President Diocletian

Chad the Elder of Fraters Libertas notes that the Democrats
"are trying to out-demagogue each other on the horrible state of the economy and how the only answer to our woes is government, government, and yes MORE government."

and

"Most of the Republican candidates aren't much better. From the populism of Huckabee to the corporatism of Romney, there's not a lot for a free marketeer to get excited about."

Chad goes on to note that fiscal stimulus plans borrow from Smith to pay Jones, and from Jones's grand-children to pay Jones. The greatest generation has saddled the baby boomers with dismal Social Security benefits, and the baby boomers have saddled generation Y with enormous federal debt, dollar depreciation, unfunded retiree health insurance and even worse Social Security benefits.

Chad notes that

"An indiscriminate spurt in "aggregate demand" is essentially irrelevant to longer-term economic problems"

and...

"Given the weakness of the dollar and some other frightening signs that we're already slumping towards a Seventies style era of stagflation, a rate cut by the Fed is not what I would prefer from a policy perspective. But as someone who's been trying to sell a house in a soft market and hopefully purchase another one soon, lower interest rates sound pretty damn appealing right now."

Chad's blog is good, but only intimates the worst long term risk to the economy in the last paragraph. According to the prisoner's dilemma, people have trouble colluding to maximize their well being. Rather, they minimize their maximum loss.

In the prisoner's dilemma, the cops have caught two crooks. They are interrogated separately, just like on Law and Order or The Wire. If neither talks, they both get three years. If either talks, one gets 4 years and the other gets 0 years. If both talk, they both get two years. Game theorists argue that they will both talk because the talking strategy dominates the non-talking one. I have played a simulation game called The Oil Pricing Exercise with my conflict and negotiation classes at NYU and Brooklyn College for the past eight years. I have done it close to thirty times, and the vast majority, ninety percent, indeed arrive at a suboptimal solution (I doubt more than 10% arrive at jointly profit-maximizing approach) even though sub-optimal (which game theorists argue is most rational for each individual but not most rational for society as a whole) means a lower grade.

The economy is a prisoner's dilemma. If we all collude and respect free markets, in the long run we will all be better off. There will be more innovation and a more productive economy, so we will be wealthier on average. If special interests or well meaning progressive-liberals interfere with the economy, wealth is shifted from its most productive uses, and the long run effect is that we are all poorer, although a few may be richer than they would have been in a free market (hence the much-observed income inequality). Given the incentives for special interests to extract favors from the government, and politicians' interest in short-term solutions that benefit today's "prisoners" at the expense of their children, free markets are at a political disadvantage in a free economy, even though in the long run they would make everyone better off. One of the bitterest flaws of Herbert Croly's and the Progressives' ideas (not to mention socialists, fascists, etc.) is that they did not realize that by freeing the public will from the restraint of limited government, in the long run society will become poorer and income inequality will increase. We are seeing the inevitable process before our eyes. The solutions that the Republicans and Democrats offer will make us poorer over time. We are leaving our great grandchildren a more modest living standard than could have been.

Chad's post illustrates this. His need to sell his house means that he has a vested interest in inflation, i.e., in reduced interest rates. In the long term, the inflation will harm those who do not own homes and who do not get salary raises. Chad knows this, but the money is too sweet to resist.

If you generalize this across the economy, and into areas of the economy like hedge funds or Wall Street where $100 or $200 thousand represents a restaurant bill, the motives for lobbying for lower interest rates are profound. There is no recession. Instead, Wall Street has paid its executives high salaries for years while it has destroyed economic value. Non-productive industries lobby for lower interest rates at the expense of the productive sectors of the economy.

Stronger moral education and better education about free markets would considerably help. It would probably take several decades to wring out the inefficiencies in the American economy and replace our lazy, speculative mentality with one based on initiative, productivity and thrift.

I fear that we are on a downward spiral and much will have to happen before America turns itself around. If ever. Rome didn't turn around after Diocletian's "government, government and more government" solutions*. It lasted another 100years.

*Diocletian believed that going forward under the current system of Roman Imperial government was unsustainable. He initiated a number of reforms to prevent a return to the disorder of previous generations and maintain the viability of the Empire. These included splitting the Empire into two in order to be more manageable, creating a new system of Imperial succession, ruling as an autocrat and stripping away any remaining façade of republicanism, and economic reforms aimed at the problem of hyperinflation..."

"...Further, in 301, Diocletian attempted to curb the rampant inflation with his Edict on Maximum Prices. This edict fixed prices for over a thousand goods, fixed wages, and threatened the death penalty to merchants who overcharged. Instead of curbing inflation, the edict's price controls drove goods onto the black market and created shortages. In some areas, the edict was simply ignored, and it was soon withdrawn in failure."

Bernanke, Ridin' That Train, Lowers Rate 75 Basis Points

"Ridin' that train. High on cocaine. Casey Jones you better, watch your speed. Trouble ahead; trouble behind. And you know that notion, just crossed my mind."--The Grateful Dead

Money News on Newsmax reports that the Fed has lowered interest rates 75 basis points (from 4.25 to 3.5 percent), "the biggest one day move in recent memory".

Gold stocks continue to perform well, but at 11:40 the Dow is down 138 points to 11961, the S&P 500 is down 23 points to 1302 and the Nasdaq is down 55 points to 2285.

The Fed is concerned is concerned about recession fears and the recent sharp stock market declines. The interest rate cuts should boost stock values but will also continue to depreciate the dollar. The Fed reduces interest rates by printing money. Lower interest rates enable unproductive firms to remain in business because their costs of borrowing are reduced. Firms that do not create a market-determined value that would enable them to exist are subsidized by increasing the money supply, which reduces wage earners' inflation-adjust salaries. Thus, the Fed is taxing the productive sectors of the economy to subsidize the unproductive ones. The unproductive sectors are centered on big business, the financial sector and Wall Street, who have (1) extracted excessive CEO and investment banker salaries; (2) repeatedly made terminally stupid business decisions; and (3) and now go to the Federal Reserve welfare trough for a bail out.

Meanwhile, the dollar will depreciate and inflation will escalate.

Although the markets are cool now, they likely will heat up in response to the reduced rates, but the response will be temporary.

Howard Katz's Poem

At the beginning of each issue of Howard S. Katz's financial newsletter, the One-Handed Economist, he offers a poem. Here is the poem from the January 11 issue, which is on his website:

In gold your wealth you now should park.
It hit 900 dollar mark.
Upon Filet mignon we sup
Cause price of gold is going up.

Oh, Ben Bernanake gets no thanks
He only wants to help the banks
He takes advantage of the rubes
And US dollar-down the tubes.

Yes, US dollar sinking fast
The other nations are aghast
The more they print, now don't you know,
The lower does its value go.

And as the dollar hits new lows,
Now into gold the money flows.
Yes, gold stocks, gold stocks, buy, buy, buy.
Gold stocks are going to the sky.

Model portfolio, good news
About our profits we enthuse.
And on this subject I can say,
This week we hit $200 K.

Oh Ben Bernanke he is bad.
He steals our wealth and makes us mad.
So people you must all be bold.
And buy those mining stocks of gold.

Individualist Ethics and Corporate Social Control

The history of human resource management has evolved from an individualist/conflictual approach where wage cuts followed by strikes were common. As employers started to realize that violent strikes were counterproductive, they implemented three approaches. One, scientific management and welfare capitalism, aimed for a "mental revolution" among labor and management whereby workers' aims were aligned with management's through incentives and employee benefits. A second approach was a bureaucratic approach whereby laws, rules and union agreements established a high degree of formal control through regulation and collective bargaining. However, by the 1930s employers had realized that a third approach, emotive manipulation or social control through managing workers' feelings, attitudes and ethical beliefs had the potential for a more complete influence. This theory was related to Progressivism, which, as McFarland has argued, followed an earlier attempt by the Mugwumps to establish professional standards, credentials and licensure in such fields as medicine, law, economic policy, public health and library science. The Mugwumps were most concerned with rationalization of the public sector.

The Mugwumps had earlier demonstrated that an organized movement, even if small in numbers, that utilized mass media to unify and focus the movement, could result in effective political action. The Progressives utilized this approach. The argument that labor relations could be improved through psychological methods followed the muckrakers and Herbert Croly's emphasis on the use of public power and mass movements to recreate democracy.

The shift to emphasis on psychological and social control, via the management theories of Elton Mayo and Chester Barnard, was a reflection of the Progressive movement's tactical application of the same principles for public influence. The Progressives emphasized moral relativism to combat the American religious tendency toward individual conscience. They utilized the groupthink approach that Mugwumps pioneered. They realized that to manipulate the public, understanding of the public's group processes was necessary. Thus, the progressives applied the welfare benefit approach that local political clubs had used for centuries, but nationalized it and rationalized it.