not have been to Hitler's taste.

Point six of the Nazi twenty-five-point plan, for instance, was nearly identical to Sanders's position on immigration: "Non-citizens may live in Germany, but there will be special laws for foreigners living in Germany."

The Nazis also agreed with Mr. Sanders's redistributionist schemes, as in points ten and eleven: "Every citizen should have a job. Their work should not be selfish, but help everyone. Therefore we say...No one should live off money from rents or other income unless they have worked for that money."

Like Sanders, the Nazis hoped to repeal greed.  Since greed is a natural impulse like sexual desire or hunger, aiming to repeal greed opens the door to repression and ultimately murder, as has been the case with a long list of large-scale socialist states over the past century.

The Nazis' immigration policies, redistributionist schemes, and opposition to selfishness parallel  Bernie Sanders's platform. The American left is a reincarnation of the Nazi movement, with the racist (but not anti-Semitic) element excised.

Commodity Prices to Remain Soft

The Wall Street Journal reports that oil companies are writing down assets and that the SEC is pressuring the companies to reveal how the falling prices will affect their asset values.  News like this may come a little before a bottom, although the Journal also wrote a piece on December 11 suggesting that a bottom is in.  A contrarian attitude toward newspaper reports is often right. It's when the newspapers say that there is no bottom in sight that the bottom is in. Hence, I'm not convinced that a bottom is in.

I pulled out of my MLPs and oil-related holdings in October 2014. My doing so resulted in some issues with my stock broker, so I moved my entire portfolio to TIAA-CREF.  I lost a bit on my investments in MLPs and oil stocks, but I made some back shorting oil at a few points. 

Recently, I attended an alumni meeting of the UCLA business school in New York, and several of the MBA students were interested in oil. In the course of our conversation, one asked me how I knew to pull out of oil at the beginning of the decline. I'm not a technical analyst, but I do subscribe to a technical trading letter, Sunshine Profits, that helps me. My chief interest is in their gold reports by Przemysław Radomski, CFA, but I also get a monthly oil report by Nadia Simmons.  

My overall thinking, though, was influenced by my friend Howard S. Katz, who died in 2011 and was an early advocate of the application of Austrian economics to gold trading. Murray Rothbard once called Howard an "absurd Robespierre" because of  internecine squabbles in the early days of the Free Libertarian Party. (I joined afterwards.)  Howard was a gold standard monomaniac who argued in his book The Paper Aristocracy, published in the late 1970s, that the paper money system was resulting in income inequality.  As a result, gold traders have a moral obligation to advocate the gold standard.  

I was an oddball at UCLA, where many of my fellow students were interested in Wall Street careers, but I was an advocate of policies that would have significantly shrunk Wall Street if not eliminated it entirely.  America would have been much better off  had it done so, but Wall Street's control of political discourse goes back at least to the 1912 presidential campaign, if not earlier. 

Actually, it was earlier, for there were six pivots in the evolution of America's bankocracy.  The first was the establishment of the First Bank of the United States by Alexander Hamilton and his colleagues, which was abolished and then reincarnated as the Second Bank in 1816.  The second pivot was the Civil War, which enabled the passage of the National Banking Act. A third was the establishment of the Fed and World War I.  A fourth was Franklin Roosevelt's first abolition of the gold standard and establishment of the New Deal.  Roosevelt was the nephew of Frederic Adrian Delano, the first vice chairman of the Fed, and the great great grandson of Isaac Roosevelt, cofounder with Alexander Hamilton of the Bank of New York.  In America the bankocracy is partly hereditary as well as economic.  A fifth pivot was Nixon's abolition of the gold standard in 1971.  A sixth was the financial bailout of 2008. 

Notice that each of the pivots was associated with a war.  The First Bank of the United States ensued from the Revolutionary War; its successor, the Second Bank of the United States, ensued from the War of 1812. The National Banking Act ensued from the Civil War.  The Fed preceded World War I by only six months.  The first abolition of the gold standard preceded World War II by four years. (The Gold Reserve Act was passed in 1935 and World War II began in 1939.) Nixon's abolition of the international gold standard occurred during the Vietnam War.  The monetary collapse of 2008 occurred during the Iraqi War. Concerning the relationship between the Fed and World War I, Federal Reserve History.org writes:


[T]he conflict accelerated the evolution of the Federal Reserve into a true central bank by increasing its financial resources and transforming the US dollar into a major international currency. 'The war reshaped the Federal Reserve System in many ways,'  writes economist Allan Meltzer in his landmark work A History of the Federal Reserve.

"Reshaped" is an odd word because the Fed was established during Christmas week of 1913 and World War I began in July 1914, although the US did not enter the war until 1917. Both the establishment of the Fed and the entrance into World War I were under President Woodrow Wilson. JP Morgan (a) knew Wilson from Wilson's days as president of Princeton (for Morgan was a donor), (b) financed the Progressive Party, which was responsible for Wilson's election, and (c) was involved with the drafting of the original Federal Reserve Act bill in the famous Jekyll Island meeting.  In 1936 the Nye Committee in the Senate investigated  JP (Jack) Morgan Jr.'s direct involvement in the entry of the US into World War I, but it did not prove it. 

Each of the pivots was associated with a major financial disruption.  The establishment of the first bank occurred after states' issuance of paper money, hyperinflation, and collapse of the continental.  The National Banking Act was associated with inflation resulting from greenbacks. The establishment of the Fed was followed by a hyperinflation and depression in 1919 and 1920.  The first abolition of the gold standard followed a deflation and a banking collapse. The second abolition of the gold standard was associated with the stagflation of the post-Vietnam War era.  The 2008 financial collapse was associated with the takeover of banks and the tripling of bank credit. 

These disruptions resulted in secular shifts in the economy: The National Banking Act was associated with expansion of big business and the railroads.  The establishment of the Fed was followed by the stock bubble of the 1920s. The first abolition of the gold standard and its reinstatement in the 1944 Bretton Woods agreement were followed by the post-1945 stock market bubble, the boom in urban redevelopment, the expansion of the suburbs, the creation of interstate highways, the expansion of reliance on the automobile, and the expansion of automotive air pollution. 

Not all of the banking disruptions have been inflationary.  Inflation results from excessive creation of money, but roughly half of the money of the US is held overseas, and it's possible for banks to hold reserves without lending them, and that's happening now. The National Banking Act was followed by inflation as were the establishment of the Fed and Nixon's second abolition of the gold standard, but the inflation of the post-Civil War period was followed by what Milton Friedman called the crime of 1873, the establishment of a strict gold standard with no silver bimetallism, and a consequent deflation; that was also true of the results of bank failures in the 1930s. There's no guarantee that inflation will occur in the short term from printing money--in fact, just the opposite, for there are effects on commodity prices resulting from misallocation or malinvestment that result in short-term deflation. 

Such misallocation has occurred in all current commodity markets.  From a long-term perspective, demand for oil is  greater than it would have been in a free market economy.  From today's short-term perspective, the early stages of a monetary expansion push down interest rates and expand investment in mines, resulting in falling prices. The falling prices are deflationary.  Thus, in the short run monetary expansion can cause deflation or subdue inflation, which occurred during the Greenspan years.  The later stages are usually inflationary, and commodity prices rise because the excessive competition produced by low interest rates causes bankruptcies of mining companies. More money chases fewer goods, and inflation ensues.

The commodity-price-decline cycle that began with the Volker tightening in the early 1980s culminated about twenty years later, and the gold price began to increase early in the millennium. The price peaked in 2011, but the intervening hyper-monetary-expansion of the Bernanke Fed inserted the beginning of a new cycle in 2009. The new cycle was superimposed on the preceding one, so it took a couple of years for gold to peak. We're now riding the Bernanke cycle downward. 

When will the cycle turn around?  I initially thought that the massive monetary increases would result in a brief, several year downturn, but it has extended to four years.  On the other hand, my increasing pessimism may signal a near bottom.  I am skeptical that we have hit bottom just yet, although in the coming year or two we will hit bottom. That point might coincide with economic-and-financial instability and a declining standard of living among Americans.  (That has been occurring for decades now, but the public has been susceptible to media propaganda claiming that "the economy" is improving and that borrowing large sums to buy big houses is a sign of economic health; when Americans have to cut back in basic ways, they may not be susceptible to the caricatures.) At that point, commodities will be important hedges, and prices might climb to the $3,500 level that I claimed for gold during the bull market.  

An important difference between the oil and gold markets is that the oil industry is oligopolistic; in particular, it's dominated by sovereign producers, especially Saudi Arabia.  The 19th century's fears of a private monopoly in oil were misguided.  Standard Oil had steadily reduced costs and increased efficiency throughout the 19th century. In contrast, Saudi Arabia can manipulate the price of oil, although it is sensitive to political pressure.  The political pressure for a transition to alternative energy may be spooking them. Economic theory says that a monopolist will produce to the point where marginal cost equals marginal revenue, but the Saudis' marginal revenue may still be above their marginal cost, which may be as low as $25.  If the Saudis want to dump their oil so that they are the last producer standing (in advance of a transition to green energy), then a $25 bottom is possible.

In the case of gold, the cost of production is unclear. According to Brent Cook's Exploration Insights Barrick Mining's cost of production may be $1,346.  Mining Web.com says that cash costs for 39 major miners average $649. Any number of small producers can be bankrupted, though, before we get to $649.  I had mistakenly bought GDX a couple of times over the past few years. This is the one-year GDX chart: 

How low can it go? There is a floor of demand by Chinese and other sovereign buyers. The Chinese may be interested in having the yuan replace the dollar as the reserve currency, and the Chinese like gold as an investment. As well, India demands gold for cultural reasons.  In October 2015 Bloomberg reported that gold demand in China is at an all-time high in response to the Chinese stock market. That may not, however, compensate for the excessive investment in junior exploration that responded to the low-interest-rate regime.  Notice that in both gold and oil the low-interest-rate regime saw increased production (fracking in the case of oil and gas) and subsequent price declines. 

Thus, I am relying on Przemysław Radomski to guide my gold thinking right now. There is a bottoming process, but I have no conceptual framework for when it can occur. There is going to be a bottom; we may or may not be at the bottom.  My bet is that we have further to go downward.  If oil hits $25, I will buy the leveraged ETF; meanwhile, I'm relying for technical guidance on the price of gold.  If it does not bottom around now or at $900, it can go to $400.

Walter Block Speaks to My Classes at Brooklyn College

Professor Walter Block, famed libertarian economist and Brooklyn College alum, spoke to my classes on November 3, 2015.  Block spoke about his impressions of Bernie Sanders when they were classmates together at Brooklyn. (Sanders later transferred to the University of Chicago.) Block talked about the minimum wage and victimless crimes.