Saturday, January 31, 2015

Balanced Budget Amendment: The View from History

Since the 1840s, many U.S. states have had balanced budget requirements in their state constitutions. Some have worked but others have gotten worked around in various ways, via exceptions or pushing the debt down to the municipal level. Exceptions can be minimized by the language of the clause or amendment but the tradeoff is that ironclad language is inflexible in the face of crises, unexpected situations, etc.

I much prefer returning to what Bill White has called America's Fiscal Constitution. Here are excerpts from my review of his book as it appeared on page 38 of the fall edition 2014 of Financial History:

Every policymaker, politician, and pundit in America should read this book even though author Bill White, a long-time Democratic  mayor of Houston turned investment banker, might seem at first blush an unlikely policy hero. White’s weighty tome (500+ pps.) would qualify as a doctoral dissertation at any university on the planet because it contains 40+ pages of notes, almost 40 pages of bibliographic entries, and almost 40 pages of statistical appendices reconstructed from original sources. Most impressively of all, the end result is not a partisan political screed but a highly readable and well-balanced account of the rise and demise of America’s unwritten fiscal constitution, the set of budgetary rules that made the United States one of the world’s most creditworthy nations in the nineteenth and twentieth centuries.

White shows that U.S. lawmakers long countenanced only four acceptable use of debt: preservation of the union; expansion of the nation’s borders; waging of war; and keeping the government afloat during recessions. After each war, expansion, and recession, the federal government stopped borrowing and sometimes even ran surpluses. That, combined with robust economic growth, prevented the national debt from ballooning out of control and kept the country’s credit strong, ready for use during the next emergency or opportunity.


White suggests that America’s fiscal constitution could be reconstituted through a few, simple-to-implement reforms. First and foremost, the budget needs to be made, in Jefferson’s words, “clear and intelligible” to “any man of any mind” (p. 363). That means producing a tax-financed budget based on good faith revenue estimates updated monthly. Any appropriations above the tax-financed budget need to be clearly distinguished as such and voted on separately so that voters can readily identify politicians who want to borrow and spend instead of make difficult choices about tradeoffs. Second, the debt ceiling system needs to be dismantled because Congress votes on the ceiling only after it has voted to spend more than its tax revenues. Third, bond issue votes, like the thousands held annually at the state and municipal levels, should be held at the federal level as well. “Nothing,” White argues, “prevents Congress from holding a national referendum on whether to incur federal debt for specific purposes and amounts” (p. 369). Since 1970, he notes, state and local debt levels have grown at only half the federal rate.

Friday, January 23, 2015

Genealogy of American Finance

Book launch!: Tuesday, March 10, 5:30 at Museum of American Finance in downtown Manhattan.

Monday, January 12, 2015

Economics of Interstellar Are Far From Stellar

I watched Interstellar in the cut rate movie theater in Sioux Falls yesterday (1/11/15) and wish I had my $3.50 and 3 hours back! I've wanted to watch the movie ever since reading a laudatory review of it on a bulletin board in a theater back east over Christmas break. The reviewer focused mostly on the science of black holes and so forth and not being a physicist I guess that part of the movie was okay. But the economics were ... underdeveloped to say the least. The reason Matthew McConaughey has to travel to another galaxy ***spoiler alert, spoiler alert *** to have his ass kicked (well, his face mask smashed) by Matt Damon is that earth is dying due to giant dust storms a la the Great Depression and plant diseases that have somehow become uncontrollable. Only corn remains and is somehow directly feeding the remaining billion people on the planet. Seriously, McConaughey's character complains that they have to eat popcorn at a baseball game instead of hot dogs! Corn is a good choice for "last crop" standing but there are no mentions of other crops (soybeans for example) aside from wheat and ochra or what happened to all the domesticates that can eat corn and end up in hot dogs, like hogs. (And I mean that literally, not just that if you remove the "ot d" from hot dogs you end up with hogs.) And where the heck are the locusts?

But here is the big question: If you are spending millions on actors and special effects, why not spend a few bucks on an economic consultant? Heck, I'd have done it for a grand and business historian Mary Yeager (wife of John Lithgow, who appears in the movie as McConaughey's father-in-law) might well have helped out gratis. What sense does it make to produce a movie that has (apparently) passable physics only to motivate the story with some leftist-sounding economic hooey?

Friday, January 09, 2015

Update on Minimum Wage

UPDATE 1/9/2015: As of 1 Jan. 2015, the famous "three dollar movie theater" in Sioux Falls now charges $3.50! Coincidence? Of course this would be an example of a price response rather than a reduction in employment but as we know from Bastiat's essay, "That Which Is Seen, and That Which Is Not Seen," employment somewhere/everywhere will be negatively effected by the price increase.

Tuesday, January 06, 2015

The Minimum Wage and Holy Scripture

The King James version of Ecclesiasticus 34:22 reads: "He that taketh away his neighbour's living slayeth him." One way to take away a neighbor's job, his means of life, is to use the coercive power of the state to force the neighbor to accept a wage that potential employers are unwilling/unable to pay. If a minimum wage law leads to a single person's unemployment, ergo, it goes against Scripture as well as civil rights. And while the number of unemployed created by minimum wage laws is disputed, the number is certainly greater than one. The fitness center here at Augustana College has cut its hours due to the minimum wage increase that took effect in South Dakota the first of the year and look what suddenly appeared in the local Sam's Club, in lieu of the woman who used to hand out the samples. How many more people shall we slayeth?

Sunday, January 04, 2015

The Usefulness of History

Over the holiday break, while languishing at my step daughter's house, I watched two series on Netflix, Wentworth, an Australian women's prison series a la Orange Is the New Black (only better), and Jericho. In one scene in Jericho, a schoolteacher (Emily Sullivan played by Ashley Scott) tries to motivate students to study history but almost all of them leave once they discover that school attendance is no longer mandatory in post-apocalyptic western Kansas. Making candles in the bathtub, as one of the students claimed he would do in lieu of class, may have been more important at that moment but a society that forgets its past is doomed to suffer costly calamities. I won't roll out the usual litany of pro-history quotations here but instead will point to the use of history in public policy, specifically my chapter on the history of chartermongering (attracting charter fees from out-of-state corporations) by South Dakota and its influence on the state's current chartermongering efforts as reported today (5 January 2015) in the Rapid City Journal in the article by Seth Tupper called "Look Out Delaware."

History can also help policymakers with a wide range of other issues, including preventing asset bubbles and reducing the incidence of modern day slavery. That is why I accepted the offer to edit a monograph series published by Cambridge University Press and sponsored by Historians Against Slavery that aims to use historical insights to help to fight slavery, which is still widespread today. The first three volumes in the new series, Slavery Since Emancipation, are under contract and will be appearing over the next few years,with more surely to follow.

So (until the EMP anyway) the next time you feel like making bathtub candles (or wasting time some other way), read a good history book instead! Here is a great place to start.