1. Ominous new from the San Francisco Fed David Henderson, EconLog
  2. Will Libra impinge on monetary policy? Scott Sumner, TheMoneyIllusion
  3. A case for left-wing nationalism Lisa Gaufman, Duck of Minerva
  4. A republic for discussion? Raymond Geuss, the Point


  1. Stop trying to use monetary policy for your ideological whims Joakim Book, Adam Smith Institute
  2. The lighthouse never justified state intervention Vincent Geloso, Adam Smith Institute
  3. California lawmakers haven’t learned their lesson on rent control Ethan Blevins, the Hill
  4. Ideas were not enough Mark Koyama, Aeon

(Yes, these are all Notewriters contributing op-eds to professional outlets. Fear not! They’re still around.)

Economists, Economic History, and Theory

We can all come up with cringeworthy clichés for why history matters to society at large – as well as policy-makers and perhaps more infuriatingly, to hubris-prone economists:

And we could add the opposite position, where historical analysis is altogether irrelevant for our current ills, where This Time Is completely Different and where we naively disregard all that came before us.

My pushback to these positions is taken right out of Cameron & Neal’s A Concise Economic History of The World and is one of my most cherished intellectual guidelines. The warning appears early (p. 4) and mercilessly:

those who are ignorant of the past are not qualified to generalize about it.

We can also point to some more substantive reasons for why history matters to the present:

  • Discontinuities: by studying longer time period, in many different settings, we get more used to – and more comfortable with – the fact that institutions, routines, traditions and technologies that we take for granted may change. And do change. Sometimes slowly, sometimes frequently.
  • Selection: in combination with emphasizing history to understand the path dependence of development, delving down into economic history ought to strengthen our appreciation for chance and randomness. The history we observed was but one outcome of many that could have happened. The point is neatly captured in an obscure article of one of last year’s Nobel Prize laureates, Paul Romer: “the world as we know it is the result of a long string of chance outcomes.” Appropriately limiting this appreciation for randomness is Matt Ridley’s rejection of the Great Man Theory: a lot of historical innovations seems to have been inevitable (When Edison invented light bulbs, he had some two dozen rivals doing so independently).
  • Check On Hubris: history gives us ample examples of similar events to what we’re experiencing or contemplating in the present. As my Glasgow and Oxford professor Catherine Schenk once remarked in a conference I organized: “if this policy didn’t work in the past, what makes you think it’ll work this time?”

History isn’t only a check on policy-makers, but on ivory-tower economists as well. Browsing through Mattias Blum & Chris Colvin’s An Economist’s Guide to Economic Historypublished last year and has been making some waves since – I’m starting to see why this book is quickly becoming compulsory reading for economists. Describing the book, Colvin writes:

Economics is only as good as its ability to explain the economy. And the economy can only be understood by using economic theory to think about causal connections and underlying social processes. But theory that is untested is bunk. Economic history provides one way to test theory; it forms essential material to making good economic theory.

Fellow Notewriter Vincent Geloso, who has contributed a chapter to the book, described the task of the economic historian in similar terms:

Once the question is asked, the economic historian tries to answer which theory is relevant to the question asked; essentially, the economic historian is secular with respect to theory. The purpose of economic history is thus to find which theories matter the most to a question.

[and which theory] square[s] better with the observed facts.

Using history to debunk commonly held beliefs is a wonderful check on all kinds of hubris and one of my favorite pastimes. Its purpose is not merely to treat history as a laboratory for hypothesis testing, but to illustrate that multitudes of institutional settings may render moot certain relationships that we otherwise take for granted.

Delving down into the world of money and central banks, let me add two more observations supporting my Econ History case.

One chapter in Blum & Colvin’s book, ‘Money And Central Banking’ is written by Prof. John Turner at Queen’s in Belfast (whose writings – full disclosure – has had great influence on my own thinking). Focusing on past monetary disasters and the relationship between the sovereign and the banking system is crucial for economists, Turner writes:

We therefore have a responsibility to ensure that the next generation of economists has a “lest we forget” mentality towards the carnage that can be afflicted upon an economy as a result of monetary disorder.” (p. 69)

This squares off nicely with another brief article that I stumbled across today, by banking historian and LSE Emeritus Professor Charles Goodhart. Lamentably – or perhaps it ought to have been celebratory – Goodhart notes that no monetary regime lasts forever as central banks have for centuries, almost haphazardly, developed their various functions. The history of central banking, Goodhart notes,

can be divided into periods of consensus about the roles and functions of Central Banks, interspersed with periods of uncertainty, often following a crisis, during which Central Banks (CBs) are searching for a new consensus.”

He sketches the pendulum between consensus and uncertainty…goodhart monetary regime changes

…and suddenly the Great Monetary Experiment of today’s central banks seem much less novel!

Whatever happens to follow our current monetary regimes (and Inflation Targeting is due for an update), the student of economic history is superbly situated to make sense of it.


  1. Functional Illiteracy Stephen Cox, Liberty Unbound
  2. Hydraulic Monetarism Nick Rowe, Worthwhile Canadian Initiative
  3. The “New” Monopsony Argument and the Suppression of Wages Mario Rizzo, Think Markets
  4. The Computer-Glitch Argument for Central Bank eCash George Selgin, Alt-M

George Halm against Common Wisdom on Currency Boards

Motivated by the recent decision of Argentina’s government to ask for an stand-by loan to the I.M.F., after a run on the peso, the last The Economist’s Bello section gives an account of the history of the relationship between them and makes a remark about the Argentine currency board experience between 1991-2002 that today is almost common wisdom: Since convertibility meant forgoing exchange-rate flexibility and an independent monetary policy, fiscal discipline was all-important for its success.”

But by the time the I.M.F. was being created, that was not an unanimous opinion. We have the example of George N. Halm who, in his book Economics of Money and Banking, stated that every Currency Board must implement a countercyclical policy on reserve requirements to be held by the commercial banks. Thus, the Currency Board could neutralize or mitigate an expansion or contraction of the base money by alternatively increasing or lowering the reserve requirements of the banks. For George Halm, a Currency Board could be almost in full command of monetary policy -and even more with respect to any other system, since it retains its political independence.

It is hard to imagine a Halm’s Currency Board that promotes a rapid economic growth which, in turn, could bring any popularity to its implementation. But it is as hard to imagine as the probability that a monetary system as such could end up in a bank run.

SMP: The Macro Bifurcation

One of the major issues in contemporary macroeconomics concerns monetary policy since the 2008 crisis. For many, if not most, of the major central banks, the conventional channels through which the money supply changes do not work anymore. For instance, by paying interest on reserves, the Federal Reserve has moved from adjusting the money supply to influencing the banks’ money demand. Some central banks have even maintained that money supply does not affect inflation anymore.

Continue reading at the Sound Money Project.

SMP: On the Delusions of Price Level Stability

One of the lessons that should have been learned after the 2008 crisis is that price level stability does not guarantee economic and financial stability. Rather, central bankers and policy makers understand that the lesson is there should be even more regulation.

In a recent column, William White explains how “major central banks’ vigilant pursuit of positive but low inflation has become a dangerous delusion.” The idea that price level stability is both, necessary and sufficient to achieve macroeconomic stability and growth should have been put to rest by the 2008 financial crisis. But conflicting narratives have enabled it to live on.

Since the crisis, the focus of many central bankers has turned to macroprudential policy. The objective is to manage financial risk. Regulatory efforts have increased as a result. On the monetary policy front, price level stability still reigns supreme. New tools have been developed to execute monetary policy, to be sure. But the overall objective has been more-or-less left intact.

Keep reading at Sound Money Project.

Josh Barro and the Gold Standard

A few days ago, when it was announced that former Cato Institute president John Allison was under consideration for treasury secretary, Josh Barro of Business Insider dismissed the man as a “nutcase”. Why? Because Allison believes that the Federal Deposit Insurance Corporation (FDIC) generates a moral hazard that contributes to financial crises (a statement I agree with).

This slur irked one of the economists at Cato, George Selgin, who took to twitter to challenge Barro. In the exchange, at one point, Barro indicated that the desire of libertarians to return to the gold standard confirms the “nuttiness” of libertarians and the people at Cato.

And here, Barro allows me to make a comment on the gold standard. The sympathy towards the gold standard is not sympathy towards gold per se, but rather sympathy for reducing the capacity of governments to exercise discretion. Basically, each time you hear some academic economist mention the gold standard, what that economist means is rules-based monetary policy.

The gold standard era (1875-1914) was not an image of perfect monetary policy. It is not a lost paradise that we ought to strive to. However, the implicit rules imposed by the system did favor more stability that would have been the case with discretion during that era. In fact, the era of central banking with the Federal Reserve has not been that great relative to the gold standard era (and in the world of central banks, the Fed is pretty good). A lot of the scorn that the gold standard era has received had to do with regulatory policy towards banks (notably regarding restrictions on branch banking which forced more volatility) or with the role of changes in international demand for assets (see here). Thus, in spite of its many flaws, the gold standard was not that bad (but it was not* gold per se that was helpful – it was the shunning of discretion by governments).

To be sure, I do not favor a return to a gold standard era. What I do like, and what I think John Allison likes as well, is the return to rules-based monetary policy. Josh Barro should have been intellectually generous and understand this key distinction. By not making that distinction, of which he must be aware given his background, he debased the debate over monetary policy.

NGO v. NGDP: In reply to Nunes and Sumner

A week ago, I initiated a discussion on using another indicator of nominal spending instead of NGDP when the time comes to set monetary policy. My claim was that NGDP includes only final goods and as a result, it misses numerous business-to-business transactions. This means that NGDP would not be the best indicator. I propose a shift to a measure that would capture some intermediate transactions.

The result was a response by Nick Rowe (to which I did respond), Matt Rognlie, Marcus Nunes and Scott Sumner (to whom I am responding now). Nunes and Sumner are particularly skeptical of my claim. I am providing a first response here (and I am attempting to expand it for a working paper).

The case against NGDP

GDP has important shortcomings. First of all, thanks to the work of Prescott and McGrattan (2012 : 115-154), we know that a sizable part of capital goods acquisition fails to be included inside GDP. That sizable part is “intangible capital” which Prescott and McGrattan define as the “accumulated know-how from investing in research and development, brands, and organizations which is the most part expensed rather than capitalized” (p.116).  Yet, investments in research and development are – in pure theoretical terms – like the acquisition of capital goods. However, national accounts exclude those. Once they’re included in papers like those of Prescott and McGrattan and those of Corrado, Hulten and Sichel (2009), increases in productivity were faster prior to 2008 and that the collapse after 2008 was much more pronounced.  In addition, this form of capital is increasing much faster than tangible so that its share of the total capital stock increases. Thus, the error of not capturing this form of capital good investment is actually growing over time causing us to miss both the level and the trend.

A second shortcoming of importance is the role of time in production. Now, just the utterance of these words makes me sound like an Austrian. Yet, this point is very neoclassical since it relies on the time to build approach. In the time-to-build model of the real business cycle approach, production occurs over many periods. Thus changes in monetary policy may have some persistence.  The time-to-build model proposes that firms undertake long projects and consume more inputs. In terms of overall transactions, this will mean more and more business to business (B2B) transactions.  Hence if an easy monetary policy is inciting individuals to expand their number of projects that have more distant maturities, then a focus on GDP won’t capture the distortionary effects of that policy through. Similarly, if monetary policy tightens (either directly as a fall of the money supply or through an uncompensated change in velocity), the drop in economic activity as projects are closed down will not equally well captured. While this point was initially advanced by Kyland and Prescott (1982), some Austrians economists have taken up the issue (Montgomery 1995a; 1995b; 2006; Wainhouse 1984; Mulligan 2010), several neoclassicals have also taken it up (Kühn 2007; Kalouptsidi 2014; Kyland, Rupert, Sustek, 2014).

Why shift to another measure

My contention is that NGO (Nominal Gross Output) allows us to solve a part of that problem. First of all, NGO is more likely to capture a large share of the intangible capital part since, as a statistic, it does not concern itself with double counting. Hence, most of the intangible capital expenses are captured. Secondly, it also captures the time-to-build problem by virtue of capturing inputs being reallocated to the production of projects with longer maturities.

Thus, NGO is a better option because it it tries to capture the structure of production. The intangible capital problem and the time to build problem are both problems of intermediate goods. By capturing those, we get a better approximate idea of the demand for money.

Let me argue my case based on the Yeager-esque assumption that any monetary disequilibrium is a discrepancy between actual and desired money holdings at a given price level. Let me also state the importance of the Cantillon effects whereby the point of entry of money is important.

If an injection of money is made through a given sector that leads him to expand his output, the reliability of NGDP will be best if the entry-point predominantly affects final goods industry. If it enters through a sector which desires to spend more on intangible investments or undertake long-term projects, then the effects of that change will not appear as they will merely go unmeasured. They will nonetheless exist. Eventually firms will realize that they took credit for these projects for which the increased output did not meet any demand. The result is that they have to contract their output by a sizable margin. In that case, they will abandon those activities (imagine unfinished skyscrapers or jettisoned research projects).

In such situations, GO (or even a wider measure of gross domestic expenditures) are superior to GDP. And in cases where the effects would start in final-goods industry, then they have the same efficiency as GO (or the wider measure of gross domestic expenditures.

The empirical case

The recurring criticism in most posts is that NGO is volatile over the period when the data is available (2005Q1-today). True, the average growth rate of NGO is the same as NGDP over the same period, but the standard deviation is nearly twice that of NGDP. However if you exclude the initial shock of the recession, the standard deviations converge. In a way, all the difference in volatility between the two series is driven by the shock of the recession. Another way to see it is to recompute two graphs. One is an imitation of the graphs by Nunes where NGDP growth in period T is compared with growth in the period T minus 1, but we add NGO. The second is the ratio of NGO to NGDP.

As one can see from the first figure, NGO and NGDP show the same relation except for a cluster of points at the bottom for NGO. All of those lower points are related to the drop from the initial recession. All concentrated at the bottom. This suggests that the recession had a much deeper effect than otherwise believed. The second graph allows us to see it.


The ratio of NGO to NGDP shows that the two evolved roughly the same way over the period before the recession. However, when the recession hit, the drop was more important and the ratio never recovered!  This suggest a much deeper deviation from the long-term trend of nominal spending which is not seen at the final level but would be seen rather in the undertaking of long-term projects and the formation of intangible capital (the areas that NGDP cannot easily capture).


The case for NGO over NGDP is solid. It does not alter the validity of the case for nominal spending stability. However since the case for nominal spending stability hinges on total transactions of inputs and outputs more than it does on the final goods sold, NGO is a better option.


Quick comment in response to Rognlie 
In his reply to Nick Rowe, Matt Rognlie states that the more important fall of NGO is explained by changes in relative prices. Although his transformation shows this, the BEA disagrees. Here is the explanation provided by the BEA:
For example, value added for durable-goods manufacturing dropped 15 percent in 2009, while gross output dropped 19 percent.  The decline in gross output is much more pronounced than the decline in value added because it includes each of the successive declines in the intermediate inputs supply chain required to manufacture the durable goods.


Was Murphy Foolish to Take Caplan’s Bet?

A few days ago, Bryan Caplan posted on his bet with Robert Murphy regarding inflation. Murphy predicted 10% inflation. He lost … big time. However, was he crazy to make that bet?  In other words, what could explain Caplan’s victory?

Murphy was not alone in predicting this, I distinctly remember a podcast between Russ Roberts and Joshua Angrist on this where Roberts tells Angrist he expected high inflation back in 2008. Their claims were not indefensible. Central banks were engaging in quantitative easing and there was an important increase of the state money supply. There was a case to be made that inflation could surge.

It did not. Why?

In a tweet, Caplan tells me that monetary transmission channels are much more complex than they used to be and that the TIPS market knew this. Although I agree with both these points, it does not really explain why it did not materialize. I am going to propose two possibilities of which I am not fully convinced myself but whose possibility I cannot dismiss out of hand.

Imagine an AS-AD graph. If Murphy had been right, we should have seen aggregate demand stimulated to a point well above that of long-run equilibrium. Yet, its hard to see how quantitative easing did not somehow stimulate aggregate demand.  Now, if aggregate demand was falling and that quantitative easing merely prevented it from falling, this is what would prove Murphy wrong. However, all of this assumes no movement of supply curves.

While AD falls and before monetary policy kicks in, imagine that policies are adopted that reduce the potential for growth and productivity improvement. In a way, this would be the argument brought forward by people like Casey Mulligan in work on labor supply and the “redistribution recession” and Edward Prescott and Ellen McGrattan who argue that, once you account for intangible capital, the real business cycle model is still in play (there was a TFP shock somehow). This case would mean that as AD fell, AS fell with it. I would find it hard to imagine that AS shifted left faster than AD. However, a relatively smaller fall of AS would lead to a strong recession without much deflation (which is what we have seen in this recession). Personally, I think there is some evidence for that. After all, we keep reducing the estimate for potential GDP everywhere while the policy uncertainty index proposed by Baker, Bloom and Davids shows a level change around 2008.  Furthermore, there has been a wave – in my opinion of very harmful regulations – which would have created a maze of administrative costs to deal with (and whose burden is heavy according to Dawson and Seater in the Journal of Economic Growth). That could be one possibility that would explain why Murphy lost.


There is a second possibility worth considering (and one which I find more appealing): the role of financial regulations. Now, I may have been trained mostly by Real Business Cycle guys, but I do have a strong monetarist bent. I have always been convinced by the arguments of Steve Hanke and Tim Congdon (I especially link Congdon) and others that what you should care about is not M1 or M2, but “broad money”. As Hanke keeps pointing out, only a share of everything that we could qualify broadly as “money” is actually “state money”. The rest is “private money”. If a wave of financial regulations discourages banks to lend or incite them to keep greater reserves, this would be the equivalent of a drop of the money multiplier. If those regulations are enacted at the same time as monetary authorities are trying to offset a fall in aggregate demand, then the result depends on the relative impact of the regulations. The data for “broad money” (Hanke defines it as M4) shows convincingly that this is a potent contender. In that case, Murphy’s only error would have been to assume that the Federal Reserve’s policy took place with everything else being equal (which was not the case since everything seemed to be moving in confusing directions).


In the end, I think all of these explanations have value (a real shock, a banking regulation shock, an aggregate demand shock). In 25 years when economic historians such as myself will study the “Great Recession”, they will be forced to do like they do with Great Depression: tell a multifaceted story of intermingled causes and counter-effects for which no single statistical test can be designed. When cases like these emerge, it’s hard to tell what is happening and those who are willing to bet are daredevils.

P.S. I have seen the blog posts by Scott Sumner and Marcus Nunes regarding my NGO /NGDP claims. They make very valid points and I want to take decent time to address them, especially since I am using the blogging conversation as a tool to shape a working paper.

NGDP, NGO and total expenditures

I did not think that my post on NGO versus NGDP would gather attention, but it did (so, I am happy). Nick Rowe of Carleton University and the (always relevant) blog Worthwhile Canadian Initiative responded to my post with the following post (I was very happy to see a comment by Matt Rognlie in there).

Like Mr. Rowe, I prefer to speak about trade cycles as well. I do not know how the shift from “transactions” to “output” occurred, but I do know that as semantic as some may see it, it is crucial. While a transaction is about selling a unit of output, the way we measure output does not mean that we focus on all transactions.  I became aware of this when reading Leland Yeager (just after reading about the adventures on Lucas’ Islands). However, Nick (if I may use first names) expresses this a thousand times better than I did in my initial post. When there is a shift of the demand for money, this will affect all transactions, not only those on final goods. Thus, my first point: gross domestic product is not necessarily the best for monetary transaction.

In fact, as an economist who decided to spend his life doing economic history, I do not like gross domestic product for measuring living standards as well (I’ll do a post on this when I get my ideas on secular stagnation better organized). Its just the “least terrible tool”. However, is it the “least terrible” for monetary policy guidance?

My answer is “no” and thus my proposition to shift to gross output or a measure of “total spending”. Now, for the purposes of discussion, let’s see what the “ideal” statistic for “total spending” would be. To illustrate this, let’s take the case of a change in the supply of money (I would prefer using a case with the demand for money, but for blogging purposes, its easier to go with supply)

Now unless there is a helicopter drop*, changes in the money supply generate changes in relative prices and thus the pattern (and level) of production changes too. Where this occurs depends on the entry point of the increased stock of money. The entry point could be in sectors producing intermediary goods or it could closer to the final point of sale. The closer it is to the point of sale, the better NGDP becomes as a measure of total spending. The further it is, the more NGDP wavers in its efficiency at any given time. This is because, in the long-run, NGDP should follow the same trend at any measure of total spending but it would not do so in the very short-run. If monetary policy (or sometimes regulatory changes affecting bank behavior “cough Dodd-Frank cough”) causes an increase in the production of intermediary goods, the movements the perfect measure of total spending would be temporarily divorced from the movements of NGDP. As a result, we need something that captures all transaction. And in a way, we do have such a statistic: input-output tables. Developed by the vastly underrated (and still misunderstood in my opinion) Wassily Leontief, input-output tables are the basis of any measurement of national income you will see out there. Basically, they are matrixes of all “trades” (inputs and outputs) between industries. What this means is that input-output tables are tables of all transactions. That would be the ideal measure of total spending.  Sadly, these tables are not produced regularly (in Canada, I believe there are produced every five years). Their utility would be amazing: not only would we capture all spending (which is the goal of a NGDP target), but we could capture the transmission mechanism of monetary policy and see how certain monetary decisions could be affecting relative prices.** If input-output tables could be produced on a quarterly-basis, it would be the amazing (but mind-bogglingly complex for statistical agencies).

The closest thing, at present, to this ideal measure is gross output. It is the only quarterly statistic of gross output (one way to calculate total spending) that exists out there. The closest things are annual datasets. Yet, even gross output is incomplete as a measure of total spending. It does not include wholesale distributors (well, only a part of their activities through value-added). This post from the Cobden Centre in England details an example of this. Mark Skousen in the Journal of Private Enterprise published a piece detailing other statistics that could serve as proxies for “total spending”. One of those is Gross Domestic Expenditures and it is the closest thing to the ideal we would get. Basically, he adds wholesale and retail sales together.  He also looks at business receipts from the IRS to see if it conforms (the intuition being that all sales should imitate receipts claimed by businesses). His measure of domestic expenditure is somewhat incomplete for my eyes and further research would be needed. But there is something to be said for Skousen’s point: total nominal spending did drop massively during the recession (see the fall of wholesale, gross output and retail) while NGDP barely moved while, before the recession, total nominal spending did increase much faster than NGDP.


In all cases, I think that it is fair to divide my claim into three parts: a) business cycles are about the deviation from trends in total volume of trades/transactions, thus the core variable of interest is nominal expenditures b) NGDP is not a measure of total nominal spending whose targeting the market monetarist crowd aims to follow; c) since we care about total nominal spending, what we should have is an IO table … every month and d) the imperfect statistics for total spending show that the case made that central banks fueled spending above trend and then failed to compensate in 2008-2009 seems plausible.

Overall, I think that the case for A, B and C are strong, but D is weak…

* I dislike the helicopter drop analogy. Money is never introduced in an equal fashion leading to a uniform price increase. It is always introduced through a certain number of entry points which distort relative prices and then the pattern of trade (which is why there is a positive short-term relation between real output and money supply). The helicopter drop analogy is only useful for explaining the nominal/real dichotomy for introductory macro classes.
** Funny observation here: if I am correct, this means that Hayek’s comments about the structure of production would have been answered by using Leontief’s input-output table. Indeed, the Austrians and Neoclassicals of the RBC school after them have long held that monetary policy’s real effects are seen through changes in the structure of production (in the Austrian jargon) or by inciting more long-term projects to be undertaken creating the “time to build” problem (in the RBC jargon). Regardless of which one you end up believing (I confess to a mixed bag of RBC/Austrian views with a slight penchant to walk towards Rochester), both can be answered by using input-output tables. The irony is that Hayek actually debated “planning” in the 1970s and castigated Leontief for his planning views. Although I am partial (totally) to Hayek’s view on planning, it is funny that the best tool (in my opinion) in support of Hayek is produced by an intellectual adversary

Distribution of Wealth — A Distortion of Focus

A ‘sociology’ paper by LA Repucci

Wealth vs Wages

Much hay is made of the distribution of wealth in the modern United States.  Recently, the Occupy movement has protested the accruing affluence of a shrinking number of individuals that constitute the top ‘1%’ of wealthy within the country.  Data suggests that the top 1% of income earners in the country represent a myriad of professions, investments, and financial instruments as revenue streams, with the largest portion (30.9%) represented as the executive/corporate professionals, as shown by graphic 1.1 below:

1.1: Top 1% of Wage Earners by Profession, US.  Source, Wikicommons

Analyzing the data from this table paints a picture of broad distribution of wage incomes across a myriad of industries, but fails to account for the disproportionately massive amounts of wealth that aren’t generated by salaries at all, nor are they representative of the fact that the wealthiest legal entities within the US aren’t people — they are tax-sheltered corporate entities:

1.2: Corporate Profits vs Tax Liability

The Corporate Model

Corporations are paper entities recognized by the state as legal persons.  They exist in order to generate and accrue revenue, and pay stakeholders.  Unlike natural persons, corporate entities are immortal.  Instead of competing on the open marketplace for revenue, the most successful and largest corporations have discovered a way to cut the market out of their revenue streams altogether.  It is simply easier and more cost effective to lobby the state to enact laws that protect their revenue stream and squash market forces than it is to operate within a competitive market.  Progressive, draconian tax structures enacted as a hedge against corporate domination of wealth may be adopted by government in an effort to increase tax revenue from the corporations, but in reality, simply provide further incentive for corporations to allocate resources in an effort to mitigate or outright eliminate their tax liability within the US.  For example, Google, the fastest growing and wealthiest of the new tech giants, pays a majority of it’s taxes in Ireland and Bermuda — nations with a far friendlier income tax policy than the US — and bypass their US tax liability almost entirely due to the so-called ‘loophole’ in the income tax law, resulting in the federal government’s lost tax revenue from one of the largest US corporations in history. This leads increasingly to a larger percentage of individuals, sole proprietors and small-to-mid cap businesses shouldering an increasing burden within the tax structure as shown in 1.3 below.


The State’s Culpability

The new corporate model of tax evasion coupled with astronomical growth in profits-to-cost relies heavily on the government’s complicit action with regard to tax policy and recognition of corporate person-hood.  It is in a company’s interest to make money — but to ‘saw the ladder off’ below them, they require government cooperation to enact laws that make tax sheltering and corporate personhood possible.  This culture of lobbying and outright appropriation of the legislative process has progressed to the point that there is little differentiation between the state and the corporation.  Insurance companies write health care laws, and banking institutions write tax laws and set monetary policy.  The roots of this collaboration run deep through US history, crystallized notably by the creation of the Federal Reserve Bank in 1913 on Jekyll Island by J.P. Morgan, Paul Warburg and other global-level financiers with the collusion of Senator Nelson Aldrich, who had close ties to both Morgan and Nelson Rockefeller. (Further reading: ‘The Creature from Jekyll Island’ by E.B. White)  The Federal Reserve Act of 1913 was signed into law by then US President Woodrow Wilson, and effectively turned over control of the nation’s monetary policy, issuance of currency, and anti-market fixing of interest rates to a private bank set up as a for-profit corporation called the Federal Reserve Bank, effectively undoing the American Revolution and the work of his predecessor, President Andrew ‘Old Hickory’ Jackson.  The ‘Fed’ as it is known today, continues to be the sole issuer of paper money accepted for the payment of taxes in the US.  While the people remain ‘free’ to trade in whatever currency or barter they choose, all state and federal taxes in the US must be paid in Federal Reserve Notes, giving the Fed a monopoly on currency.

The Corporate-State Combine

A century of the above-outlined activities of corporate entities have led to an overlap between the banking community and government that often goes understated.  JP Morgan/Chase market their banking services directly to government, as clearly outlined in their marketing materials: It is no surprise that most of the nominees for president, cabinet members, the Fed and legislators exist in a professional ‘revolving door’ environment that moves them from banking to high office and back over the course of their careers.  For example, both major party candidates for president in the last 20 years have had direct professional ties to JP Morgan and Goldman Sachs.  This ‘partnership’ has led to a century of collusion between government and banking, taking an ever-increasing cut of the total wealth out of the real market, and enriching our legislators to the point that many of the wealthiest counties in the nation now surround Washington DC as evidenced in the data provided.  This corporate-government combine acts as a siphon, sucking wealth out of the population through inflation, currency devaluation and increased tax burden, and enriches the corporate interest through outright gifting (TARP, Stimulus, Bailouts, etc) to the wealthiest of the wealthiest of the 1%.  Warren Buffett, one of the wealthiest men in the world and owner of Berkshire Hathaway Ltd. championed bailouts while his firm received the largest portion of us taxpayer money from the TARP program. Buffett himself pounds the table for higher tax rates, while he and his company manage to ‘limit’ their tax liability and avoid paying taxes owed back to 2002.  Mr. Buffett is a major campaign contributor to our current President, Barack Obama.


With the compound factors of massive increases in government spending (roughly $20,000 annually per citizen), and the steady evaporation of corporate tax liability (less than 40% of the total tax base of businesses in the US is covered by large-cap corporations) the problem of the distribution of wealth in the US is starkly apparent.  To identify what is going wrong in the economy is one thing — providing real solutions is another entirely.  Both major political parties offer their version of the fix — the right would suggest cutting government spending on services and lowering the tax base to broaden it and encourage large cap corporate interests to pay their income taxes in-country.  The left advises steeply progressive tax laws on private citizens (one would assume the left would suggest tax reform for large corporations, but the democrat party has been in charge of the tax law for decades with no such legislation to speak of), and consumption and indulgence taxes on goods and services, combined with further devaluation of the dollar through Quantitative Easing (QE) and raising (or outright elimination of) the debt ceiling.

While it would seem that these two paths are the only potential ‘fixes’ to our nation’s distribution of wealth problem, neither of these plans would provide real, permanent relief to the average citizen who is continually squeezed out of the middle of the economy, with an ever-increasing portion of their revenue taken by the state through tax, and devalued by the state through inflation.  Indeed, it would seem that our problem is not ‘distribution of wealth’, but rather, the redistribution of wealth through taxation and devaluation of the dollar.  Looking at the problem from this perspective, the solutions become simpler and multi-fold.

Monetary Policy/END THE FED

Should the Federal government enact law that checks the monopoly power of the Fed to issue currency by accepting in payment of taxes any and all used currencies in the market, the nation would be free to adopt currencies other than the dollar.

Bitcoin, a decentralized crypto-currency, is a notable example of a market solution to the problem of distribution of wealth.  Though Bitcoin has it’s detractors and a relatively small market cap, it’s value has continued to skyrocket on the open market, and is in the early stages of large-scale adoption and public use.  Bitcoin requires no bank or government to ‘mint’ it as a currency, and is freely traded electronically between users with no bank needed.

Similarly, gold and silver have been used for thousands of years the world over as viable hard currencies.  Hard currencies cannot be devalued through running of a printing press like paper currencies, nor through the click of a button like crypto-currencies.  As there is a finite amount of gold and silver in the market, it’s value has a ‘hard floor’ — it is always worth at least it’s value as a raw material.

The fact that the Federal government will only accept Federal Reserve Notes (which, in itself violates the constitutional directive for the US Treasury to mint coin, not a private bank) in payment of taxes effectively gives the FED a monopoly on currency.  The last US President to order the Treasury mint silver certificates was John F. Kennedy.


Corporations are legal ‘persons’ with the ability to lobby the legislature directly, resulting in tax laws and policies that favor them over natural citizens of the US.  This has resulted in laws being written directly by corporations, including insurance companies’ authorship of the Affordable Healthcare Act.   The insurance companies’ stock has risen by a factor of 2-5 due to the implementation of the law, while the cost of health insurance for the average citizen has skyrocketed.  Ending corporate person-hood would go a long way to ending the power of lobbyists to purchase legislators, and result in elected officials representing the people who elect them.

Tax Policy/END THE TAX

‘Taxes’, ‘tariffs’, or any other name the state wishes to apply, are simply pseudonyms for extortion — that is, the violation of individual property rights through threats of aggressive reprisal.  When private entities such as a thief or mob perform the same action, we rightly call it theft.  It is completely inconsequent what a thief does with your money once he has violated your rights to acquire it, even if he assures you that it is to your personal, direct benefit that he take your property from you by force.  To fix the distribution of wealth, and as well to return to a moral society where one does not live on the property of his neighbor through state-sponsored theft, all taxes should be eliminated.  If a portion of the population would like to provide a service or product to their neighbors, let them do so legitimately through voluntary free association and exchange.  The state spends more than it takes in in taxes, and floats the rest on credit.  This activity has crippled the purchasing power of the dollar, which has lost 99% of its total purchasing power on the market in the 100 years the Fed has controlled the nation’s currency.


Wikimedia Commons. N.p., n.d. Web. 04 Dec. 2013.

JP “State and Local Government.” N.p., n.d. Web. 06 Dec. 2013.

Cogan, John F. Federal Budget Deficits: What’s Wrong with the Congressional Budget Process. Stanford, CA: Hoover Institution, Stanford University, 1992. Print.

What Ails You, Economy?

The Keynesian is ever mistaking economic activity for economic growth, credit expansion for wealth creation, profligacy for progress. Growth, wealth, progress. He uses his own definitions of each to reinforce his definitions of the others. And they are all fallacious.

When the Austrian tells the Keynesian that the printing and spending of mere pieces of paper cannot lead to more wealth in society, the Keynesian retorts that it is undeniable that credit expansion and stimulus lead to more economic activity. In this he is technically correct. Printing more dollars and handing them out to those who would consume and invest them, does indeed lead to “activity,” even more perhaps than there otherwise would have been.

But our Keynesian assumes, or assumes that his audience will assume, that mere economic activity is growth, is wealth, is progress. Presumably this includes even that activity which our Austrian rightly considers overinvestment (more properly, malinvestment), overconsumption, and/or the proverbial breaking of windows, each of these a common side-effect of the Keynesian witchdoctor’s remedies (often intended to cure ailments caused by earlier interventions, some Keynesian, some not).

If the Keynesian’s definition of economic activity doesn’t (oh, but it does!) include these things then the burden of proof is on him to show that his prescriptions lead to more real growth than would their absence on an unhampered market. And that his incantations lead, on the whole, to economic health rather than disease. A free market is largely unencumbered by the ailments mentioned above so in order to do this it would need to be shown that the sicknesses that do affect it are somehow worse than those caused by intervention.

And to be sure, pure economic freedom isn’t perfect. It has its own share of maladies. But these are all coughs and sneezes by comparison. Cures, if they are needed at all, come from the market itself. The economic meddlers and potion peddlers only serve to make things worse.

We must admit that not even on the most unfettered of markets does all economic activity lead to growth. For human actors err, and the market punishes their errors. How much more is all this the case under a centrally-planned expansionary-monetary/stimulatory-fiscal regime? And how much more severe will be the punishment?