Viral Video on the History of the Federal Reserve

Word on the web is that a documentary on the Federal Reserve that I am interviewed in has gone viral, in the good sense of course. That is the one that Augie covered several days ago here. The documentary, put together by economist Murray Sabrin at Ramapo College in "Joisey," is embedded below. Enjoy!

America: Time to Learn From So. Dak.

I published the first two grafs below on the FacultyRow site several days ago but ran out of words. Here they are again, along with my closing thoughts.

America’s huge economy is finally showing signs of renewed vigor but it still faces significant headwinds in both the long and short terms. Inflationary pressure has been building for some years due to the rapid and sustained increase in the Fed’s balance sheet following the Panic of 2008. The monetary pressure may become insurmountable if the economy continues to heat up and the federal government continues to run large deficits. Longer term, the U.S. economy may face several crises related to the effects of changing demographics and runaway healthcare and higher education costs at a time when confidence in the federal government’s ability to do anything right, much less to implement substantial reforms, is at a very low ebb. 

Most troubling of all is the decline in Americans’ “economic freedom” as measured by the Heritage Foundation. The United States now ranks tenth in the world and its absolute score has declined for five consecutive years. Numerous studies have shown that economic freedom is highly correlated with sustained economic growth and many scholars believe, after removing the statistical noise created by the business cycle and one-off shocks like wars, that economic freedom is the root cause of growth. Bigger, more intrusive government, especially one that is no longer trusted by many citizens for a variety of reasons, is not conducive to entrepreneurship, especially of the more growth-inducing innovative and inventive varieties. Crony capitalism, one of the “bad” forms of capitalism identified by Will Baumol et al, appears ascendant.

Policymakers, pundits, and concerned citizens looking for a way out of this morass will find much to learn from South Dakota, America's freest state (and just a smidge less free than Alberta, the freest place on the continent). Although solidly Republican, the state is highly democratic; its people demand efficient government and usually get it, at least relative to many other places globally and even nationally. Congress has finally passed a budget, but one that doesn't solve any fundamental problems. Washington should not waste this reprieve but instead use it to really analyze government services and cut what is not needed, privatize that which can be privatized without endangering national security or the economy, and streamline the rest. If it makes those decisions based on independent studies and not partisan politics it will win back some respect and can then start to work on cronyism.

Jon Stewart: Gutless, (Economically) Brainless, but so Funny!

Jon Stewart has been making me laugh for over a decade now ... I started to tune in to The Daily Show just before the invasion of Iraq. He has often made the right calls politically and diplomatically over the years but almost every time he tackles economic or financial subjects, he sounds like an uncastrated male bovine with diarrhea. (That means a bunch of bullshit in case you missed the joke.) Last night was no exception as he berated somebody for asking if a $15 minimum wage is good for the economy, why isn't a $100,000 minimum wage? Of course nobody means that as a serious question. What she was really asking was how do central planners (like Stewart and others advocating for a higher minimum wage) know that $10 or $12 or $15 is the "right" figure economically. (As opposed to the one that is high enough to meet their policy objectives, which apparently is to garner votes for Democrats, who are hurting after the Obamacare website fiasco, but not so high as to cause inflation, immediate derision, etc.) Once you seriously begin to consider what the minimum wage "should" be economically, it soon becomes a silly exercise because the cost of living varies over place (and time) and the ability of businesses to pay it varies over industry, location, season, and so forth. A central planner who was really interested in the commonweal, i.e. in the most economically efficient outcome, would soon begin to pine for some sort of mechanism for balancing the number of workers with the need for workers in each industry ... and oh geesh there it is, supply and demand. If S&D lead to an equilibrium that is not socially efficient, direct subsidies are much more efficient than distorting the labor market with a wage floor.

I call Jon Stewart "gutless" because he won't have me on his show. He knows I will show him up and generally kick his knee jerk liberal, uneconomic brain all over his own stage and do it in a funny way too. I have sent him books before, with handwritten notes, etc., and never so much as a query has come from his office. He has another opportunity now, with the launch of my Corporation Nation from the University of Pennsylvania Press on Monday, December 9, 2013. The book should appeal to him at some level because it shows that corporate governance has broken down, giving execs too much power over their own compensation, by exploring in detail for the first time early U.S. corporate governance rules, which contained numerous checks and balances against arbitrary power that began to seriously erode after the Civil War and today are almost completely gone. I'll be on the East Coast a few times over the next few months to make it even easier for him to finally have on his show an intellectual who is not part of the NE academic elite. But he won't because he is afraid of what scholars in the Midwest might think or say, setting back his apparent attempt to brainwash his viewers with liberal economics of dubious (to say the least!) merit.

Slavery Today

Substance of a Talk Given in Madsen Center 201, Augustana College So. Dak. at 3:30 pm, 3 December 2013:

I got interested in modern slavery soon after coming to Augustana College because I was disappointed with a student in my U.S. history survey course who kept whining about how she couldn’t believe that quote unquote WE stole the land of Native Americans and that SHE would have stopped the exploitation of Indians. When I pointed out that she was doing nothing to help Native Americans today and that they were still very much exploited, she shifted to abolitionism and complaining about what quote unquote WE did to Africans. Two minutes on Google allowed me to bash her over the head, metaphorically speaking of course, on that one too. 

Only later did I realize that I should have thanked that student for awakening me to the notion that the study of history can do more than make us feel good or bad about the past, it can help us to change the future. Now I am the Academic Director of Historians Against Slavery and editor of “Slavery Since Emancipation,” a new book series being published by Cambridge University Press that publishes books that show that knowing something about the history of slavery and abolition can help activists today to reduce slavery worldwide.

The idea that slavery still exists in the world today may sound preposterous at first, but that initial incredulity evaporates when we reflect on North Korea or other totalitarian states that clearly condone political or Lockean slavery, i.e., the subjugation of people to the arbitrary will of some leader or his agents.

          The notion that economic slavery persists to this day might seem strange at first, too, until one becomes aware of labor conditions in many Less Developed Countries, the politically correct term for what we used to call undeveloped or Third World nations. 

Please note that I refer here not to sweatshops, which may or may not be staffed by persons working against their will, but to conditions like those depicted in the 2006 film Blood Diamond starring Leo DiCaprio, where workers are essentially abducted and forced to labor for others. That is very different from someone choosing to work in a factory for a pittance over selling fruit for half a pittance or not working at all. 

What separates the slave from the non-slave is personal agency, or the ability, in other words, to choose a course for oneself, even if the alternatives do not appear very savory to the individual worker much less to rich world observers. To be a non-slave is not to have the God-like power to arrange the universe to one’s liking but to take the world as it comes and change between existing paths as one sees fit, not as directed by another. For example, I do not count myself a slave because I was too fat, slow, and weak-armed to play Major League Baseball. I am a non-slave because when confronted with the reality of my inability to consistently hit 90 mile per hour sliders I chose where to go next with my life. Some might even call that freedom but it certainly is not slavery.

That economic slavery exists in the United States, and even right here in Sioux Falls, surely must be false, right? How could anyone be forced to labor for another in the U.S. today? There are no cotton plantations in So. Dak., no slave coffles are observed on Louise Avenue, or even Minnesota Avenue, and no runaway slave notices appear in the Argus Leader. That is all true because chattel slavery was abolished throughout the United States, and indeed the entire world, by the end of the second half of the nineteenth century.

But as anyone who has ever scored some alcohol before age 21, or a little weed outside of certain states, or maybe smoked some crack with Toronto mayor Rob Ford knows, making something illegal does not eliminate it but merely forces it into new forms. Slavery never went away but transformed into debt peonage, convict labor, and sex trafficking. It is not as important economically as it once was but that does not make it right or reduce our moral obligation to free those currently ensnared. 

Today, slavers keep their slaves hidden from open public view through a variety of techniques ranging from actual physical restraints to threats against family members to subtle psychological manipulation. Even in antebellum American slavery, most of the barriers to slave freedom were invisible, psychological rather than physical. Most slaves did not slay their masters or run for the North because slavers taught them that they were inferior and worked hard to deny them access to information that would aid rebellion or escape. Slavers do the same today.

Right here in Sioux Falls, in June of this very year, 37-year-old Carl Campbell of Sioux Falls received three life sentences plus 40 years after being convicted of luring minors and young adults into his power and forcing them to engage in commercial sex acts in the Sioux Falls area and elsewhere. That was one of three local cases cracked this year alone. How many are as yet undetected? Certainly more than zero because South Dakota’s sex trafficking laws have been ranked as the weakest in the nation and not all criminals are morons and hence will gravitate to where the likelihood and costs of getting caught are lowest.

Many of the prostitutes that service the Sturgis Motorcycle Rally and some pheasant hunting lodges are trafficked. In other words, they are tricked, cajoled, bullied, and intimidated into selling sex and are not doing it of their own accord. Some are shipped in from other states or countries for those and other events while others are Native, with a capital N. For more details, see Be Free 58’s website, befree58 dot org.

Modern slavery entails more than sex trafficking.  Slavers force people to do other sorts of work as well, usually low-skilled work. In 2007, for example, Robert and Angelita Farrell were convicted of forcing Filipinos to labor at their Comfort Inn and Suites hotel in Oacoma, which is just across the Big Mo from Chamberlain in case I pronounced it wrong. The enslaved Filipinos said that the Farrells controlled every aspect of their lives, including what they ate and where they lived as well as their working hours and tasks. The Farrells issued paychecks but then forced their slaves, under threat of turning them into federal immigration authorities, to endorse them back to the Farrells.

It doesn’t bother me when people work long, hard hours for what seems to be little pay so long as compensation is set fairly, which is to say by the market forces of supply and demand. But when employers steal from their workers by forcing them to accept below market wages they need to be stopped, fined, and imprisoned. And the victims, the enslaved individuals, need to be helped. That is where students like you can help the most, by providing resources to NGOs that interdict slavers and help victims to recover from their ordeals and to reduce their vulnerability to re-enslavement. Forming an Augie chapter of The Free Project, which is now part of Historians Against Slavery, is one way to do so. It is easy to do and the chapter itself gets to direct where every dollar it raises goes. Check it out at thefreeproject, all one word, dot org.

Thanks! I can take a few questions.

Don’t Be an Armsby

Move over Kunta Kinte, Solomon Northup is back! Actually, there is no objective basis for ranking Roots and 12 Years a Slave as they served two very different Americas. The former, which first aired in 1977, struck viewers still healing from the Civil Rights Movement of the 1950s and the urban uprisings of the 1960s and still coping with the overt bigotry of All in the Family’s Archie Bunker and his ilk. The latter is hitting theaters with the nation’s first African American president in his second term and with racism, though still a potent force, lurking deep in institutional crevices and exposed to public scrutiny only occasionally, by series like HBO’s The Wire.

As a period piece, 12 Years a Slave is extremely well executed. It is so good, in fact, that I hope that some well-heeled individual or well-endowed foundation will buy the rights and make it available to the world for free. Yes, people can read the book for free on Google and elsewhere online but the big screen version supersedes the text in some respects. The savagery of the whipping scenes, followed by tenderness of the post-whipping care that slaves provided each other, belie the slavers’ claims that it was the enslaved who were the savages. The hanging scenes expose how powerless the enslaved ultimately were: Northup watches helplessly as two slaves are strung up while later slaves go about their daily activities as Northup himself tiptoes in the mud with a noose about his neck for hours on end. Similarly, the wailing of a mother separated from her children by sale will not be soon forgotten by most viewers.

Director Steve McQueen has gotten the details right too. The overseers and slave traders are suitably grimy and ignorant. The economic activities depicted, shopping in stores, picking cotton, cutting cane, milling, and so forth, are accurately portrayed. Masters lust after their chattel, as we know many did, and their wives respond in authentic ways. And Paul Giamatti plays a scumbag slave trader oh so well. In short, professors can show this film in class confident that students will come away with an accurate glimpse into antebellum American chattel slavery.

There is a deeper layer here as well, one that I hope professors will explore in their classrooms. In short, we’re all Solomon Northup now. We may get a glimpse of slavery, as Northup did in a flashback scene to his pre-abduction life in Saratoga Springs, New York, but we do nothing about it, confident that slavery is something that happens to somebody else, somebody far removed from us in time or space. We cannot believe that our loved ones could ever end up in bondage but the simple fact is that it could happen, that it already has happened to millions of people worldwide, including untold numbers of Americans both at home and overseas. (Exact figures are disputed but not the point here.) Our abduction and sale are unlikely, but so was it for Northup. His trusting nature and high market value ($1,000 at the time, or approximately a quarter million dollars today) put him at risk and bad luck sealed his fate. Today, females and children are most at risk, both to be prostituted and put to forced labor, but in some areas adult men are still prized as agricultural field hands, fishers, or industrial workers. The remote possibility of abduction must be weighed against the high cost of losing a cherished one to slavers, even if you are one of the lucky few to possess Liam Neeson’s “very particular set of skills.”

We simply do not know what percentage of the enslaved are ever emancipated from modern bondage. Surely some perish and others never recover their former identities (including possibly Northup himself, who disappeared with nary a trace in 1857). Although modern forms of slavery take place all around us, the enslaved are trapped by invisible chains similar to those that prevented Northup from trying to escape, the fear of corporal punishment and even death. While Northup, a Dickensian surname to be sure, had to contend with the great physical distance from the Louisiana plantations where he was forced to whip his fellow slaves to freedom in the North, he did not have to worry about slavers killing his family like many slaves today must.

Spreading the word about modern slavery can help people to avoid abduction in the first place but just as importantly it can help to turn everyone into Brad Pitt, or rather Bass, the Canadian laborer who Pitt plays in 12 Years. Bass was antislavery but he not an abolitionist hero. He was just a handsome working stiff who saw injustice and risked his own neck and livelihood to save a fellow human being in trouble. He probably did not know that free blacks were abducted and enslaved by the hundreds (possibly thousands) but he was intelligent enough to see that Northup’s story was plausible. Had white wage laborer Armsby (played by Garret Dillahunt) been more intelligent, or at least more informed, he might have chosen to help Northup instead of taking Northup’s money and ratting him out to the master.

Maybe by next fall term, professors can show 12 Years a Slave to their students legally and at no cost. It is good enough to be used as a straight up period piece to supplement lectures or readings on antebellum American chattel slavery but the connections to modern slavery should be explored in classrooms as well. Like Northup, most of us know a little about modern slavery but rest content in our comfortable middle class lives barely cognizant that we, too, could fall victim to slavers. More likely, we could be cast to play a potential savior and will have to choose between Armsby and Bass. Let’s help our students to pick the latter every time.

Why South Dakota Should NOT Raise Its Minimum Wage to $8.25/hour

This is the text of the comments I gave at the "Augie After Hours" event tonight at Monk's, a local tavern. ************************************************************************************************************************* I oppose raising the minimum wage for the simple reason that we can’t fix a broken nation by breaking it further. Minimum wage laws hurt the very groups of people that they purport to help. It would be nice if public policy problems could be solved merely by passing a law but human nature and human institutions are too complex to bend to simplistic policies like minimum wage laws. The key to understanding my position is to realize that the median worker now receiving $7.25 per hour is NOT worth $8.50 per hour to their respective employers. Let me repeat that: the median worker now receiving $7.25 per hour is NOT worth $8.50 per hour to their respective employers. I can assert that without reservation or qualification because if the median worker was worth $8.50 per hour an unexploited arbitrage opportunity would exist. In other words, somebody could form a company, pay say $8.25 per hour, attract all the employees currently earning less than $8.25 per hour, then lease those employees back to their original employers at $8.50 per hour and pocket the difference. To state the matter yet another way, if the only thing suppressing wages is that employers enjoy pricing power over workers, a labor monopolist could arise and eliminate the employers’ bargaining advantages. That no for-profit company has arisen, and that Professor Nesiba does not form a non-profit organization to engage in such an activity, suggests that no arbitrage opportunity exists and that the median minimum wage worker is NOT worth substantially more than $7.25 to his or her employers. So that means if the minimum wage is raised to $8.50 per hour, $1.25 per hour per worker has to come out of somebody’s hide. You might think, as the proponents of this policy recommendation apparently do, that the money will come from business owners and that they can well afford it. Both presumptions are dangerous. Implementation of a higher minimum wage could well put marginal firms out of business and their employees out of work. Well-situated businesses, on the other hand, will be able to pass some or all of their cost increases onto consumers, including y’all, but you won’t be able to take a tax deduction for what amounts to an act of forced charity. Still other businesses will undercut the law by exploiting its many loopholes. For example, a fast food joint might change into a fast service diner and actually decrease their worker’s minimum wage to $2.13 per hour, plus tips. Or, it might promote a number of workers to salary status, which is also exempt from the minimum wage requirement. Others will switch to piece rates and pay by the burger served or by the course or book, as colleges do with adjuncts and publishers do with authors. Still others will turn their hourly employees into independent contractors or require lengthy unpaid apprenticeships or internships. Others will eliminate worker perks like employee discounts. I suppose supporters of a minimum wage increase could create a very complex law that would attempt to stymie such obvious work arounds but the ingenuity of business people trying to save their companies or maintain their own incomes will likely outmatch their best efforts. Moreover, complex regulation of business is not a South Dakota thing. We attract and retain businesses by keeping things as easy as possible. A complex minimum wage law would drive away small businesses, the very heart of our economy, which is thriving under current law by the way. Moreover, even under the most oppressive regulatory regime imaginable, employers will still always have two options open to them, increased use of technology and wage compression. The former eventually will occur anyway but if enacted the proposed minimum wage hike will speed the process. Already in the East, it is possible to order, pay for, and pick up a sandwich without interacting with a human being. Even in Sioux Falls we have already seen self-checkout lines at retailers like Walmart. As technology costs fall and wage rise, low skilled jobs will be lost, just as they were in farming and manufacturing in the nineteenth and twentieth centuries. So is it better to be unemployed or to have a job that pays $7.25 per hour? Instead of letting individuals decide, the proposed policy would answer the question for them: $8.50 or bust. Moreover, wage compression will occur when and where there are no other alternative work arounds for employers. What that means is that it will take much longer for workers to get a raise above minimum wage. In effect, more productive workers will subsidize the wages of less productive workers, weakening the incentives of both. In other words, more employers could afford to pay $8.50 an hour to older, sober, reliable, hard-working employees if they did not have to pay $7.25 to Slacker Joe and the stoned teenager who reports to work when she feels like it. But no, because in 1938 the same moron president who burdened us with Social Security and corporate health insurance provided through employers also inured us to the notion of a minimum wage for a narrow group of workers. So, again, we know for certain that today’s minimum wage workers are not worth $8.50 an hour to their employers or there would be a market solution to the problems that Professor Nesiba has identified. Any artificial attempt to raise workers’ wages to that level, however, will decrease the quantity and/or quality of employment by inducing business failures, increased use of technology, job reclassification, loss of perks, wage compression, and higher prices for consumers. A gigantic irony looms over this entire discussion: most of the people earning minimum wage are the products, or should I say the victims, of failed public school systems and broken public welfare policies, including grotesquely suboptimal Native American policies begun under the administration of that moronic president I mentioned just a moment ago. Broken educational and motivational systems are the heart of the problem and that is what we should be addressing, not slapping a feel good band aid on a severed artery. Until we can fix the root causes of an unproductive workforce, I suggest that we help the laboring poor via private charity: give food, clothing, and money when you can and take your just reward in the next life and the next fiscal year, don’t try to help the working poor by hurting employers, consumers, and other low paid workers. ********************************************************************************************************************** Prof. Nesiba "won" the event 10 to 2 ... lest there be any misunderstanding, 60+ people attended and 43 consistently voted, anonymously, using a text message polling site. The 10 to 2 tally was the number of people who switched sides or moved from undecided to a "for" or "against" raising the minimum wage between the initial poll, the halftime poll, and the final poll. Because the methodology was announced beforehand, however, the results might have been skewed as it doesn't take a rocket scientist to figure out that the way to get a "win" for your side is to vote undecided in the initial poll and then "switch" to your real position in the later polls. Of course "my" side knew the rules too but we were outnumbered 2 to 1 in favor to begin with and my opponent, who has been here several decades, is better connected with the alumni community. (I felt particularly aggrieved by the presence of two students who I recently failed on a project.) It is astonishing to hear the arguments that people will use rhetorically to support their position, which included Henry Ford's pay policies a century ago and rural electrification! The next round is in Minneapolis in a few weeks, where I expect more of the same. It was still a good time, though, even if I don't drink alcohol anymore. Augie needs to do more of this sort of thing and to be more inclusive about it too.

When the Manhattan Company Saved New York's Honor

I haven't been blogging much about the debt crisis because I've been tied up doing interviews on the subject for local media, WSJ's Market Watch, The Fiscal Times, and so forth. Plus, I've said it all before, back in 2011. (See my earlier blog posts about the unconstitutionality of deliberately defaulting, origins of the debt ceiling, etc.) I'm also up to my eyeballs writing the histories and compiling the corporate genealogies of America's largest 50 bank holding companies, which should come out of Columbia University Press's biz imprint in 2015. (Don't confuse that project with Corporation Nation, which will be out this December from UPenn. Go ahead and pre-order it. I dare you.) 

Anywho, I just ran across the following letters in Lester W. Herzog, 150 Years of Service and Leadership: The Story of National Commercial Bank and Trust Company (New York: Newcomen Society in North America, 1975), 6-7 and wonder aloud if any of the big banks that received bailouts in 2008, including JPMC (the M stands for Manhattan, i.e., the bank below), would lend the federal government money, without authorization from Congress, to prevent a U.S. government default?

S. E. Church, Comptroller of the State of New York, to C. O. Halsted, President of the Manhattan Company, Albany, May 30, 1859:

I regret to be compelled to inform you that the Legislature at its recent session, neglected to provide any means to pay the interest on the new canal debt of $12,000,000. ... The amount  required for the October and January interest will be $355,000, making an aggregate of $385,000, necessary. ...

I have ventured to write this note for the purpose of inquiring whether, in view of the unexpected and extraordinary omission of the Legislature, and the disastrous consequences which it would produce, your bank will not advance the amount required for this object, and thus save the State from the disgrace of having its obligations dishonored. ...

I possess no authority as a public office to borrow the money, or bind the State to repay it; nor can I tender any other security than the expression of the entire confidence in the integrity of the people. ...

 

C. O. Halsted, President of the Manhattan Company, to S. E. Church, Comptroller of the State of New York, Albany, June 2, 1859:

Yours of the 30th ult. received, and its contents noted. It is deeply to be regretted that provisions should not have been made for the payment of the interest on the new canal debt of $12,000,000. That the credit of the State should be protected is a matter of vital importance. ...

The high credit which this State so deservedly enjoys, both in this country and in Europe, and which has always been regarded with just pride by its citizens, must be preserved untarnished and its obligations must not be dishonored. If you as the Comptroller possess no authority to make a loan for the payment of the interest, and no other means can be made available, relying upon the ability, the honor and the faith of the State to repay the money, this institution will advance the necessary amount.

Very respectfully,

Your obedient servant [that was a stock sign off back then, btw]

According to MeasuringWorth.com, $385,000 in 1859 is the equivalent of about $1.4 billion in 2012 so this was no small favor but rather the actions of a public spirited institution also interested in protecting the value of the state bonds it held on its balance sheet at secondary reserves. Hint, hint holders of Treasuries.

 

Banning Political Parties, Allowing Reverse Eminent Domain, and Other Constitutional Amendments Suggested by the Government Shutdown

Well, parts of the federal government remain shutdown with no end in sight. I think both parties are culpable and should be banned, along with all other political parties, by a Constitutional amendment. The Framers didn't want political parties. Look it up. So why not ban them?

We should also pass a Constitutional amendment that would ban gerrymandering by limiting Congressional districts to six sides at most (unless a state, like SD, has only one Rep, in which case no gerrymandering is possible). Of course if parties were effectively eliminated there would be much less pressure to contort district boundaries to create safe districts for extremists.

A third Constitutional amendment would ensure that Congress and the heads of the Executive branch would not receive any salaries, offices, benefits, or other perks if the federal government shuts down or if any default occurs on the national debt. Better yet, let those events trigger immediate elections with all the current incumbents ineligible to run for national office ever again.

Finally, and once again, we need some sort of reverse eminent domain, some way for private entities to buy or lease government assets. A shutdown would be a nice triggering device. So, say, Yosemite would be leased to the highest bidder for 30 plus years. The bidder would not be able to change the park but would collect admittance fees in exchange for amenities upkeep. Ditto on the panda cam and heck the entire National Zoo.

And we don't really need NASA anymore, except maybe to look for collision threats in space, and I am not even entirely sure about that. If we could credibly commit to sending a private company's CEO and largest stockholders to any comet or asteroid they miss on a last ditch, Bruce Willis-type mission I think it would do the best job technologically possible. Not sure the government can make such a commitment when it comes to its own employees ...

It's all about incentives people and right now the incentives in Washington are FUBAR.

The Best Tuition is No Tuition (for Public Colleges)

Once again, somebody has replicated a core idea of Fubarnomics and made hay with it. The latest is Robert Samuels, who argues in a book and in the Chronicle of Higher Education that public colleges shouldn't charge tuition. No sh*t! What he misses (in the Chronicle anyway --  I have yet to read the book) is the notion that what we need is a GI-like bill for all young people, i.e., some way for them to earn money for college (public or private) while, well, growing up and sowing their wild seeds. No, I don't want to send all our kids to Afghanistan but rather to give them options like the Peace Corps, Habitat for Humanity, National Park service, etc. They will be better students for it as they will come to the classroom with some real world experience and additional maturity. Moreover, they will have paid for their education with their sweat and so will take it more seriously than if it is just handed to them by the government, or mommy and daddy.

"Are regulatory safeguards in place to ensure that there would be no wrongdoing, no breaches of contract?"

That is the question I posed on page 221 of Fubarnomics regarding the acquisition or failure of for-profit colleges. Unfortunately, nobody paid any heed to that book, or its chapter on higher education called "3rd Rock from the Sun." Now students, profs, and other stakeholders are paying the price. For details, see "Closures of For-Profit Campuses Point to Gaps in Oversight" in the Chronicle of Higher Education, A3, August 2, 2013.

Americans hate taxes now more than ever

This infographic just came in. It is from http://www.master-of-accounting.net/taxes/.


Image source: www.master-of-accounting.net

Student Debt Bubble

"Will Student Debt Be America's Next Financial Bubble?" is the latest of a number of articles/blog posts to wonder aloud whether student debt will lead to another financial crisis. The authors of such pieces have every right to be worried about another financial crisis as the root causes of the last one largely went unaddressed by Dodd-Frank and other regulatory reforms. I think student debt an unlikely first cause of the next crisis, however, because a market blowup would require a level of unemployment among recent grads not likely to be achieved without some other major economic shock occurring first.

Student debt is not a cause of the financial problems facing U.S. Higher Education sector but rather a symptom of high and rising costs. A widespread reorganization of the sector is in the offing: some schools will close; others will merge; others will look drastically different in five years. The cause of high tuition I ultimately trace to colleges having the wrong ownership structures: state ownership; stockholder ownership; and trustee ownership all create dreadful incentives for containing costs while maintaining quality. See my Fubarnomics for details and solutions.

Economy/Policy: Which Comes First?

Below is the substance of my remarks made at the teacher's institute at Mt. Vernon on July 17:  

By Robert Wright, Nef Family Chair of Political Economy, Augustana College SD, for the George Washington Teachers’ Institute, Mt. Vernon, Virginia, 11 am to noon, 17 July 2013

Nancy Hayward, the director of this little shindig, asked me to address two questions this morning. The first is the extent to which the economy drives public policy and vice versa. The second is how the Washington administration, particularly the financial reform program implemented by Alexander Hamilton under Washington’s leadership, is relevant to policy issues today. The two questions are intimately interrelated and so shall be the answers, which I will endeavor to make quite explicit.

First, I’ll argue that the economy and policy are co-determined, but only broadly. With just two pieces of economic information, per capita income and percentage of GDP derived from natural resources, I can broadly describe a nation’s major policies and institutions. Conversely, I can predict the order of magnitude of a nation’s per capita GDP based on a general description of its major policies and institutions without any knowledge of its geography, history, or other variables. This isn’t a parlor trick but rather stems from the empirical fact that, with the exception of a few major oil producers, nations that provide its denizens with more economic freedom -- that do a better job of protecting life, liberty, and property as Washington and Hamilton put it – have higher per capita incomes than nations that have more restrictive policies – that practice tyranny in Washingtonian and Hamiltonian lingo.

In other words, nations with per capita GDP in the tens of thousands of dollars allow their citizens to start or shutter businesses quickly and cheaply, have courts that provide what Adam Smith called a “tolerable administration of justice,” keep inflation -- what Hamilton and Washington called currency depreciation – in check, and so forth. The details can be downloaded from the Fraser Institute’s website. The economy of the United States currently ranks tenth freest in the world, in case you were wondering, but has been falling in absolute and relative terms since the financial crisis of 2008. The six freest economies today are those of Hong Kong, Singapore, Australia, New Zealand, Switzerland, and Canada, in that order.

The world’s poorest nations, those with per capita incomes in the hundreds of dollars per year, are the least free because they wallow in anarchy or under the heel of a despot -- as Washington and Hamilton would have said. In such places nobody has any incentive to do other than to live for the morrow as Adam Smith put it. So they do not invest in the future and quickly convert investments given to them from abroad into current consumption because that is the rational thing to do when one’s life or property seem likely to be stolen by a brigand or a tyrant.

Middle income nations, those with per capita incomes in the thousands of dollars per year, are betwixt the two polar extremes but interestingly there are relatively few such countries in existence at any given time as most, like China currently or Japan near the end of the life of Hamilton’s wife Betsey, are either ascending toward the top or, like Argentina in the 1930s and 40s and Somalia in the 1990s, descending toward the bottom.

What I can’t do is tell you the economic effect of specific policies, mostly because most matter so little in the big scheme of things. Consider, for example, raising the federal minimum wage. Adam Smith, Alexander Hamilton, and most economists today explain that a minimum wage law increases wages for some while reducing wages for others by rendering them unemployed. Parsing out the overall economic effect of that is difficult and in the end usually nets to approximately zero. Thousands of other policies are also more about redistribution or reallocation of existing resources rather than expanding or shrinking the overall size of the economic pie. Think about it: policies that definitely expand economic activity in a major way would be political juggernauts certain to pass provided, of course, that they did not threaten entrenched interests. Conversely, policies that definitely shrink the economy would be dead on arrival politically. So most new policies are, in and of themselves, rather minor affairs of great interest to a few but rightly unnoticed by most.

Most major policy reforms, therefore, tend to be initiated during crises or as a reaction to them: the sundry troubles of the 1780s, the Civil War, the Great Depression, and financial panics like those of 1907 and 2008. Many of the nation’s worst policy mistakes, like Social Security and Medicare, began as relatively modest programs but over time grew into the GDP draining monstrosities we love and hate today. The Social Security system, for example, did not include disability insurance until the 1950s and did not include most Americans until the 1960s.

Other major drains on the economy, as outlined in my 2010 book Fubarnomics, include the custom construction industry, higher education, real estate, healthcare, and the continued subterranean existence of slavery both at home and abroad. Policy improvements in each of those areas would raise GDP by non-trivial amounts, or so I argue, because sundry policies, enacted piecemeal over decades, led to the dysfunction apparent in each of those parts of the economy. Fundamental reform has proven difficult, however, because those piecemeal policies created entrenched interests that fight reform at every turn. Imagine how my tenured colleagues reacted to my suggestion that professors should own their colleges in professional partnerships, especially when they learned that such a form of ownership would entail putting a monetary value on tenure. It went over like … well, do people still use the expression like a fart in church?

It is also difficult to get people to listen rationally to reforms based on a private-insurance healthcare system when they don’t understand the differences between mutual corporations and joint-stock companies, differences of course familiar to both Washington and Hamilton. If people coming out of high school knew the differences between the two types of business, we’d have many more credit unions and a lot fewer deposits in the big banks that almost brought down the financial system five years ago.

So, again, I think that policy and economy are broadly co-determined in the sense that scholars can predict one if they know the other. Most specific policies, however, have little net effect on per capita output. In the aggregate, however, they affect the economy by increasing or decreasing the overall level of economic freedom. In nations with representative governments, truly bad economic policies, like the New Deal’s National Industrial Recovery Act, will be short-lived if they see the light of day at all. Growth positive policies, however – like the ones that I come up with -- can be stymied by entrenched interests and/or public apathy or ignorance.

And that leads me to suggest that policies and the state of the economy are co-determined in another way as well. Nations that are very poor do not suddenly adopt enlightened – as Hamilton and Washington would say – pro-growth policies. Rather, upwardly mobile countries, from Holland in the seventeenth century to China in the twenty-first, tend to have some economic spark first that is subsequently built upon as their policies improve. So if this looks like a chicken-egg problem to you, it essentially is. Economic freedom causes economic growth but is also caused by that growth. The American Founding can be used to make this point. The U.S. Constitution and Hamilton’s financial reforms did not so much outright “cause” the two plus centuries of economic growth that followed as they “sparked” or “unleashed” it by initiating a positive feedback loop between increased incomes and increasingly freer policies, or by extending existing policies to new groups such as women, immigrants, African Americans, and I hope to be able to one day say Native Americans as well. Americans entered the late 1780s with an economy that was moribund but they still possessed significant capital: physical capital in the form of land and improvements, tools, and livestock; human capital in the form of some formal education and extensive amounts of work experience; financial capital in the form of some money and lots of IOUs, though both were of tenuous value. By protecting existing capital to an extent that Americans had not known since the Imperial crisis began in the early 1760s, the Constitution provided people with incentives to create more. Soon after, Hamilton and his reforms, especially funding, assumption, the Bank of the United States, and state corporation law, allowed for the creation of more and better financial capital.

So that is one way to make Washington and Hamilton relevant: to cast them not just as creators of our political system but also of our economy, which is why I named my first born son Alexander Hamilton Was Wright. Yep, that’s right, Alexander Hamilton Was Wright. Look it up in the Wall Street Journal. Anyway, the story I have related about Hamilton and economic development in One Nation Under Debt and sundry essays is rather different from the standard one, which makes some silly assertions about tariffs, factories, and government planning. Hamilton’s contribution to economic growth was through institution-building, particularly the Constitution and the Treasury Department, and policies that led to capital market development – funding, assumption, and the Bank of the United States again -- and also the easy entry of corporations, which proliferated widely in the 1790s and 1800s thanks in part to precedents set by Hamilton, who helped to establish the Bank of New York and the Merchants Bank of New York as joint-stock companies without the government’s charter or other official stamp of approval. Had he lived, I am sure that Hamilton would have championed general incorporation laws, in which case American entrepreneurs may have enjoyed the benefits of those salubrious policies decades earlier. Corporation formation and economic growth were deeply intertwined, or so I argue in Corporation Nation forthcoming from Penn Press this December.

But we can’t stop here in our quest for relevance. The views of Hamilton, Washington, and their contemporaries are relevant to almost every major policy topic, economic or otherwise, today. History doesn’t repeat, of course, but as Mark Twain said, it does rhyme, sometimes quite closely. So today we debate abortion instead of infanticide. Influenza epidemics today loom as large as yellow fever did in the 1790s. Inroads against smallpox mirror those being made against cancer today. Muslims quote unquote terrorized American ships in the 1790s. Interestingly, in the 1790s it was Americans who spilled over the border into Spanish lands. International trade policies spurred riots in the 1790s as well as the 2000s. I’m thinking Jay Treaty and Seattle of course. In the 1790s, small farmers and retailers found it impossible to compete with larger, more efficient rivals. And on, and on, and on. So from my point of view, the issue isn’t so much whether or not the 1790s are relevant today – they certainly are, as is every other era of the nation’s past – it is whether individual teachers have the skills and knowledge to draw out the connections effectively in the classroom because doing so requires knowing students and pedagogy inside and out but also current topics and, most daunting of all, details of history not found in high school or even college textbooks.

I certainly can’t tell you about your students and the last time I studied pedagogy in earnest was in the late 1980s, when I was contemplating becoming a high school teacher. I can, however, try to guide you regarding the public policies I know best and that are most likely to arise in your classrooms in the next several years.

The most obvious of these is the federal budget. Hamilton is often quoted as having written that a national debt … then ellipses … will be to us a national blessing. The ellipses leave out a crucial caveat: quote if it is not excessive. unquote That phrase of course begs the question of what differentiates an excessive national debt from a healthy national debt, a topic that was hot in the news a few months back when a graduate student found a major computational error in an empirical paper by a couple of economist hot shots who argued that a debt to GDP ratio of 90 percent is the cutoff between health and excess, between a national debt being pleasantly plump and morbidly obese. Hamilton took a more nuanced approach and argued that a national debt is excessive if it leads to a hard default or in other words a missed interest or principal payment, or if it causes a soft default or in other words inflation, or if it significantly raises the real interest rate and thereby reduces private investment, or if it necessitates tax increases large enough to stymie economic growth. Under the Articles of Confederation the national debt was clearly excessive, breaking all four criteria. Under Hamilton’s tax and financial reforms – again the great trinity of funding, assumption, and the national bank – the national debt went on a diet and became a blessing.

In the same famous quotation just mentioned, Hamilton also says that the national debt will serve as a quote powerfull cement of our union unquote. What he meant was that people who owned federal bonds, the Sixes, Threes, and Deferreds create by his funding and assumption reforms, would have strong incentives to support the new national government so as to keep up the value of their bonds. That could lead to a classroom discussion about how the national debt today keeps foreign creditor nations like China and Japan interested in the prosperity of the United States and how Social Security and other entitlements keep individuals from contemplating the demise of the U.S. government, despite the modest box office success of not one but two recent presidential snuff films. Deficit financing -- enlarging the national debt every year by borrowing -- ensures that every state in the Union receives more federal money than it pays into Washington’s coffers and thus keeps secessionist movements on the fringe.

The size of the government as a percentage of the economy is another obvious topic to grow out of discussions of the federal budget but it is a tricky one because many people, perhaps even you, learned that Jefferson wanted a small national government while Hamilton wanted a large one. In fact, Hamilton wanted a large government only relative to Jefferson’s vision. From today’s perspective, both wanted a miniscule government. Under Washington and Adams, federal revenues averaged just 1.72 percent of GDP. Under Jefferson, they averaged 1.67 percent, or less than 1 in every 50 dollars of value created by the economy. From 2001 through 2010, federal revenues averaged 20.56 percent of GDP, or just over 1 in every 5 dollars of value created by the economy. That naturally begs the question of what the government does now that it didn’t do then and that could lead to a fruitful discussion of U.S. foreign policy – Washington’s Farewell Address anyone? – or to the constitution of American military forces and the debates over militia versus regular forces and Navy frigates versus privateers or Jefferson’s littoral defense forces. It could also lead to a discussion of America’s changing role in the world and so forth.

The issue of enlarged government could also lead to discussions of transportation infrastructure and their provision mostly by private corporations or state and municipal, not federal, governments during the Early Republic and antebellum eras. Some students might wonder about old age annuities and healthcare, leading to discussions of changes in the age structure, the development of the medical profession, and the long tradition of what we might term private or family income security.

Another budget-related topic almost certain to appear in the news over the next year is the debt ceiling, a kooky institution that emerged during World War I and that is diametrically opposed to Hamilton’s view of public finance. Hamilton, and presumably Washington, believed that the government should not borrow money without first securing a stream of revenue to repay it. Today, Congress raises the debt ceiling, then worries about how to pay for the newly authorized obligations. Another important tidbit here is that Hamilton and his contemporaries generally thought of taxes in terms of dollars actually raised, not in terms of tax rates. So they didn’t get into theoretical disputes about the revenue effects of raising tax rates, they adjusted tax rates until they supplied the sum of money the government needed, whether that meant moving tariff and tonnage duties and excise taxes up or down. It is absolutely essential to understand that Hamilton did NOT, repeat did NOT, advocate protective tariffs, tariffs designed to allow domestic manufacturers to compete against foreign ones. Rather, his tariffs were for revenue purposes and in his famous Report on Manufacturers, which more people cite than actually read or understand, he ultimately decides that production bonuses are more efficient at promoting manufacturing than protective tariffs are, and does so on proper theoretical grounds I might add.

Sequestration is another budget topic likely to remain in the news. This one is best handled, I think, with reference to Jefferson’s claim that in democracies politicians do not have incentives to “tax and spend” because the tax part will cost them in the next election as much as the spending part will benefit them. Rather, politicians have incentives to “borrow and spend.” That way, their constituents get a new freeway, a low cost college education, or what not, but don’t suffer higher taxes. Not today anyway. Economist David Ricardo showed two centuries ago that government borrowing is simply a form of deferred taxation but not many people know that, or don’t care if they do. As a result of the electoral incentive to borrow and spend, politicians are unlikely to enact a policy of taxing and cutting spending and many economists provide them with theoretical support by arguing that increasing taxes while cutting government spending is a recipe for recession. Sequestration, therefore, was a political ploy to cut spending and raise taxes without anyone getting blamed for it, or getting caught in the Congressional Record voting for a serious dose of fiscal austerity.

Other topics that may reappear in the news in the next few years are government bailouts, corporate governance, and corporate influence on politics and government. Bailouts were big news during the 2008 fiasco and will become so again when, not if, there is another financial crisis. Some observers are already warning of another looming breakdown. Corporate governance was an important component of the 2008 crisis and also about a decade ago when Enron, WorldCom, and other presumably multi-billion dollar corporations evaporated overnight. The Sarbanes-Oxley and Dodd-Frank reforms have not helped matters so it is only a matter of time before a big corporation falters and corporate governance is again big news. And the Citizens’ United decision remains wildly unpopular and may be challenged in court or by new legislation. The founding generation, and Hamilton in particular, have much to say about all three issues.

In early 1792, the United States suffered from a financial panic, a period when the prices of financial assets, like government bonds and bank stocks, plummeted quickly, leading to panicked selling, widespread credit distress, sky-high interest rates, and bankruptcies that interacted in a nasty negative feedback loop or downward cycle like the circling of water in a toilet bowl. Working in conjunction with the Bank of New York and the Bank of the United States, Hamilton squelched the panic by inventing a rule that would later become known as Bagehot’s rule. During a panic, the lender of last resort, Hamilton and later Bagehot said, should lend freely at a penalty rate to all borrowers who can post good collateral. The effect of the rule is two-fold: first, it quiets panic because all solvent individuals and companies are assured of being able to borrow if they have to, so they stop selling assets at distressed prices for cash and thereby short-circuit the feedback loop slash stop the toilet flush. The penalty rate ensures that borrowers will go to the lender of last resort only when they cannot find a private lender. Second, the rule forces insolvent individuals and companies into bankruptcy so it does not increase what economists call moral hazard and what mere mortals like us call excessive risk-taking.

Hamilton’s nee Bagehot’s Rule is a much different policy from that followed by the Federal Reserve today, which responds to panics by lowering interest rates for everybody, including poor depositors and bondholders, and lending on flimsy collateral and only to banks. The Fed’s actions as lender of last resort are part of the reason that Rand Paul and others have tried to audit it and talk of eliminating or drastically reforming the century-old institution is the loudest it has been since the Great Inflation of the 1970s or even the Great Depression of the 1930s.

Assumption of state debts was also a type of bailout of state governments. Hamilton made clear, however, that the bailout was justified only by the origins of the debt in the common cause of the Revolution and by the Constitution’s prohibition of state tariffs, long a major source of revenue for colonial governments. He also made clear that he opposed future federal bailouts of state government debts for fear it would render them profligate and for the most part his advice has been heeded. The states that defaulted on their bonds after the Panic of 1837 received no federal aid and the debts of the Confederate government and the rebel states were disavowed by Constitutional amendment. The connection here is to states with large deficits like California and also to the Europe Union and its pigs problem. That problem, by the way, is pigs spelled P I I G G S, which is short for Portugal, Ireland, Italy, Greece, Great Britain, and Spain.

Corporate governance usually makes the news in the form of failed corporations or high executive pay. Today, stockholders have very little say in how corporations are managed because executives control proxy votes and/or shares with super voting rights and stockholders have little legal recourse. Unsurprisingly, big businesses are essentially run by executives, for executives, and that leads to “Heads I win big, tails I win bigger” contracts: huge bonuses, stock options that reset when conditions become unfavorable, and golden parachutes that reward executives for failing with more money than we will make in our entire lifetimes – everyone in this room combined in some cases. Washington and Hamilton were involved in the formation of several early corporations, foresaw the possibility of such shenanigans, and put effective checks and balances against them in place. One was capped or prudent mean voting rules that ensured minority stockholders had some say in how corporations were run. Another was the concept of ultra vires – corporations were chartered or associated to operate in specific industries thus limiting managerial discretion. Perhaps most importantly, executives were beholden to a board of directors, the members of which were truly independent and compensated solely by the company’s bona fide economic performance. Stockholders could inspect the company’s books, order independent audits, and oust directors and officers that tried to expropriate corporate wealth. The system was imperfect, as all things of the flesh are, but far superior to what passes for corporate governance today. Due to policies that bar their active participation in governance and that have limited their ability to buy out underperforming companies, most institutional investors that discern governance problems at corporations in their portfolios simply sell out, passing the problem onto unsuspecting individual investors.

Corporate governance has not been improved partly because the issues involved are arcane ones for most Americans, not topics regularly discussed in college courses much less high school ones or even informally around water coolers. Another reason that governance problems persist is that corporations, or rather the executives that run them, have considerable political influence, influence enhanced by the Supreme Court’s ruling in the 2010 Citizens’ United case. In its infinitesimal wisdom, SCOTUS held that corporations were just agglomerations of people and hence that their political speech is protected by the First Amendment. That opened the door to the SuperPACs and what not so thoroughly satirized by Stephen Colbert and his Report and elsewhere. Of course Washington, Hamilton, and the other Founders did not consider corporations people in any sense of the term but rather referred to them as a corporate body or a body politic. When John Marshall used the term person in connection with corporations he did not mean a natural person, or human being, but rather what we would today call an entity. Even the conservative Cato think tank concedes this but ignores the implication that entities created solely to influence elections are anathema to most Americans now and the Founders to a man, and I suspect to a woman too, but you should ask Cokie Roberts about that. Early corporations – through the Civil War at least – were clearly creatures of the state and suffered only because the state could dismantle them at will if they threatened the public good. Nobody asserted the right to incorporate to influence elections and if they had they would have been burned in effigy or given a nice bath of tar and feathers. Now there is a nice hands-on activity for your students.

Seriously, how to get any of these ideas across to your students is beyond me, unless you happen to teach AP American History. As I conceded earlier, connecting past and present is not easy to do at all and is really hard to do well. If you would invest a summer and a few hundred dollars you could read all my books and articles and talk glibly about all of these subjects. A few dozen more summers spent reading the work of some other policy historians and you’ll be all set to begin thinking about the pedagogy involved. That is completely tongue in cheek, of course. The best approach, I think, is for those of you who enjoy these topics to develop lesson plans, have them vetted, solely for accuracy of content, by somebody like me, and then share them widely with other educators.

I hope you have questions; we certainly have time left for me to try to address them.