Some Thoughts on Supply-side Economics, Richard M. Ebeling (03/02/2010)

July 25, 2016

When Keynes‘s General Theory was published in 1936 there was no reason to believe that it would soon serve as the framework for 40 years of economic theory and policy. Almost to a man, every important economist of that era condemned the book and its message as confused, inconsistent and dangerous.

Joseph Schumpeter compared Keynes‘s proposals with the types of economic policies pursued by France’s Louis XV, which led to the bloodshed of the French Revolution.1 Friedrich Hayek angrily insisted that Keynes was asking us to abandon 200 years of economic theory and return to the crude and naive idea that somehow the more money you create the wealthier you become.2

And Kenneth Boulding declared that

Mr. Keynes’ economics of surprise, like Hitler’s, may be admirable in producing spectacular immediate success. But we need Puritan economists like Dr. Hayek to point out the future penalties of spendthrift pleasures and to dangle us over the hellfire of the long run.3

Yet, by 1946, only ten years after the appearance of The General Theory, all that had changed. Keynesian economics had swept the field and those who refused to accept the new vision were considered as out of date and antiquated as those who still believed that the sun revolved around the earth.

Paul Samuelson could prayerfully give thanks that Keynesian system had given economists, “a Gospel, a Scripture, a Prophet.”4 And Gottfried Haberler, who had once been one of Ludwig von Mises‘s most promising students in the 1920s and early 1930s, could insist that, “Only a dullard or a narrow minded fanatic could fail to be moved to admiration by Keynes‘ genius.”5

Promising price stability, Keynesian monetary policy produced 30 years of ever worsening inflation; pledging an era of full employment, Keynesian contra cyclical manipulations created severe fluctuations and distortions in employment and output, particularly in the last ten years; and assuring the public that the secret to ever greater investment and productivity lies in the government’s fiscal ability to stimulate aggregate demand, the last 20 years has seen productivity increases falling rapidly and capital investment become ever more erratic.

With such a widening margin between promise and performance, a revolt against the Keynesian system was inevitable. The first step in this revolution was the rediscovery of the quantity theory of money. Both Austrian and Chicago economists hammered away at the public and their fellow economists that a prolonged and accelerating rise in prices could never happen without an ever increasing expansion of the supply of money and credit.

How successfully has this truth been learned? James Meade, a leading British Keynesian and Nobel Laureate, gave a lecture in Vienna last year in which he said that a “system of uncontrolled [trade union] monopoly power” combined with a “Keynesian governmental undertaking that, whatever happens to the level of money wages, demand will be stimulated sufficiently to avoid any General Unemployment,” has created a “set of institutions which might well have been expressly designed to set in motion and maintain [a] process of explosive inflation.”6

When one of the leading intellectual advocates of the British Welfare State and the Keynesian system begins to show such grave doubts, we can hope that the era of naive but highly dangerous rationalizations for monetary expansion may be coming to an end.

Another major blow against the Keynesian paradigm is now being leveled by those who call themselves the “supply-side” economists.

Pointing to the low rate of savings in the United States (approximately 3 percent), and the low rate of (real) investment and productivity increases, the “supply-siders” have lifted from a bookshelf long neglected by the Keynesians, the old 19th century classical works that had so cogently argued that only that which has been produced can be consumed and only that which has been saved is available to be invested. With great articulation they have helped bring back to Say’s Law the respect it always deserved and should never have been denied.

All exchange has as its purpose the fulfillment of human wants and desires. We offer to trade something we possess for something held by another because we believe that that which the other person presently has title to would give us greater satisfaction than that which we presently own. Yet, unless we have been the beneficiary of a magnanimous gift giver, the only way to acquire what we want is first to produce or participate in the production of something that other individuals might possibly desire.

That too much of one thing and too little of another might be produced is almost inevitable in a world where the future is uncertain and present productivity must be guided by anticipations of future wants. But through the process of profit and loss, incentives are always being created for producers to supply greater quantities of some goods and less of others. Thus, while a perfect balancing of supply and demand may never exist at any moment in time, that is the tendency that is always at work in the system.

The “supply-side” economists have not only repeated these arguments, but have also attempted to analyze under what conditions it is worthwhile to trade or not to trade, work or not to work, and save or not to save. Individuals, they point out, must compare the relative advantages of doing one thing rather than another, and the alternative that offers the highest anticipated gain will be the one chosen.

In the market place, relative advantages come to be expressed in terms of prices. We enter the supermarket and, given our income, we allocate our expenditures so as to maximize utility or achieve the highest level of satisfaction possible.

If the relative prices of some goods change, we reevaluate our estimations of them and most people will tend to buy a relatively smaller amount of the products that have risen in price and a relatively larger amount of those that have gone down in price. Relative prices, and any changes in them therefore, influence and guide the allocation of income on the part of consumers and the allocation of production on the part of producers.

The same tools of analysis, the “supply-siders” argue, can also be applied to a study of fiscal policy. Tax rates, for example, represent some of the relative prices that an individual has to take into consideration when making a decision.

If an individual is considering working additional hours or is contemplating a new investment or a new device for improving productivity, he must compare the additional revenue or gain that he would receive from carrying out this plan with the additional costs — including taxes — involved.

Thus, “supply-siders” conclude, progressively rising marginal tax rates that take a greater and greater proportion of one’s income will tend to dissuade work, create incentives to move into barter or cash transactions that can avoid the leering eye of the tax collector, and diminish the incentive for saving and investment.

How could work, productivity, saving, investment and greater division of labor be stimulated? By lowering the marginal tax rates, so that at every level of income the proportion remaining in the hands of workers and producers would be larger. Then the relative cost of making a work or saving or investing decision would have fallen and these activities over time would probably be expanded.7

Now, if the “supply-side” argument was left at that, the main thrust of their argument could be considered unobjectionable in its general outline, with few grounds for major disagreement. They would have only more or less supplied the basic tools of price theory to some aspects of fiscal policy.8

An additional ingredient in the tool kit of some “supply-side” theoreticians, however, is the concept of the “Laffer Curve,” named after Arthur Laffer, a USC economist.

Laffer argues that there are two possible tax rates that will generate the same level of government revenue. If taxes are zero, government revenue is zero and the people retain 100 percent of their income. If taxes are l00 percent, government revenue would again be zero because, Laffer says, nobody would bother to work if they were not allowed to keep any of what they had earned and produced.

If the rate of taxation is lowered from l00 percent, individuals would have an incentive to work, since they could now keep some of what they had produced and government revenue would rise from zero to some positive number. Every lowering of the tax rate would continue to induce more and productivity, with greater government revenue besides.

Greater government revenue, that is, until some point at which any further lowering of the tax rate would, in fact, generate less of a government take rather than more. Hence, the “Laffer Curve.”

What, then, is the goal to which economists and politicians should direct their efforts? In The Way The World Works, Jude Wanniski, one of the leading gurus of the “supply-side” school of economics, gives as an answer, the discovery of the actual shape of the “Laffer Curve.”

That part of “The Curve” at which government revenue is maximized should be pinpointed and fiscal policy implemented to assure that the economy is moved to that point without further delay.9

The obvious question is, how do we ever find out the actual shape of “The Curve” and where we are on it?

If, for sake of the argument, we accept that such a “Curve” exists somewhere out there, it is important to realize that it would be nothing more than the cumulative subjective estimations of a multitude of individuals about the relative advantages of work vs. leisure, consumption vs. savings, etc.

“The Curve” would be no more fixed or stable than the expectations and preferences of the individuals in a particular community. Changes in people’s valuations, revisions in expectations about the political, social or economic climate and new discoveries of cost-saving production techniques would all work to make any hypothecated “Laffer Curve,” a shifting, shadowy entity whose position and shape would be as fluid and erratic as the imaginative minds of the individuals who comprise the elements living under “The Curve.”

But even more important than the theoretical difficulties of determining the position and shape of “The Curve” is the assumption that the goal of fiscal policy should be the maximizing of governmental revenues.

The primary trade-off is not seen as that between income kept and income seized via taxation from the public. That analysis is incidental to the main purpose of discovering the tax structure that generates the most revenues for the state coffers, i.e., the incentive structure that entices and induces the slaves to produce the output that assures the maximum booty for the slave-masters and their lackey underlings.

Indeed, the in-fighting and emotional hysteria in Congress over the Kemp-Roth Bill is nothing more than the politicians and the special interests arguing over whether the proposed tax cut will or will not supply the government with ever greater sums to dole out to the friends and favorites of the political court.10

“Supply-side Economics,” as it has developed over the last few years and as it is usually presented when its case is being made, is not a vehicle for diminishing the size of government or expanding the economic liberty of the general public.

Having reached a dead-end in attempts to stimulate the economy on the side of “aggregate demand,” the macroeconomic manipulators have now discovered there is a new set of economic equations that can be massaged on the “aggregate supply” side as well.

Already the economic model builders are busy at work revising their equations and adding more variables. Michael Evans, the designer of two of the leading Keynesian econometric models, has changed over to the “supply-side” school. Having opened a new economic forecasting business, he is designing a new “supply-side” model and is already estimating how much of a percentage cut in tax rates will produce what percentage increase in savings and work effort.11

And after having slowly been shown the light, the economic forecasters working for Congress are licking their chops calculating what tax levers should be pulled, and by how much, to generate revenue and production where the government considers it worthwhile.

Rather than a means for freeing the economy from the fiscal tax burdens of the state, “supply-side” economics may very well serve as the vehicle for what in France has long been called “indicative planning.” Instead of directly ordering the movement of labor and resources from one area of the economy to another, indicative planning operates through a system of tax incentives and subsidy programs to entice business enterprises into certain parts of France and into certain lines of production that the government considers “socially desirable.”12

Supply-side economics could open the door for systematic government manipulation of tax rates as a means to assure the “socially desirable” level of saving and investment and the “socially desirable” combination of work and leisure.

Just as the old Keynesian macroeconomics has been a mechanism for distorting the economy through “aggregate demand” tools, the new “supply-side” macroeconomics will almost certainly result in economic distortions through the use of “aggregate supply” tools.

Tax cuts and lowering of tax rates are desirable. But they are desirable because they would allow those who have earned the income the right to keep and spend it as they see fit. Would savings and investment be greater if personal and corporate tax levels were lower? Probably they would, since existing fiscal actions have set up disincentives for both activities.

But individuals, themselves, should be left free to decide how much to work or not and how much to consume and save. And equally important, entrepreneurial and business activities should be free from regulations and fiscal gimmickry so production can be organized and resources can be allocated to reflect the preferences and desires of income earners in their role as consumers.

There is no “socially desirable” level of work or of saving and investment other than what individuals freely choose as desirable. And unless the case for “supply-side” economic reform is modified to reflect an argument for individual freedom, it may very well serve as a means for even greater state control over the economy and not less.

  • 1.Joseph A. Schumpeter, “Review of The General Theory of Employment, Interest and Money by John Maynard Keynes,” Journal of the American Statistical Association (Dec., 1936), p. 794.
  • 2.Friedrich A. Hayek, The Pure Theory of Capital (London: MacMillan & CO., Ltd., 1941), pp. 409-410.
  • 3.Kenneth E. Boulding, “Review of The Pure Theory of Capital by Friedrich A. Hayek,” Journal of Politcal Economy (Feb., 1942), p. 131.
  • 4.Paul Samuelson, “The General Theory”, in The New Economics, ed. by Seymour E. Harris (New York: Alfred A. Knopf, 1946), p. 147.
  • 5.Gottfried Haberler, “The General Theory,” in The New Economics, ibid., p. 161.
  • 6.James E. Meade, “Stagflation in The United Kingdom,” Atlantic Economic Journal (Dec., 1979). p. 6.
  • 7.Jack Kemp, An American Renaissance: A Strategy for the 1980’s (New York: Harper & Row, 1979), pp.32-76.
  • 8.See Murray N. Rothbard, Power and Market: Government and the Economy (Menlo Park: Institute for Humane Studies, 1970) pp. 63-123, who draws similar conclusions, though with important qualifications.
  • 9.Jude Wanniski, The Way the World Works (New York: Simon and Schuster, 1978), pp. 97-1 15.
  • 10.Arthur B. Laffer & Jan P. Seymour, eds., The Economics of the Tax Revolt (New York: Harcourt Brace Jovanovich: 1979), pp. 45-68.
  • 11.Michael E. Evans, “The Bankruptcy of Keynesian Econometric Models,” Challenge Magazine (Jan.-Fep.., 1980) pp. 13-19.
  • 12.Vera Lutz, Central Planning for the Market Economy, An Analysis of the French Theory and Experience (London: Longmans, Green and Co. Ltd., 1969).

“The Lessons of the 1920–21 Depression” by J. T. Salerno Pace University

July 12, 2016

The Forgotten Depression is a narrative history of the depression of 1920–21. Although it is informed by a very definite theory—the Austrian business cycle theory—it is not a standard work in applied economics. It does not first present the theory in a rigorous formulation and then move on to apply the theory by adducing pertinent qualitative facts and statistical data to explain a complex historical event such as a depression. It instead proceeds by way of anecdotes and contemporary media accounts, liberally seasoned with telling quotations from politicians, policy makers, economists, business leaders, and other contemporary observers of the unfolding depression. Data on money, prices, and production are inserted at crucial points to keep the reader abreast of the economy’s precipitous decline, but they do not dominate and weigh down the story. James Grant, a masterful stylist, effectively weaves these disparate elements into a seamless and compelling narrative that never flags in pace or wanders off track. The book should appeal to a wide variety of readers, from college students and business professionals to academic economists and policy makers.

By proceeding anecdotally, Grant gives the reader an intimate “feel” for the intellectual milieu prevailing at the time, offering a bracing immersion into an economic paradigm unimaginably alien to contemporary thinking about business cycles. It is for this reason that the book is especially valuable for academic economists whatever their theoretical bent or policy predilections. Grant conveys to the reader a clear understanding of a policy for curing depressions that was nearly universally prescribed in the era before macroeconomic concepts and formulas fastened themselves upon the minds of economists and media opinion molders. This policy is today derisively referred to as “liquidationist.”

To understand the liquidationist position, one must first grasp its foundational concepts and assumptions. In the world of the early 1920s so richly portrayed by Grant, there was no national macroeconomic entity with which economic theory and policy were concerned: “As far as the political-economic mind of 1920 was concerned, there was no ‘U.S. economy.’ And as the economic totality was yet unimagined, so too was the government’s role in directing, managing and stimulating it” (p. 128; see also p. 67). Economists—with a few notable exceptions—did not think of the “price level” as a unitary statistical construct or worry overmuch about its fluctuations. Nor did they try to calculate “aggregate demand” or total spending or even consider either relevant to economic performance. Indeed, for most economists, the core of the market economy was the interdependent system of money prices, including wage and interest rates. Money prices were seen as the foundation for the calculations of revenues, costs, profits, and asset values upon which entrepreneurs based their resource-allocation decisions. Furthermore, it was widely recognized that money prices were in constant flux as they coordinated economic activities in the face of ceaseless change in consumer tastes, business organization, technology, population, labor skills, and so on. As Grant aptly and incisively expresses his theme in the preface, “The hero of my narrative is the price mechanism” (p. 2).

The favorable view of liquidation as a cure for depression thus arose naturally out of the belief that the price mechanism, when left undisturbed, benignly adapts resource allocation and production to the underlying economic realities. As Grant points out, to liquidate, as the term was used at the time, simply meant “to throw on the market” (p. 172). In this sense, “liquidating” labor, inventories, farms, and businesses was a call to allow the price system to operate to discover the configuration of wages, prices, and asset values appropriate to the reemployment of idle resources in the production of goods most urgently demanded by consumers. If this price adjustment incidentally resulted in deflation, then so be it. In lieu of the fictitious concept of a unitary price level, inert and resistant to movement, money prices were conceived as naturally and fluidly (but not instantly) moving up and down like a swarm of bees in flight. The fact that the “price swarm” might be ascending or descending would not inhibit and, indeed, might be required to facilitate necessary changes in the relative positions of money prices. (The metaphor of a “price swarm” wasn’t coined until 1942 by Arthur W. Marget in The Theory of Prices: A Re-examination of the Central Problems of Monetary Theory, 2 vols. [New York: Kelley, 1966, pp. 2:330–36], but it aptly describes the earlier classical-liquidationist view of the value of money.) Deflation presented no special problem because the classical view of the value of money still prevailed. In this view, money’s value was simply the unaveraged array of money prices inverted to reveal the alternative quantities of each good or service that exchanged for the money unit—for example, the dollar. Money prices fluctuated freely, so then must the value of money, which was determined in the same integral market process.

Grant’s judicious choice of quotations shows how pervasive and deeply ingrained was the view that the only sure cure for the depression was deflation and liquidation of overblown resource and asset prices. Here are some examples.

Benjamin Strong, the governor of the Federal Reserve Bank of New York, foresaw the need for deflation and liquidation at the height of the postwar boom in 1919, writing that an anticipated change in Federal Reserve Board and Treasury policy “will insure during the next year or two a very considerable liquidation of our banking position . . . and a considerable decline in the price level” (qtd. on p. 92). The Berkeley economist Adolph C. Miller, a member of the Federal Reserve Board, opined in 1919, “Where there has been inflation, there must follow a deflation, as a necessary condition of economic health,” although Miller doubted that this deflation could and would be done (qtd. on pp. 94–95). Another member of the board and concurrently the comptroller of the currency, John Skelton Williams, in early 1921 viewed the global collapse of commodity prices as “inevitable” and welcomed the day when “the private citizen is able to acquire, at the expenditure of a dollar of his hard-earned money, something approximating the quantity and quality which that dollar commanded in prewar times” (qtd. on p. 118). As Grant concludes, the entire Federal Reserve Board was in remarkable agreement: “A continuing, drastic and perhaps violent rollback in prices, and therefore in wages, was the way forward” (p. 118).

The Federal Reserve Bank of Boston identified “two important conditions precedent to the laying of enduring foundations for the future stability of business, namely, liquidation and deflation … and an increasingly satisfactory banking situation with reserves augmented and loans decreasing [i.e., bank credit contraction]” (p. 120). A. Barton Hepburn, a former comptroller of the currency, also declared for bank-credit contraction and price deflation in 1920, lamenting, “The people of the country have by no means realized as yet the necessity for economy, liquidation of loans and curtailment in the use of credits. We will never be able to bring about the desired deflation until the general extravagance is curtailed” (qtd. on p. 98).

Even some prominent academic economists took up the case for deflation. Professor Edward W. Kemmerer of Princeton University, a leading monetary theorist, vigorously exhorted an audience of bankers in mid-1920, “We must have contraction. . . . We can’t go ahead with our business and make much progress . . . until we get substantial contraction” (qtd. on p. 125 n.).

Politicians also joined the chorus calling for deflation. In his inaugural address in March 1921, President Warren G. Harding perceptively declaimed in its favor, “The economic mechanism is intricate and its parts interdependent, and has suffered the shocks and jars incident to abnormal demands, credit inflations, and price upheavals. . . . Prices must reflect the receding fever of war activities. . . . We must face a condition of grim reality, charge off our losses and start afresh [i.e., liquidate]. It is the oldest lesson of civilization” (qtd. on pp. 135–36).

There was no fear among contemporary observers that, as current macroeconomic jargon would put it, “aggregate supply curves” would shift slowly and painfully to the right because entrepreneurs’ and workers’ expectations would adjust very slowly to the new reality. For liquidationists, in contrast, deflation would proceed very rapidly because bankers, investors, entrepreneurs, and consumers expected it to do so. And they expected it to do so because the intellectual paradigm and the monetary policy regime fostered such expectations. Even though the Fed was up and running, it did not yet see its task as preventing money prices from adjusting to changed conditions of money supply and demand.

Contemporary economic observers also did not fret about the modern specter of a runaway deflationary spiral that might result from plunging prices stoking expectations of further declines in prices and inducing consumers and entrepreneurs to delay purchases into the indefinite future. The reasons they ignored such an eventuality were obvious. First, such an event had never been experienced previously under the gold standard. Second, according to the liquidationist view, credit contraction and deflation was the most expeditious method for realigning money prices and costs, in particular wage rates. It was well understood that capitalists and entrepreneurs did not react to some abstract price level but to actual or expected price margins. Deflation under a freely operating price mechanism did not just lower the height of the price swarm but also deftly reconfigured it so that price margins expanded to the point where entrepreneurial pessimism and malaise gave way to optimism and energetic risk taking.

The liquidationist policy was criticized at the time by a small but notable group of economists, foremost among them Irving Fisher, John Maynard Keynes, and the Swede Gustav Cassel. These economists formulated what came to be known as the “stabilizationist position,” according to which maintaining a constant price level was the necessary and sufficient condition for ridding the economy of business cycles, especially depression and unemployment. For these economists, deflation was “a cruel and colossal blunder” (p. 123). Cassel denied that gradual deflation was possible and foretold that the Fed would not be able to control the rate of descent of prices or the level to which they would tumble. Writing two years after the 1920–21 depression had already ended, Keynes claimed that deflation would induce “everyone in business to go out of business for the time being” and “everyone who is contemplating expenditure to postpone orders so long as he can” (qtd. on p. 124).

In any event, as Grant demonstrates, the liquidationists proved to be correct. Cassel’s dire warning that deflation, once unleashed, would become unhinged from economic fundamentals was not substantiated. And Keynes’s dire assessment of the effect of deflation was proved false two years before he wrote it down. During the depression, total spending or nominal gross national product (GNP) tumbled by 24 percent from $91.5 billion in 1920 to $69.6 billion in 1921, and real GNP shrank by 9 percent. As Grant puts it, there was a “perpendicular plunge in commodity prices,” which never before had “fallen so far and so fast” (p. 182). Both farm prices and wholesale prices plummeted by more than one-third in 1921. Unemployment reached 15.3 percent in 1921. But despite “the breakneck rate of decline” of prices—or rather because of it—the liquidation process came naturally to an end, and prices reached a finite bottom beginning in March 1921. Contrary to Cassel and Keynes, deflation did not continue indefinitely or bring about a cessation of all economic activities and business expenditures. In fact, the U.S. economy entered a remarkably strong and rapid recovery in 1921 (pp. 186–90).

Paradoxically, in the immediate aftermath of its greatest triumph, the liquidationist position was completely discredited and placed beyond the pale of rational discourse. By the mid-1920s, the early Fisher–Keynes macroeconomics of price-level stabilization swept the field in the English-speaking world. Under the sway of this sophisticated brand of monetary crankism, policy makers and politicians deliberately disabled the price mechanism and ensured that less than a decade later a garden-variety recession would be transformed into the tragedy of the Great Depression.

Interview with Juncker and Schulz: ‘Deadly for Europe’ Spiegel, Interview Conducted by Spiegel

July 12, 2016

“Schulz: I’m fully aware that my vision of a European bicameral parliament can’t be implemented tomorrow. I’m also not an integration fanatic. We agree: Brussels can’t regulate everything.” 

Bert Bostelmann/ DER SPIEGEL

European Parliament President Martin Schulz and European Commission President Jean-Claude Juncker


The presidents of the European Parliament and the European Commission, Martin Schulz, 60, and Jean-Claude Juncker, 61, talk about the consequences of the Brexit vote, the failures of EU leaders and their early morning phone calls.

 SPIEGEL: Mr. Juncker, who was the first person you talked to after hearing the news of Brexit?

Juncker: With Martin Schulz. He’s in the habit of talking to me on the phone each morning between 7 and 8 a.m. It’s a habit I sometimes wish he could drop.

Schulz: I seem to remember it being between 6 and 7 a.m. I was shocked. In the days before the vote, I bet that the British would stay in the EU.

Juncker: I put my money on Brexit. The EU Financial Stability Commissioner, Jonathan Hill from Britain, still owes me a pound. (Eds. Note: Hill announced his resignation from the Commission in the wake of the Brexit vote.) 

SPIEGEL: What did you say on the phone?

Schulz: I said: “Jean-Claude, I think this isn’t going well.” Then I advocated for a quick response from the EU. The last thing we need right now is uncertainty.

Juncker: I shared his opinion. It was important for the Brits to trigger Article 50 as quickly as possible in order to avoid any uncertainties. That was also the tenor of the press release the European Commission, Parliament and Council issued afterward.

SPIEGEL: Just like on that Friday, you often present yourselves as extremely tight political partners. Can you appreciate that some in Europe see your relationship as cronyism?

Juncker: Nonsense. Martin and I lead the two important community institutions, whose tasks include working together in confidence. After 30 years in Brussels, I can tell you: The relationship between the Commission and the Parliament has probably never been as good as it is now. 

SPIEGEL: That’s precisely what many people find problematic. Parliaments are ultimately responsible for keeping governments in check — not acting as their reinforcements.

Schulz: There can be no talk of reinforcements. Jean-Claude and I are fully aware that we have different roles. There’s also friction between us, for instance with the agreement for visa liberalization for Turkey. The Commission sent us a proposal. While 66 of our 72 conditions had been met, many of the most important ones had not been, including the reform of anti-terror laws. So we put the agreement on ice. The Commission very often has a very unpleasant time in Parliament.

Juncker: I don’t let it get to me. I said in my inaugural address that I am not the Council’s secretary, nor am I the Parliament’s lackey. That can sometimes lead to conflicts, which are defused through dialogue. Martin invariably knows what the Commission thinks, and I’m well informed about the sensitivities of the Parliament.

SPIEGEL: The day after Brexit, Martin Schulz and Sigmar Gabriel, who is the head of Germany’s Social Democratic Party (SPD), to which Schulz belongs, presented plans for sweeping reform in the EU. These plans foresee turning the Commission into a proper European government, one that is regulated by the European Parliament and by a kind of federal council of member states. The plan would mean a significant loss of power for member state governments. What do you think of the plan?

Juncker: The proposal in and of itself is convincing, but it doesn’t suit the times. To implement it, the European treaties would have to be amended. Martin’s plan is a long-term project that cannot currently be implemented due to the mood on the continent. But where the community can achieve more on the basis of existing treaties, we should do so.

Schulz: I completely agree with Jean-Claude. I’m fully aware that my vision of a European bicameral parliament can’t be implemented tomorrow. I’m also not an integration fanatic. We agree: Brussels can’t regulate everything. I’m driven by something else: There are forces in Europe that want to generally give national policy priority over a common European approach. We have to prevent this.

SPIEGEL: Nevertheless, many in Europe see you as being symbolic of the backroom technocratic politics that is associated with the European Union and the euro. Some have even accused you of being responsible for Brexit. Do you plead guilty?

Juncker: No, why should I? In the end, the British didn’t vote to leave because of the euro. They’re not even members of the currency union. Even the refugee crisis hardly affected the country. I have another explanation: In its 43 years of EU membership, Britain has never been able to decide whether it wants to fully or only partially belong to the EU.

Schulz: Primary responsibility for Brexit lies with British conservatives, who took an entire continent hostage. First, David Cameron initiated the referendum in order to secure his post. Now, fellow conservatives want to delay the start of exit negotiations until they’ve held a party conference. And regarding detractors: I’m proud of the fact that Ms. Le Pen in France insults me and Mr. Wilders in the Netherlands calls me his opponent. The way I see it is, if these people weren’t attacking me, I would be doing something wrong.

SPIEGEL: Criticism isn’t only coming from right-wing populists. Mr. Juncker, the Polish and Czech foreign ministers have called for your resignation. They feel the Commission is too domineering.

Juncker: After these reports came across the wire, I spent hours sitting at the same table as the Polish prime minister at the European Council. She made no mention of any resignation. And the Czech prime minister assured me during a recent visit that he thought I should definitely stay in office.

SPIEGEL: Do you deny that a number of Eastern European countries feel that the Commission has been too domineering — with the specification that quotas be established for accepting refugees, for example?

Juncker: I have a different understanding of the word “specification.” Sure, the Commission suggested the quota, but it was the council of interior ministers that ratified it with a qualified majority. Furthermore, the Commission helped negotiate the agreement with Turkey and thus delivered the decisive contribution to solving the refugee crisis.

SPIEGEL: Eastern Europeans see it differently. In their eyes, it was the border closures along the Balkan route that led to the numbers dropping.

Juncker: Without the Turkey agreement, tens of thousands of refugees would still be stuck in Greece. The Commission presented proposals for securing Europe’s external borders early on, but they languished in the Council for months. As you can see, the Commission isn’t asleep. Oftentimes it has to wake up the others.

SPIEGEL: Do you also need to be woken up, Mr. Schulz?

Schulz: Not at all. It’s long been routine that member states blame the Commission for everything they can’t agree upon. The scapegoat is always Jean-Claude Juncker. Should I give you a few examples?

SPIEGEL: Please.

Schulz: The plan for a financial transaction tax has been ready for years, but the member states can’t come to an agreement. To combat terrorism, the European Parliament hurriedly passed a law for gathering passenger data — but it then took the interior ministers months to sign off on it while at the same time, the automatic exchange of data was rejected. Those are two examples among many. If cooperation among governments were the superior concept for progress in Europe, I’d be onboard immediately. But the problem is that cooperation isn’t working.

SPIEGEL: For the citizens of Europe, it’s not that important who is to blame. What bothers them is the constant jockeying for power and jurisdiction and the fact that European processes are so lengthy and opaque.

Schulz: It’s true. For many people, politics in Brussels and Strasbourg might as well be happening on another planet. Just come to Brussels after a Council meeting. Do you know what happens? Every head of government holds his or her own press conference. They all say the same thing, in 24 languages: I was able to push through my agenda. And if the result is anything other than what they desired, the message is: Brussels is to blame. It has been this way for over 20 years. These messages stick with people, and that’s deadly for Europe.

Juncker: On top of that, there is a distorted perception of what goes on in Brussels. No one reports on the Commission taking a hundred initiatives from its predecessor off the table in order to shift competencies back to member state governments. Stories are invented: Juncker wants to introduce the euro everywhere or immediately deepen the EU — although I publicly stated the opposite that same day. This doesn’t just happen — it happens in order to weaken the European institutions.

SPIEGEL: What are you doing to stop it?

Schulz: Not being opportunistic. It’s not attractive at the moment to vouch for the European idea. I still do it, because I believe nothing would be better for our continent. Complementing the nation-state as it reaches its limits amid globalization: That is what Europe must offer.

SPIEGEL: Mr. Juncker, you have always presented yourself as an admirer of the great European politician Helmut Kohl. But Kohl has been rather critical recently. Today, less Europe is more Europe, he said. And he criticized some people in Brussels who he said were confusing a united Europe with a uniform Europe. Do you feel as though he’s talking about you?

Juncker: Not at all. I completely agree with Helmut Kohl. I am not an advocate of the “United States of Europe,” nor am I an integration fanatic. You can’t deepen the European Union against the wishes of the European countries.

SPIEGEL: Kohl also said Europe must return to being a community committed to stability and the rule of law. The former German chancellor was referring to the exceptions that you have granted to France, Spain and Portugal on euro-zone deficit criteria.

Juncker: Those weren’t exceptions. Rather, the Commission applied the Stability Pact as it is currently formulated. We no longer have the pact from 1997; it was radically amended in 2005 and the Commission is applying this Stability Pact with wisdom and rationality. France finds itself in a difficult economic situation and the government has taken several measures to bring order to the public budget. In doing so, France is conforming to the law. And the Commission is making decisions on the basis of applicable laws, which I recommend reading.

SPIEGEL: You didn’t justify the exceptions economically, but with the fact that presidential elections are soon to take place in the country.

Juncker: I cannot recall the Commission ever referencing elections in any of its resolutions. It could be that some commissioners said something to that effect. It also wouldn’t be prudent to slap a country down prior to elections. But that wasn’t the reason for our decision. The reason was that the Stability Pact provides justification for this decision.

SPIEGEL: The pact codifies limits of sovereign debt. France intends to exceed them. That’s a clear violation, isn’t it?

Juncker: The pact allows for the consideration of positive forecasts when sanctioning earlier violations. That is why we will soon be speaking with the Portuguese and Spanish governments to ascertain whether the two countries have the willingness and the ability to get their economies structurally back on the right track. 

SPIEGEL: The free trade agreement with Canada, known as CETA, is also controversial. First, you said the final decision should be made by the EU. But then, after Sigmar Gabriel, the head of Germany’s Social Democrats (SPD), called your approach “unbelievably misguided,” member state parliaments are now going to be allowed a say in the decision. What was the reason for the about-face?

Juncker: Your description isn’t accurate. The fact is, according to a legal opinion from the Commission, this treaty is an EU-only treaty. But I’m not deaf and the Commission isn’t operating in a parallel world of legal texts. That’s why we decided to treat this agreement as a hybrid treaty. All EU heads of state and government have agreed with me that this agreement is the best that we could have negotiated. Now, they have the opportunity to show strong leadership and make the agreement their own.

Schulz: Jean-Claude is right. The Canadian government made significant concessions on the controversial question of the dispute settlement courts and it recognized the norms of the International Labor Organization. Both were European demands that have now been pushed through. As such, CETA also set the standard for the upcoming trade talks with the US.

SPIEGEL: You don’t just agree on questions of European and trade policy. You have also emphasized that you are bound by a close personal bond. What is special about your friendship?

Schulz: I agree with the aphorism: “Friends are those who stay when everyone else leaves.” I have never been in a situation when companions have abandoned me. But I am certain that, were it to come to that, Jean-Claude would be there.

Juncker: In politics, there are different categories of friendship. My friendship with Greek Prime Minister Alexis Tsipras, for example …

SPIEGEL: … which was especially apparent at the height of the Greek crisis ……

Juncker: …… I would describe that as a utilitarian friendship. At the time, his country was facing the prospect of leaving the euro zone and many Greeks felt abandoned by Europe. In such a situation, it seemed appropriate to me to present myself as a friend to Greece. It had to do with the country’s dignity. My friendship with Martin, by contrast, is completely different in that it goes far beyond politics.

SPIEGEL: How did it begin?

Schulz: We got to know each other at an award ceremony in Aachen (Eds. Note: the prestigious Charlemagne Prize, awarded annually by the German city of Aachen). At the time, Jean-Claude was already an important man in Brussels. I was a young representative in the European Parliament. We talked for a long time and from that point on, our connection became increasingly deep. But our working-class origins are at least as important to our bond.

Juncker: My father was a steel worker and Martin’s grandfather was a miner in Saarland. In these occupations, there is a particular awareness of solidarity. That creates links that aren’t present in other relationships.

Schulz: There is an additional biographical parallel. Your father, Jean-Claude, was forcibly drafted into the Wehrmacht (Eds. Note: Germany’s Nazi-era military). He was badly wounded and ended up as a prisoner of war in Russia. My mother’s brother was killed while clearing mines in 1945. Those are things that mark your childhood and they help explain why we are so devoted to European unity.

Juncker: I have always considered it to be a minor miracle that after the war, people in Europe’s border regions were able to forget everything and, in accordance with the slogan “Never Again War,” develop a program that still works today. It is always said that Europe is a project of the elite. That’s incorrect. In fact, it was a concern of the soldiers who fought at the front, the concentration camp prisoners and the Trümmerfrauen(Eds. Note: The women in Germany who helped clear away the rubble following World War II). It was they who said, we’re going to do everything differently now. De Gaulle and Adenauer merely acted upon this desire. 

SPIEGEL: Oskar Lafontaine, the former SPD leader who resigned as party leader in 1999 and moved to the Left Party in 2005, once said that there are no real friendships in politics, merely temporary alliances of convenience.

Juncker: Lafontaine has certainly proved that he adheres to his own maxim.

Schulz: I can understand Oskar. In political life, it is extremely difficult to remain loyal to a friendship when constellations of power or interests are in the way. I have friends in politics who really put the friendship to the test through their behavior.

SPIEGEL: Which friends are you referring to?

Schulz: It is an element of friendship that one not talk about everything publicly.

SPIEGEL: Your friend Juncker has also disappointed you in the past. Following the most recent elections for the European Parliament, you agreed that he would nominate you as his Commission vice president. Were you angry with him?

Schulz: Initially, yes. But then we talked about it. I told him, you promised me. He answered, that’s true, but I can’t keep my promise because I won’t be able to push it through internally. I understood that. The most important thing is candor. In cases of lying and cheating, by contrast, the friendship usually comes to an end.

SPIEGEL: It is part of politics that one sometimes must compete for a post against one’s best friend. Is power ultimately more important than friendship?

Schulz: Would I sacrifice a friendship to take a step forward in my political career? Thus far in my political career, I have been spared from having to make such a decision, thank God. And I can’t imagine what it must be like.

SPIEGEL: Have you ever done so, Mr. Juncker?

Juncker: No, my friends have thus far protected me from such decisions. One can’t allow blind loyalty to a friendship to lead one away from acting in the public interest. If Martin were to propose something that was totally absurd, our friendship would not prevent me from doing the opposite.

SPIEGEL: Have you ever had to reject a proposal from Schulz?

Juncker: That we aren’t always of the same opinion is something that comes up constantly. Then, we talk about it. Europe is a democracy and differences of opinion are part of it. The problem is: When two governments or institutions in Europe hold differing opinions, it is immediately a crisis. If in Germany the government, the Bundesrat (Eds. Note: Germany’s second parliamentary body representing the interests of the states) and the state parliaments aren’t in agreement, nobody questions the survival of the republic. I’m always quite amazed that people in Europe become unnerved when two institutions or two people have different views.

SPIEGEL: In your friendship, do you also talk about private things?

Schulz: Yes. 

SPIEGEL: Recently, there have been reports about the state of Juncker’s health and his alcohol consumption. Have you talked about that?

Schulz: Of course. We exchanged our aggravation over the platitudes that have been disseminated. Jean-Claude has one of the most stressful and difficult jobs. The fact that one sometimes seems tired is unavoidable. Many reports are obviously part of a political campaign, no doubt.

SPIEGEL: What is your response, Mr. Juncker?

Juncker: I said in Parliament that I am neither sick nor tired. Period.

SPIEGEL: Mr. Schulz is approaching the halfway point of the legislative term as president of European Parliament and, according to the deal, the post must then be handed to a conservative. Are you also in favor of a change, Mr. Juncker?

Juncker: I am in favor of the European institutions being led for the next two-and-a-half years as they have been thus far. We need stability.

SPIEGEL: The conservative fraction, your fraction, may see things differently.

Juncker: Europe is facing difficult times and at such a moment it is good for Brussels institutions to work well together. That works great at the moment with the two floor leaders, my friend Manfred Weber and my comrade Gianni Pittella, and the same holds true for Council President Donald Tusk. I don’t see why we shouldn’t continue with a proven team.

SPIEGEL: Are you saying that as a politician or as a friend?

Juncker: I am saying that as a politician and as a friend. 

SPIEGEL: Mr. Juncker, Mr. Schulz, we thank you for this interview.

La importancia (creciente) del liberalismo. Algunos libros.

July 12, 2016

Lista de libros (por Miguel Anxo Bastos)

  1. Mañana el capitalismo, Henri Lepage
  2. La gran ilusión, Norman Angell
  3. Libertad o igualdadKuehnelt Leddihn
  4. El milagro Europeo, Eric Jones
  5. Los orígenes del capitalismoJean Baechler
  6. Derecho legislación y libertad (vol. I, II y III), F.A. Hayek (vol. II, “El espejismo de la justicia social”)
  7. Fundamentos de la libertad, F.A. Hayek
  8. Precios y producción, F.A. Hayek
  9. El capitalismo del pentágono, Seymour Neymar
  10. El manantial, Any Rand
  11. El Estado, Anthony de Jasay
  12. Teoría e Historia, Ludwig von Mises
  13. Socialismo, cálculo económico y función empresarialJesús Huerta de Soto
  14. Auge y decadencia de las grandes potencias, Paul Kennedy
  15. Crítica del intervencionismo, Ludwig von Mises
  16. La envidia igualitaria, Gonzalo Fernández de la Mora
  17. Los errores de la nueva ciencia económica, Henry Hazlitt
  18. Teoría positiva del capital, Eugen von Böhm-Bawerk

Bonus Tracks (en construcción)

  1. La increíble maquina de hacer pan, R.W. Grant
  2. La economía en una lección, Henry Hazlitt
  3. El corazón invisible, Russ Roberts
  4. Un mundo feliz, Aldous Huxley
  5. El mundo de ayer, Stefan Zweig
  6. La miseria del historicismo, Karl Popper
  7. El cisne negro, Nassim N. Taleb
  8. La antropología del capitalismo, Rafael Termes
  9. Gobierno omnipotente, Ludwig von Mises
  10. Dinero, crédito bancario y ciclos económicos, Jesús Huerta de Soto
  11. Historia bancaria de los Estados Unidos, Murray N. Rothbard
  12. Falacias económicas, F. Bastiat
  13. Camino de servidumbre, F.A. Hayek
  14. Antifrágil, Nassim N. Taleb
  15. The Man versus the State, Herbert Spencer
  16. EnsayosMontagne
  17. Civilización, Niall Ferguson
  18. The Cash Nexus, Niall Ferguson
  19. El capital humano, Gary Becker
  20. Capitalismo y libertad, Milton Freedman
  21. Las culturas fracasadas, José Antonio Marina
  22. La fatal arrogancia: los errores del socialismo, F.A. Hayek
  23. The Nature of the Firm, Ronald Coase
  24. The Rational Optimist, Matt Ridley
  25. The Tipping Point, Malcolm Galdwell
  26. The Wisdow of the CrowdsJames Surowiecki
  27. The Commanding Heights, Daniel Yergin y Joseph Stanislaw
  28. Meditaciones, Marco Aurelio
  29. Sobre la brevedad de la vida y la felicidad, Séneca
  30. Cartas a su hijo, Lord Chesterfield
  31. La Mediterránea y los bárbaros del Norte, Luis Racionero
  32. On Human Nature, David Hume
  33. Teoría de los sentimientos morales, Adam Smith
  34. La sociedad abierta y sus enemigos, Karl Popper
  35. The Bourgeois Virtues, Dierdre N. McCloskey
  36. Institutions, Institutional Change and Economic Performance, Douglass North
  37. The Coming of Post-Industrial Society, Daniel Bell
  38. Proceso al Estado, Lorenzo Bernaldo de Quirós
  39. The Great Escape, Angus Deaton
  40. The Tyranny of Experts, Bill Easterly
  41. Governing the Commons, Elinor Ostrom
  42. Thinking Fast and Slow, Daniel Kahneman
  43. A Conflict of Visions, Thomas Sowell
  44. The Counter-Revolution of Science, F.A. Hayek
  45. Individualism and Economic Order, F.A. Hayek
  46. Institutional Foundations of Impersonal Exchange, Benito Arruñada
  47. Adapt, Tim Harford
  48. The Liar’s Poker, Michael Lewis
  49. The Intelligent Investor, Benjamin Graham
  50. Why Nations Fail, Daron Acemoglu y James Robinson
  51. Economic Facts and Fallacies, Thomas Sowell
  52. Knowledge and Decisions, Thomas Sowell
  53. The Theory of Free Banking: Money Supply under Competitive Note Issue, George Selgin
  54. El antiguo régimen y la revolución, Alexis de Tocqueville
  55. El criterio, Jaime Balmes
  56. Reflections on the Revolution in France, Edmund Burke
  57. Good Money, George Selgin
  58. The Great Depression, Murray N. Rothbard
  59. La conquista de la pobreza, Peter T. Bauer
  60. La teoría de la eficiencia dinámica, Jesús Huerta de Soto
  61. Discovery and the Capitalist Process, Israel Kirzner
  62. Bienestar social y mecanismos de mercado, Joaquín Trigo
  63. Competition and Entrepreneurship, Israel Kirzner
  64. Discovery and the Capitalist Process, Israel Kirzner
  65. Las primeras burbujas especulativas, Douglas E. French
  66. Método de las ciencias sociales, Carl Menger
  67. Ensayos políticos, David Hume
  68. La libertad y la ley, Bruno Leoni
  69. Principios de un orden social liberal, F.A. Hayek

Just a Game by Bill Gross

July 6, 2016

If only Fed Governors and Presidents understood a little bit more about Monopoly, and a tad less about outdated historical models such as the Taylor Rule and the Phillips Curve, then our economy and its future prospects might be a little better off. That is not to say that Monopoly can illuminate all of the problems of our current economic stagnation. Brexit and a growing Populist movement clearly point out that the possibility of de-globalization (less trade, immigration and economic growth) is playing a part. And too, structural elements long ago advanced in my New Normal thesis in 2009 have a significant role as well: aging demographics, too much debt, and technological advances including job-threatening robotization are significantly responsible for 2% peak U.S. real GDP as opposed to 4-5% only a decade ago. But all of these elements are but properties on a larger economic landscape best typified by a Monopoly board. In that game, capitalists travel around the board, buying up properties, paying rent, and importantly passing “Go” and collecting $200 each and every time. And it’s the $200 of cash (which in the economic scheme of things represents new “credit”) that is responsible for the ongoing health of our finance-based economy. Without new credit, economic growth moves in reverse and individual player “bankruptcies” become more probable.

But let’s start back at the beginning when the bank hands out cash, and each player begins to roll the dice. The bank – which critically is not the central bank but the private banking system– hands out $1,500 to each player. The object is to buy good real estate at a cheap price and to develop properties with houses and hotels. But the player must have a cash reserve in case she lands on other properties and pays rent. So at some point, the process of economic development represented by the building of houses and hotels slows down. You can’t just keep buying houses if you expect to pay other players rent. You’ll need cash or “credit”, and you’ve spent much of your $1,500 buying properties.

To some extent, growth for all the players in general can continue but at a slower pace – the economy slows down due to a more levered position for each player but still grows because of the $200 that each receives as he passes Go. But here’s the rub. In Monopoly, the $200 of credit creation never changes. It’s always $200. If the rules or the system allowed for an increase to $400 or say $1,000, then players could keep on building and the economy keep growing without the possibility of a cash or credit squeeze. But it doesn’t. The rules which fix the passing “Go” amount at $200 ensure at some point the breakdown of a player who hasn’t purchased “well” or reserved enough cash. Bankruptcies begin. The Monopoly game, which at the start was so exciting as $1,500 and $200 a pass made for asset accumulation and economic growth, now turns sullen and competitive: Dog eat dog with the survival of many of the players on the board at risk.

All right. So how is this relevant to today’s finance-based economy? Hasn’t the Fed printed $4 trillion of new money and the same with the BOJ and ECB? Haven’t they effectively increased the $200 “pass go” amount by more than enough to keep the game going? Not really. Because in today’s modern day economy, central banks are really the “community chest”, not the banker. They have lots and lots of money available but only if the private system – the economy’s real bankers – decide to use it and expand “credit”. If banks don’t lend, either because of risk to them or an unwillingness of corporations and individuals to borrow money, then credit growth doesn’t increase.The system still generates $200 per player per round trip roll of the dice, but it’s not enough to keep real GDP at the same pace and to prevent some companies/households from going bankrupt.

The system still generates $200 per player per round trip roll of the dice, but it’s not enough to keep real GDP at the same pace.

That is what’s happening today and has been happening for the past few years. As shown in Chart I, credit growth which has averaged 9% a year since the beginning of this century barely reaches 4% annualized in most quarters now. And why isn’t that enough? Well the proof’s in the pudding or the annualized GDP numbers both here and abroad. A highly levered economic system is dependent on credit creation for its stability and longevity, and now it is growing sub-optimally. Yes, those structural elements mentioned previously are part of the explanation. But credit is the oil that lubes the system, the straw that stirs the drink, and when the private system (not the central bank) fails to generate sufficient credit growth, then real economic growth stalls and even goes in reverse.*

Chart I: Annualized U.S. Credit Growth

Chart I: Annualized U.S. Credit Growth

Source: Federal Reserve, Bloomberg.

  • To elaborate just slightly, total credit, unlike standard “money supply” definitions include all credit or debt from households, businesses, government, and finance-based sources. It now totals a staggering $62 trillion in contrast to M1/M2 totals which approximate $13 trillion at best.

Now many readers may be familiar with the axiomatic formula of (“M V = PT”), which in plain English means money supply X the velocity of money = PT or Gross Domestic Product (permit me the simplicity for sake of brevity). In other words, money supply or “credit” growth is not the only determinant of GDP but the velocity of that money or credit is important too. It’s like the grocery store business. Turnover of inventory is critical to profits and in this case, turnover of credit is critical to GDP and GDP growth. Without elaboration, because this may be getting a little drawn out, velocity of credit is enhanced by lower and lower interest rates. Thus, over the past 5-6 years post-Lehman, as the private system has created insufficient credit growth, the lower and lower interest rates have increased velocity and therefore increased GDP, although weakly. Now, however with yields at near zero and negative on $10 trillion of global government credit, the contribution of velocity to GDP growth is coming to an end and may even be creating negative growth as I’ve argued for the last several years. Our credit-based financial system is sputtering, and risk assets are reflecting that reality even if most players (including central banks) have little clue as to how the game is played. Ask Janet Yellen for instance what affects the velocity of credit or even how much credit there is in the system and her hesitant answer may not satisfy you. They don’t believe in Monopoly as the functional model for the modern day financial system. They believe in Taylor and Phillips and warn of future inflation as we approach “full employment”. They worship false idols.

Money supply or “credit” growth is not the only determinant of GDP but the velocity of that money or credit is important too.

To be fair, the fiscal side of our current system has been nonexistent. We’re not all dead, but Keynes certainly is. Until governments can spend money and replace the animal spirits lacking in the private sector, then the Monopoly board and meager credit growth shrinks as a future deflationary weapon. But investors should not hope unrealistically for deficit spending any time soon. To me, that means at best, a ceiling on risk asset prices (stocks, high yield bonds, private equity, real estate) and at worst, minus signs at year’s end that force investors to abandon hope for future returns compared to historic examples. Worry for now about the return “of” your money, not the return “on” it. Our Monopoly-based economy requires credit creation and if it stays low, the future losers will grow in number.

What is the morality of debt? (27/10/2011) by E. Hadas via Reuters

July 5, 2016

Debt is a moral matter. While most economic activity is concerned with the “is” of how things are (investment, consumption and so forth), debts are always entwined with an “ought” – to repay. In discussing controversial debts – for example government borrowing in the euro zone and the U.S. – the moral question should be addressed directly: should these debts be paid off in full, or is some forgiveness justified?

Aristotle can help frame the argument. The philosopher condemned all lending at interest because money cannot create wealth by itself; a loan is just a way for the lender to take advantage of the borrower. Some proponents of Islamic finance make a similar argument, but it is not quite right. Capitalism has shown that loans can indeed produce wealth. If the lent funds are invested well, enabling the borrower to improve his lot and the world’s, then interest payments are the lender’s just reward for providing the fruitful funds.

But Aristotle’s moral logic remains relevant; his condemnation is appropriate for loans that do not share wealth justly between borrower and lender. Unfair loans should not be made, and where they have been, full repayment only compounds the original injustice.

Libertarians, believers in the right of individual to make their own decisions, have another contribution to the moral discussion. They point out that loans are freely agreed contracts that should be honored. Both sides should understand the possible consequences of their free choices. Borrowers should repay, even if that requires making sacrifices, and creditors who make bad lending decisions should suffer losses.

In the euro zone, some libertarians (and most Germans) consider the borrowers’ obligations to be paramount. The governments of Greece and the other over-extended nations can and should repay all their agreed debts. The citizens just have to work harder and pay more taxes.

Other libertarians take the opposite moral line. Losses are the just punishment for the foolish creditors. And the Aristotelian logic may justify forgiveness. The lent money has mostly been spent unproductively, so the borrowers now have few gains to share with the lenders. The original loans turned out to be unjustly generous to the debtors, but the terms have become unjustly harsh.

Which side has the stronger moral logic? Forgiveness looks right for Greece, where the debts are particularly high and the government and economy are particularly inept. For the rest, it is a closer call.

Turn to the U.S. government, which is building up its own substantial debt pile. The American moral debate on the practice is as old as George Washington, who warned that such debts “ungenerously throw upon posterity the burden which we ourselves ought to bear.” Today, the National Research Council writes of “an unfair and crushing burden on future generations.”

Foreign debts are particularly crushing. Citizens get to spend now on consumption and investment but are obliged to repay foreigners later, with interest. This deferment has produced $4.5 trillion of foreign debt in the U.S., 30 percent of one year’s GDP. That is far less than Greece’s full year of GDP, but enough to worry about.

If the U.S. authorities were committed to full repayment of these foreign debts, they would strive to keep the dollar’s value constant and to avoid inflation. That way, the foreigners would receive not just the contracted dollars but the full agreed economic value. While American authorities may care in theory, they are not concerned enough to refrain from loose monetary policy, which pushes the dollar down.

In this case, pro-repayment libertarians have right on their side. The largest and one of the richest economies in the world – and the issuer of the global reserve currency – is honor-bound to make good on its debts. While the creditors should have noticed that the country was becoming less responsible, their neglect does not excuse American indifference.

For purely domestic U.S. government borrowing, Aristotelian scrutiny is more appropriate. Do the ultimate borrowers, the mostly poor beneficiaries of federal programs, gain enough from these loans to justify the higher taxes that will be needed later to repay the mostly rich lenders? There is no obvious answer to that question, but it is well worth asking.

More generally, philosophical arguments ratify what practical experience teaches. Lenders should be wary about lending to governments. The choice to borrow rather than to raise funds through taxes is usually a sign of political weakness. When the time comes to repay, governments may be unable or unwilling to persuade the people that the sanctity of contracts is a principle worth protecting.

Also, the proceeds of loans to such governments are likely to be spent foolishly. Then full repayment will fail the Aristotelian test of justice. The rioters in Athens may know little about the Ancient Greek philosopher’s doctrine on lending, but they could be protesting in his name.

La economía moral de la deuda (ProSyn), por R. Skidelsky (21/10/2014)

July 5, 2016

Cada colapso económico viene de la mano de una demanda de condonación de deuda. Los ingresos necesarios para saldar préstamos se han evaporado y los activos presentados como garantía han perdido valor. Los acreedores reclaman lo suyo; los deudores piden ayuda a gritos.

Consideremos Strike Debt, un descendiente del movimiento Occupy, que se autodefine como “un movimiento nacional de opositores a la deuda que lucha por la justicia económica y la libertad democrática”. Su sitio web sostiene que, “como consecuencia de los salarios estancados, el desempleo sistémico y los recortes en los servicios públicos”, se está obligando a la gente a endeudarse para obtener las necesidades más básicas de la vida, lo que la lleva a “depositar su futuro en manos de los bancos”.

Una de las iniciativas de Strike Debt, “Rolling Jubilee” (Jubileo Permanente), financiada a través de donaciones populares en Internet, compra y cancela deuda en un proceso que llama “resistencia colectiva a la deuda”. El progreso del grupo ha sido impresionante: lleva recaudados más de 700.000 dólares hasta la fecha y canceló deuda por un valor de casi 18.600 millones de dólares”.

La existencia de un mercado de deuda secundario es lo que le permite a Rolling Jubilee comprar deuda a tan bajo costo. Las instituciones financieras que dudan de la capacidad de sus prestatarios para saldar sus deudas venden la deuda a terceros a precios bajísimos, muchas veces de hasta cinco centavos por dólar. Los compradores luego intentan ganar dinero rescatando parte o la totalidad de la deuda de los prestatarios. Sallie Mae, una entidad crediticia que otorga préstamos a estudiantes en Estados Unidos, admitió que vende deuda reempaquetada por hasta 15 centavos por dólar.

Para llamar la atención ante las prácticas muchas veces perversas de las agencias de cobro de deuda, Rolling Jubilee recientemente canceló deuda estudiantil de 2.761estudiantes de Everest College, una escuela con fines de lucro cuya empresa matriz, Corinthian Colleges, está siendo demandada por el gobierno de Estados Unidos por otorgar préstamos predatorios. La cartera de préstamos de Everest College estaba valuada en casi 3,9 millones de dólares. Rolling Jubilee la compró en 106.709,48 dólares, o casi tres centavos por cada dólar.

Pero eso es una gota en el océano. Sólo en Estados Unidos, los alumnos deben más de 1 billón de dólares, o aproximadamente el 6% del PIB. Y la población estudiantil es apenas uno de los muchos grupos sociales que viven endeudados.

Por cierto, en todo el mundo, la crisis económica de 2008-2009 aumentó la carga de la deuda privada y pública por igual -al punto de que la distinción público-privado se volvió borrosa-. En un discurso reciente en Chicago, el presidente irlandés, Michael D. Higgins, explicó de qué manera la deuda privada se convirtió en deuda soberana: “Como consecuencia de la necesidad de pedir prestado dinero para financiar el gasto actual y, por sobre todo, como resultado de la amplia garantía extendida a los activos y pasivos de los principales bancos irlandeses, la deuda general del gobierno de Irlanda aumentó del 25% del PIB en 2007 al 124% en 2013”.

El objetivo del gobierno irlandés, por supuesto, era salvar al sistema bancario. Pero la consecuencia no intencionada del rescate fue destrozar la confianza en la solvencia del gobierno. En la eurozona, Irlanda, Grecia, Portugal y Chipre tuvieron que reestructurar su deuda soberana para evitar un incumplimiento de pago rotundo. Los crecientes ratios deuda/PIB empañan la política fiscal, y se convirtieron en la principal justificación para la implementación de las políticas de austeridad que prolongaron la crisis.

Nada de esto es nuevo. El conflicto entre acreedores y deudores ha sido la sustancia de la política desde los tiempos babilonios. La ortodoxia siempre ha defendido los derechos sagrados del acreedor; la necesidad política frecuentemente exigió el perdón para el deudor. Cuál es el lado ganador en determinada situación depende de la magnitud de la aflicción del deudor y la fuerza de las coaliciones opositoras de acreedores y deudores.

La moralidad siempre ha sido la moneda intelectual de estos conflictos. Los acreedores, al afirmar su derecho a cobrar la totalidad de la deuda, históricamente han creado todos los obstáculos legales y políticos posibles para el default, insistiendo con sanciones duras -embargo de ingresos, por ejemplo, y, en situaciones extremas, cárcel o hasta esclavitud- por la imposibilidad de los prestatarios de honrar sus obligaciones de deuda. Siempre se pretendió que los gobiernos que incurren en deuda en guerras costosas aparten “fondos de amortización” anuales para poder saldarla.

La moralidad, sin embargo, no siempre estuvo enteramente del lado del acreedor. En idioma griego del Nuevo Testamento, deuda significa “pecado”. Pero, aunque pueda ser pecaminoso endeudarse, Mateo 6:12 respalda la absolución: “perdónanos nuestras deudas, así como nosotros perdonamos a nuestros deudores”. La resistencia social generalizada a los reclamos de los acreedores sobre la propiedad de los deudores por no pagar implicó que rara vez se llevara la “ejecución” al extremo.

La posición de los deudores se vio aún más fortalecida por la prohibición de la usura -cobrar un interés irracionalmente alto por el dinero-. Los topes a las tasas de interés fueron abolidos en Gran Bretaña recién en 1835; las tasas casi cero de los bancos centrales prevalecientes desde 2009 son un ejemplo actual de los esfuerzos por proteger a los prestatarios.

La verdad de la cuestión, como señala David Graeber en su majestuoso Deuda: los primeros 5.000 años, es que esa relación entre acreedor y deudor no encarna ninguna ley de hierro de moralidad; más bien, es una relación social que siempre debe ser negociada. Cuando la precisión cuantitativa y una estrategia inflexible frente a las obligaciones de deuda son la regla, lo que sobreviene de inmediato es el conflicto y la penuria.

En un esfuerzo por frenar las crisis de deuda recurrentes, las sociedades tradicionales abrazaron la “Ley de Jubileo”, un borrón y cuenta nueva ceremonial. “La Ley de Jubileo”, escribe Graeber, “estipulaba que todas las deudas se cancelaran automáticamente ‘en el año del Shabat’ (es decir, después de que hubieran pasado siete años) y que todos los que languidecieran en cautiverio debido a esas deudas fueran liberados”. Rolling Jubilee es un recordatorio oportuno de la continua relevancia de una de las leyes más antiguas de la vida social.

La moraleja del cuento no es, como aconsejó Polonio a su hijo Laertes, “no seas ni prestatario ni prestador”. Sin ambos, tal vez la humanidad todavía estaría viviendo en cavernas. Necesitamos, más bien, limitar la oferta y la demanda de crédito a lo que la economía es capaz de producir. Cómo lograrlo y al mismo tiempo mantener la libertad de empresa es uno de los grandes interrogantes sin resolver de la economía política.


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