Rick Perry Mangles Basic Economics

Last week, Department of Energy boss Rick Perry stuck his foot in his mouth when he said to a group of coal workers, “Here’s a little economics lesson: supply and demand. You put the supply out there and the demand will follow.” On its face, the statement seems to imply that supply creates its own demand. This is obviously not true. CNN and other cable news networks wasted no time pointing this out.

These errors are nothing new for Perry, who has a history of this kind of verbal faux pas. He sank his presidential campaign in 2012, when, during a primary debate, he famously forgot the names of the three federal departments he would eliminate. (The correct answer is all of them.)

What Perry got wrong is called Say’s Law, or the Law of Markets. J.B. Say was a French economist in the late 18th century who noted not that supply creates its own demand, but that production always precedes consumption.

Say wrote in his A Treatise on Political Economy wrote,

“A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value…As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase”

 

Because of  the division of labor, you work, producing goods or services for your employer. Your labor is compensated with money, which you use to buy things that other people produce. The more money you make, the more you tend to purchase.  These are not controversial economic statements.

At the macro level, the Law of Markets says that aggregate supply will drive aggregate demand to a relatively equal level. This means that there can never be a general glut in the economy over the long term. When the market is allowed to operate freely, businesses that fail are liquidated into the capital the fuels new businesses ventures, some of which succeed. This is how economies grow.

Instantly, you can see why government doesn’t like the Law of Markets. If a free market produces a growing economy, it is much more difficult for them to steal the money to intervene in the economy  i.e. socialize the costs of failing pet interests, bail out industries en masse, and wage aggressive wars around the world.

John Maynard Keynes was the one who coined the phrase “supply creates its own demand” as a way to discredit the Law of Markets. Keynesian economics advocates for widespread government intervention into the economy. He thought government could end the business cycle by stimulating demand when necessary and contracting when necessary, providing a smooth, growing national economy. Given that we are still feeling the effects of the government driven economic meltdown of 2008, that is clearly a laughable proposition.

Secretary Perry’s mangling of the Law of Markets shows that he doesn’t understand the underlying economic principles. Not surprising, given the GOP’s dismal track record on economics.

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Economic Bubbles and the Fed

From Ron Paul’s weekly column at The Ron Paul Institute:

Federal Reserve Chair Janet Yellen recently predicted that, thanks to the regulations implemented after the 2008 market meltdown, America would not experience another economic crisis “in our lifetimes.” Yellen’s statement should send shivers down our spines, as there are few more reliable signals of an impending recession, or worse, than when so-called “experts” proclaim that we are in an era of unending prosperity.

Yellen’s statement underlies the general attitude of government economic managers who believe that even though crashes have become a normal part of the Keynesian mixed economy, they wouldn’t happen under the right leadership. It’s the same delusion that the communists suffered from: if only the right “top men” were in charge, everything would’ve been fine. The problem is that if the car is broken down, it doesn’t really matter who’s driving.

Yellen also seems to be underestimating the impact of student loan and federal debt. Student loan debt outpaced personal credit card debt in 2010 and shows no signs of slowing down. Student loan debt already totals over $1 trillion dollars. That wouldn’t necessarily be a problem except for the troubling trend of student loan defaults. More than 8 million borrowers stopped paying their student loans and defaulted student loan debt is up over 14% in 2016 alone.

This is the same trajectory the housing bubble took before it crashed in 2008. For years, the government, operating on the theory that every American should own a home, used Fannie Mae, Freddy Mac, and artificially low-interest rates to extend easy credit. Banks, knowing that questionable loans would be covered, began lending to unqualified borrowers, known as sub-prime lending. Millions of these borrowers, who wouldn’t have qualified for loans under traditional market circumstances, began defaulting and “pop” went the bubble, along with the U.S. and world economy.

Federal debt issues are even more pressing. Already over $20 trillion, the federal debt is largely ignored by our politicians. Dr. Paul writes, “Despite claims of both defenders and critics of the president’s budget, neither President Trump nor the Republican Congress have any plans for, or interest in, reducing spending in any area.” A full two-thirds of the federal budget is spent on three mandatory items: Medicare/Medicaid, Social Security, and interest on the federal debt. Those percentages will increase as the baby boomer generation continues to retire and the debt continues to increase.

Given the federal government’s total lack of desire to cut real spending, as well as the Fed’s penchant for monetizing the debt, the prospects of limitless prosperity seems far-fetched at best and dangerously naïve at worst.

Meltdown at CNN

There are few relationships in our modern American political culture that are as antagonistic as the relationship between President Trump and the cable news network, CNN. As I’ve written here before, that is not a new phenomenon. A century before the Washington Post toppled President Nixon over the Watergate scandal, Abraham Lincoln and his Republican Congress was suspending Habeas Corpus, shutting down hundreds of dissenting northern newspapers and throwing thousands of northern journalists in jail for criticizing his administration’s handling of the War Between the States. Suffice it to say that the president and his administrations have always had a conflicted relationship with the press.

What is new is the obvious desperation of those at CNN to be the organization that takes down President Trump. To be fair, this doesn’t just describe CNN; all cable news channels are openly critical of Trump, including Fox News. This is also not a one-sided affair. Trump has been more than happy to return fire. He repeatedly claims that CNN peddles “fake news” and has even refused questions from CNN reporters at press briefings. The difference is that CNN has taken Trump Derangement Syndrome to a new level. A Washington Examiner report from May showed that 92% of all CNN news coverage focused on President Trump, with 94% of the coverage negative.

Cut to last week. On Twitter, Trump re-tweeted a gif of himself when he was a guest on WWE Raw in 2007. In it, he clotheslined WWE boss Vince McMahon, who had the CNN logo superimposed onto his head. The gif, originally posted by a Reddit user named HanAssholeSolo, would cause most people to just roll their eyes or chuckle and move on, but not CNN. In their judgement, they regarded the video as a threat to both their journalists and their First Amendment free speech protections.

So CNN tracked down the troll who originally posted the gif on Reddit and bullied him into a retraction and apology by threatening to release his personal information. Then they bragged about it in an article.

Per CNN:

CNN is not publishing “HanA**holeSolo’s” name because he is a private citizen who has issued an extensive statement of apology, showed his remorse by saying he has taken down all his offending posts, and because he said he is not going to repeat this ugly behavior on social media again. In addition, he said his statement could serve as an example to others not to do the same.

CNN reserves the right to publish his identity should any of that change.

The move has received backlash from across the political spectrum and all of it has been well deserved. CNN has once again overplayed their hand and the result is thousands of new memes and gifs, posted and re-posted tens of millions of times, all of which are critical of CNN.

It’s the same type of mistake Republicans made in the 90’s with Bill Clinton. They beat the dead horse of his legitimate and repeated legal issues to the point of receiving backlash. After seven years of constant Republican attacks culminating in two impeachment charges, Clinton’s approval rating went up 10 percentage points to 71%.

Trump’s approval rating may never see 50%, let alone 71%, but day in, day out attacks with little or no evidence, are already starting to take its toll on CNN’s credibility. Bullying teenage internet trolls certainly won’t help that.

 

Thoughts on the Virginia and Kentucky Resolutions of 1798

I’ve become thoroughly depressed by current events lately, so I’ve decided instead to go back to reading more American history. I’ve always respected the men and women of the founding generation: their bravery and fierce independent streak laid the foundation for the America we know today, for better or worse. Even though the U.S. Constitution is a deeply flawed document that led to the biggest and most intrusive government in world history, it wasn’t originally so.

In 2015, Gallup, a leading polling and analytics firm, found that 60% of Americans believed the federal government had too much power. Given the federal government’s penchant for expanding their own scope and authority, that figure shouldn’t be surprising. What may be surprising, though, is that the debate over federal power goes back much further than many realize, all the way back to the founding generation.

In 1798, when President John Adams and the Federalist Congress passed the Alien and Sedition Acts, many believed them to be a violation of the federal government’s clearly defined powers outlined in the U.S. Constitution. Shortly after its passage, several private citizens critical of the federalist government found themselves charged, indicted, convicted, jailed and fined in federal courts, which by that time were packed with federalist judges. In response, James Madison and Thomas Jefferson drafted the Virginia and Kentucky Resolutions of 1798, respectively.

In the Virginia Resolution, Madison re-emphasizes where the powers of the federal government come from, as well as defends the right of the states to “interpose” themselves between the federal government and the “authorities, rights and liberties” of the states and the people. Effectively, Madison argues that the states have the right to determine the constitutionality of any federal laws and in so doing, the states are “duty bound” to stop any abuses of the federal government. The reason is simple: the states created the federal government and delegated its powers in the constitution and, as a result, the states have the duty to keep the powers of the federal government in check.

Madison’s view that the states have the power to determine the constitutionality of federal laws, as well as openly defy them if necessary, is certainly at odds with the modern day American understanding of U.S. Government. Most people see the role of determining the constitutionality of federal laws as exclusively under the purview of the federal court system. This view, taught in all government schools, fundamentally misunderstands the constitution as it was ratified by the states. The founders, as evidenced by the 9th and 10th amendments, viewed the states as a final check on the power of the three branches of federal government.

Madison wrote, “the “Alien and Sedition Acts” passed at the last session of Congress; the first of which exercises a power no where delegated to the federal government, and which by uniting legislative and judicial powers to those of executive, subverts the general principles of free government.” (Emphasis mine.) Madison rightly saw that the tendency of the federal government to join together and expand power at the direct expense of the states was “inevitable” and would eventually lead to back to monarchy. The independent states offered the best defense against such an expansion of federal power.

Thomas Jefferson, in the Kentucky Resolution, echoes Madison’s concerns over the consolidation and expansion of federal power. He writes, “the general government is the exclusive judge of the extent of the powers delegated to it, stop nothing short of despotism; since the discretion of those who administer the government, and not the constitution, would be the measure of their powers”. Jefferson understood that federal courts would ultimately side with the federal government in matters of its authority, but even Jefferson couldn’t have imagined how prescient his words have become.

Regarding the rights of the states, Jefferson’s language was even stronger than Madison’s. Where Madison claimed the states were “duty bound” to oppose unconstitutional federal power, Jefferson writes, with no equivocation, that the states, who formed the constitution, are “sovereign and independent” and have the “unquestionable right” to determine the constitutionality of federal acts.    Furthermore, Jefferson argues, the “rightful remedy” to such an infraction is “nullification”; that is, for the states to invalidate any federal acts it has deemed unconstitutional.

What the Virginia and Kentucky Resolutions show is that the struggle over the size and scope of the central government is nothing new in American political culture. In fact, it is the struggle that defined the revolutionary period and the creation of the United States. Unfortunately, those who have argued against increased federal power have long been on the losing side. While the states have largely been content to trade their sovereignty and independence for federal tax dollars, the words of Madison and Jefferson should serve as a wake up call to anyone who believes in self-determination and individual liberty.

Reclaiming the Independent American Spirit

independenceday

Here is a July 4th sentiment I can get behind. Note: it isn’t the cold, dead, bloated, debt-ridden corpse of the American Empire that we currently live in.

The story of the founders is the story of a people who refused to let an unchecked central government perpetrate a “long Train of Abuses and Usurpations” against them. The end result being the “Establishment of an absolute Tyranny over these States.”

Those words, which Thomas Jefferson wrote 241 years ago, still ring true today.  The federal government has become every bit as tyrannical toward the states and the people as King George III was in colonial times. The ideas of self-determination and self-rule that formed this country have been obliterated over the years, devolving from strong independent states and a small central government to a strong central government and weak, dependent states. The result has been rampant inflation, endless war, crippling debt, the death of federalism, and the almost total loss of individual freedom.

That doesn’t mean that the states are perfect. Far from it. Tyranny can just as easily come from a local or state government as it does from a federal one. As a libertarian anarchist, I advocate for total abolition of the State, instead favoring voluntary interactions through the free market. But there can be no question that the closer the government is to the people, the easier it is to change. In Arizona, where I reside, there are 61 state representatives. That’s one for every 110,000 Arizonans. There are only 9 U.S. Representatives, though. That’s one for every 750,000 Arizonans. If you want to have the greatest impact on your community, do what historian Brion McClanahan says, “think locally, act locally.”

This year, let’s remember what it is Americans really celebrate on July 4th: that men, endowed with natural rights (life, liberty, and the freedom to pursue happiness), have the duty to alter, abolish, and “throw off” a government that begins to destroy those rights and create “new Guards for their future security.”  Americans have always celebrated secession, independence, and self-determination. It’s time we started acting like it.

Seattle’s Own Minimum Wage Study Finds Wage Hike a Disaster

In a delicious bit of irony, a study done by the University of Washington and supported and partially funded by the city of Seattle, found that city’s recent minimum wage hike to have disastrous dis-employment effects on minimum wage earners.

The multi-year study comes on the heels of a University of California Berkeley study finding, interestingly enough, exactly the opposite results, claiming that no jobs were lost due to the hiked wages, though the study did limit its study to food service jobs. Minimum wage supporters were quick to tout the success, including Seattle mayor Ed Murray.

Per the Mercury News:

“When we passed the $15 minimum wage, we were warned the economy would tank, jobs would dry up, and employers would flee,” Murray said. “Today, Seattle’s economy is the strongest it has ever been, unemployment is at a historically low rate, and employers are competing for employees.”

The city of Seattle’s minimum wage, depending on the size of the business, was around $10/hour in 2015. That amount has been raised twice since then, with the most recent hike on January 1, 2017 to $15/hour if the employer doesn’t pay towards medical benefits or $13.50 if they do pay towards medical benefits. In comparison, the federal minimum wage is $7.25 in 2017.

Specifically, the University of Washington study found the following (nicely summarized here):

  • The number of hours worked by low-wage employees was reduced by 3.5 million hours per quarter. This is both by the thousands of jobs lost, as well as by the reduced hours of those lucky enough to remain employed.
  • The large wage increase had the effect of reducing total income paid to low-wage employees over $120 million per year at “single location Seattle businesses”. These are small businesses with small margins that can scarcely afford to see their labor costs rise so dramatically.
  • The unfortunate end result is that on average, low-wage earners made $125 per month less in total income.

As I’ve said before and has been repeatedly borne out in practice, wage and price controls do not work. Not only do they not work, they target and hurt the very people they are intended to help: minorities, the young and unskilled, and the working poor.

Quote of the Day

From Mises Institute President Jeff Deist, in a piece published on The Daily Caller.

“A government big and powerful enough to cause widespread psychosis after presidential elections is a government without much legitimacy. People become irrational about politics precisely because government depressingly controls so much of our lives. It chooses winners and losers. It is the superstar player in American society, rather than the referee.

The obvious and reasonable option staring us all in the face is to go our separate ways. Let us consider political secession, radical decentralization, nullification, and localism as the realistic alternatives to a much more unpleasant conflict. Let us reconsider living as a loose confederation of states. 320 million vastly diverse people, from Anchorage to San Francisco to Topeka to Miami, cannot be governed by a top-down central authority in Washington.

Surely divorce, in whole or in part, is better than an abusive marriage.”