Mises Wire |
- The Feds Collect Most of the Taxes in America—So They Have Most of the Power
- The Drive for Regulatory Harmonization
- The Real Trickle-Down Effect: Making "Luxuries" Affordable to Regular People
- Pregnant Woman Tries to Comply with Police Orders, Then the Cop Attacks Her
- Why Producer Prices (Like Lumber Prices) Are Rising Faster Than the CPI
| The Feds Collect Most of the Taxes in America—So They Have Most of the Power Posted: 24 Jun 2021 03:00 PM PDT In 2021, it's clear Americans now have thrown off any notions of subsidiarity and instead embraced the idea that the federal government should be called upon to fund pretty much anything and everything. From "stimulus checks" to "paycheck protection," it's assumed an entire national workforce can be propped up by federal spending. Moreover, in the wake of 2020's Covid Recession, every pressure group from local governments to weapons manufacturers looks to the federal government to offer ever larger amounts of federal spending ladled out from the federal pot of more than six trillion dollars of annual spending. Need some "infrastructure"? The federal government will pay for it. Need a bailout? You know where to go. And how is all this spending possible? Naturally, it can only happen when governments tax or borrow. And the federal government does a lot of that. Moreover, the federal government can borrow in increasingly stunning amounts thanks to the monetization of debt going on at the central bank. The Feds Tax Us a Lot More than the StatesBut even if we ignore all the ways the federal government can spend at astronomical levels thanks to huge deficits and monetary tricks, we find the feds are still very much in the game of collecting good old-fashioned taxes. And lots of them. Moreover, the feds are collecting a lot more in taxes than even all state and cities combined. When it comes to taxes, the federal government is the biggest game in town, and it should surprise no one that everyone is looking to DC for some easy cash. We might hear a lot about how "blue states" are levying crippling taxes on their residents. But not even the governments of California or New York have anything on the federal government when it comes to extracting wealth from the taxpayers in America. According to a 2018 study from the Tax Policy Center, for example, "Federal, state, and local government receipts totaled $5.3 trillion in 2016. Federal receipts were 65 percent of the total, while state and local receipts (excluding inter-governmental transfers) were 20 percent and 15 percent, respectively." State and local governments may certainly be taking their pound of flesh from the taxpayers, but the fact is the federal government is taking a whole lot more. Indeed, contrary to the US's reputation for "local control," the United States is not particularly decentralized when it comes to tax revenues and government spending. When it comes to taxation, the central government dominates in America. In in his study on taxation, for example, Anwar Shah categorizes the United States as "centralized," noting—with numbers similar to those of the Tax Policy Center—that the federal government collects more than sixty percent of all tax revenue in the nation. This puts the US in the same category—according to Shah—as Brazil and Russia. On the other hand, only 37 percent of all tax revenue is collected by the central government in Switzerland, a "decentralized" tax system according to Shah. In other words, the state and local governments in Switzerland collect most of the taxes, while the situation is reversed in the United States. This becomes even more clear when we look at tax collections on a state-by-state basis. Using 2019 data from the IRS we see that total federal tax collections coming out of California amounted to approximately $472 billion. But state tax collections totaled about $188 billion.1 Put another way, the total state tax bill in California was 39 percent the size of the federal tax bill. Or, for every dollar the federal government collects from Californians, Californians pay their state government 39 cents. The difference is even more obvious in many other states. In Florida in 2019, the federal government collected $210 billion from the taxpayers. The State of Florida, meanwhile, collected $44 billion. In other words, for Florida residents, Florida's tax bill was only one-fifth the size of the federal tax bill.  Source: IRS state-by-state revenue, and the Census survey of state tax collections. Even in big states with huge tax hauls like New York, Illinois, and Pennsylvania, state tax collections don't even begin to rival the taxes pulled in by federal payroll taxes and income taxes. In fact, no state collects as much in taxes as the Federal government collects. Hawaii comes the closest, where Hawaii residents pay 88 cents in state taxes for every dollar collected by the federal government. But nearly all states collect less than fifty cents for every dollar collected by the federal government.  Source: IRS state-by-state revenue, and the Census survey of state tax collections. Local governments tend to collect an even smaller amount than states, when compared to federal spending. The political implications for this are large. Thanks to the Sixteenth Amendment, the federal government is able to tax Americans directly and it does so in amounts that are usually more than double what the state governments pull in. This puts an enormous amount of power in the hands of federal officials, and it means fiscal power in the United States mostly resides in the hands of federal policymakers. (We could contrast this with Switzerland where the federal power to tax expires without an affirmative vote extending this power every ten years or so.) It's a big reason why we're now seeing state governments go to the federal government seeking bailouts—and why interest groups spend so much time and energy focusing on federal laws, taxes, and regulations. It's only natural that they should. Washington, DC is where most tax money goes in America, so we should expect to find most of the political power there as well. Once we consider that the federal government—with the help of the central bank—can spend far beyond even what it collects in taxes, we should not be surprised that in times of fiscal crisis, state and local governments go running to the feds. As the old saying goes, he who pays the piper calls the tune, and with states playing the part of junior partner in the taxation game, we should expect them to be junior partners in every other sense as well.
 This posting includes an audio/video/photo media file: Download Now |
| The Drive for Regulatory Harmonization Posted: 24 Jun 2021 12:00 PM PDT Contemporary social and economic affairs take place within a bewildering complex of regulatory restrictions and requirements. Already profuse beyond comprehension, the labyrinth grows ever more extensive. In the United States, at the federal level alone, the 4,000 to 5,000 new final rules put in place each year require some 20,000 pages of the Federal Register for their official promulgation (Clyde Wayne Crews, Jr., Ten Thousand Commandments: An Annual Policymaker's Snapshot of the Federal Regulatory State [Washington, D.C.: Competitive Enterprise Institute, March 1999], 14–15). Simultaneously, the 50 states, 3,043 counties, 19,279 municipalities, and 16,656 townships crank out countless new regulations of their own (see Statistical Abstract of the United States 1997, 297, for the number of government units in 1992). All of this regulatory activity, of course, occurs within a single nation-state. Elsewhere in the world, the regulators are not just sitting on their hands, and in certain countries—France springs immediately to mind—the bureaucrats would be outraged by the mere suggestion that the American regulators were surpassing them. Business firms that operate globally must deal with a vast variety of regulatory restrictions and requirements. In general, complying with many different bodies of regulation costs more than complying with just one, or so it has often seemed to business people. Hence their inclination to support "regulatory harmonization." In the United States HistoricallyIn the United States, business support helped to create the very first federal regulatory agency, the Interstate Commerce Commission, in 1887. As the historian Gabriel Kolko has remarked, in the locus classicus of this thesis, "The railroads realized long before 1900 that the federal regulation of railroads offered them protection, actual or potential, from harassment by the states"; and "it was this threat of state legislative attacks that kept the railroads solidly behind the I.C.C. and federal regulation" (Railroads and Regulation, 1877–1916 [Princeton: Princeton University Press, 1965], 164, 205; see also the section titled "National vs. State Regulation," 217–26). Similarly, as Gary Libecap has shown, the shift of lobbying efforts by butchers and cattle raisers from the state legislatures to the US Congress—not the complaints of consumers—played a crucial role in gaining passage of the Sherman Antitrust Act in 1890 ("The Rise of the Chicago Packers and the Origins of Meat Inspection and Antitrust," Economic Inquiry 20 [April 1992]: 242–62). Along the same lines, Richard Sylla has argued that efforts toward regulatory harmonization underlay the widespread business support for big federal government that became so evident during the Progressive Era:
Reacting to an earlier, unpublished version of Sylla's article, I agreed that
The story, however, did not end at that point. The businessmen who supported the creation of new federal regulatory agencies hoped, of course, to make their lives simpler and their costs lower. Better still, perhaps they could "capture" the agencies and make them serve, in effect, as cartel police, keeping maverick competitors in check and assuring higher rates of return to the cartel members. By no means did they always succeed in that quest (on the early ICC, for example, see Paul W. MacAvoy, The Economic Effects of Regulation: The Trunk-Line Railroad Cartels and the Interstate Commerce Commission before 1900 [Cambridge, Mass.: MIT Press, 1965]). But, to the extent that they did succeed, consumers suffered as a result. No doubt George J. Stigler had just such outcomes in mind when he observed, "Regulation and competition are rhetorical friends and deadly enemies" (The Citizen and the State: Essays on Regulation [Chicago: University of Chicago Press, 1975], 183). Not infrequently, however, business support for regulatory harmonization at the federal level gave birth to an unmanageable offspring. Like Dr. Frankenstein's monster, the newly created federal regulatory agencies often stopped heeding the voice of their business progenitors. Within 20 years, for example, the ICC had fallen under the sway of shipper interests, and, by refusing to approve reasonable rate increases, the commission proceeded to compress the railroad companies in a merciless cost-price squeeze (Albro Martin, Enterprise Denied: Origins of the Decline of American Railroads, 1897–1917 [New York: Columbia University Press, 1971]). So severely had the railroad firms suffered in the decade after 1906 that during World War I they collapsed, financially exhausted, into the loving arms of the US Railroad Administration; and afterward, under the terms of the Transportation Act of 1920, they found themselves reduced to little more than regulated public utilities (Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government [New York: Oxford University Press, 1987], 152–53). In similar manner, over the past century many a firm must have rued the day that business interests threw their weight behind the enactment of the Sherman Act and thereby gave rise to galling government harassment that epitomizes everything suggested by the phrase "arbitrary and capricious." Nor have consumers been well served by the rampaging federal trustbusters, as the contemporary case against Microsoft makes crystal clear once again (Richard B. McKenzie and William F. Shughart, "Is Microsoft a Monopolist?" Independent Review 3 [Fall 1998]: 165–97; and Stan J. Liebowitz and Stephen E. Margolis, Winners, Losers, and Microsoft: Competition and Antitrust in High Technology [Oakland, Calif.: Independent Institute, 1999]). On the International Scene CurrentlyAs international commerce has grown in recent decades, more and more firms have found themselves butting up against the obstacles posed by the great variety of regulatory systems in place around the world. Seeking to mitigate the great cost of complying with diverse regulations, business people have lent their support to an accelerating movement toward international regulatory harmonization. Outstanding manifestations of this trend have appeared in the European Union and its predecessor organizations. As Manfred E. Streit has recently observed, "Almost throughout the whole process of European integration, harmonisation of national laws and regulations was considered a matter of course." There existed "a widespread prejudice … of assuming quite uncritically that a uniform legal system which covers a large area has a value on its own and that legal harmonisation will lead to the best possible system" ("Competition among Systems, Harmonisation and Integration," Journal des Economistes et des Etudes Humaines 8 [June-September 1998]: 239, 251). However one may characterize the course of economic activity in the EU, no one can deny that "business" has been brisk in Brussels. Although I find myself in nearly complete agreement with the analysis of harmonization presented by Streit in the article just cited, I take issue with his particular conclusion that "taken together, the normative and positive evaluations suggest that harmonisation appears only advisable in those cases in which compelling reasons, such as the prevention of hazard, can be given" (250, emphasis added; the same exception for "health or safety" is adduced by Alan O. Sykes in his otherwise well-reasoned discussion, "The [Limited] Role of Regulatory Harmonization in the International System," working paper no. 96/97–23, University of California School of Law, Program in Law and Economics, Berkeley, 21, 24). In large part, however, my disagreement springs from a recognition of certain tendencies noted by Streit himself, especially the following one: "Considering those regulations which have been introduced by harmonisation, it became obvious that in many cases they were more complex and comprehensive than those regulations which were previously in force in the member states" (252). Far from applying to the EU case alone, this statement tends to apply to the harmonization process wherever it occurs. That is, international harmonization of diverse national regulations tends to raise the severity of the regulations at least to the highest level previously reached by a member of the accord—there is, so to speak, a leveling up—and frequently to a higher, formerly untried level, so that even the previously strictest regulator becomes stricter still. Now, it may seem counterintuitive that harmonization would be undesirable—even dangerous—in relation to regulations aimed at the prevention of hazard or the promotion of public health, but at least in certain pertinent areas I have studied in some detail, I am persuaded that such is the case. Medical Devices as an ExampleIn the United States, medical devices—thousands of distinct products that now range from bandages, syringes, and latex gloves to implantable defibrillators, CT scanners, and laser eye-sculpting machines—first became subject to regulation by the Food and Drug Administration (FDA) under the authority of the Food, Drug, and Cosmetic Act (FDC Act) of 1938. The scope and severity of the regulation became much greater under the authority of the Medical Device Amendments of the FDC Act, enacted in 1976, and later amendments, especially those of 1990. By the early 1990s, firms in the industry found themselves subject to excruciatingly detailed, unpredictable, very costly, and sometimes strangling regulatory strictures. Worse, consumers of the products—ultimately the patients themselves—suffered because of the regulation's destructive effect on technological development and because of the withholding of already-developed products from the market while firms waited, often for years, to receive marketing approval from the FDA. (For a detailed account, see Robert Higgs, "FDA Regulation of Medical Devices," in Hazardous to Our Health? FDA Regulation of Health Care Products, edited by Robert Higgs [Oakland, Calif.: Independent Institute, 1995], pp. 55–95.) In Europe the situation contrasted markedly. Until recently, European countries imposed relatively little regulation on the producers of medical devices. Although the scope, detail, and cost of the regulation varied widely, no European country practiced the sort of rigid, elaborate, legislatively defined, centrally directed and enforced regulation imposed in the United States since 1976. The Europeans relied more on the formulation of technical standards by professional organizations, leaving manufacturers free in most cases to comply or not comply with the established standards. Purchasers, of course, could insist that products meet certain standards, and in some countries major purchasers such as the national health service were either required or urged to do so. In the 1970s, the Europeans began to develop a more restrictive system of regulation, but the adoption of the new system proceeded slowly. Only in the 1990s did the member states of the EU begin to put in place a more systematic and demanding regulatory system. (For an account of the development of medical device regulation in Europe, see Robert Higgs, How FDA Is Causing a Technological Exodus: A Comparative Analysis of Medical Device Regulation—United States, Europe, Canada, and Japan [Washington, D.C.: Competitive Enterprise Institute, February 1995], 23–34.) By the beginning of the 21st century, the European situation will have changed drastically, especially in countries that previously had little or no regulation. Notably, no evidence exists that European consumers in general have suffered because of the previous, relatively undemanding regulatory environment, and obviously many European patients have benefited by gaining quicker access to new, more effective devices ("FDA Slammed in Comparison with Europe," Clinica 694 [February 26, 1996]: 7; for many specific examples, see the evidence cited in Higgs, How FDA Is Causing a Technological Exodus, 48 n. 107). The recent, now nearly completed European changes have been driven not by safety concerns but by the need to make regulations uniform throughout the European Union in order to preclude their serving as trade barriers. As the desired uniformity is achieved, the common regulatory system will impose more regulation, even in countries such as France and Germany that already had relatively extensive regulation. Still, when the new EU system is fully in place, it will fall far short of FDA-type regulation, leaving European device manufacturers, purchasers, and patients much better off relative to their US counterparts. Because regulatory requirements still differ among the major market areas—the United States, the European Union, and Japan, not to speak of the rest of the world—producers continue to confront troublesome and costly regulatory diversity. Hence, they continue to press for an even greater, and ultimately global, harmonization of the regulations ("Global Harmonisation is the Only Solution to Escalating Regulatory Costs, Says Industry Executive," Clinica 867 [July 19, 1999]: 5). The FDA Modernization Act of 1997 directs the FDA to meet with foreign governments to work out harmonization agreements. A Global Harmonization Task Force, including representatives of industry and regulators from the European Union, the United States, Australia, Canada, Japan, and other countries, was created in 1992 to chart a course toward that ultimate objective, and its four study groups have been busily emitting documents for potential official adoption by the appropriate government authorities ("Focus Moves from Mutual Recognition to Global Harmonisation," Clinica 815 [July 6, 1998]: 6). A halfway house on the road to global harmonization is the mutual recognition agreement (MRA), a number of which have been reached by various pairs of countries and by the EU and various countries (Egid Hilz, "Mutual Recognition Agreements Set the Scene for Easier Trade," Clinica Review 1998 [1999]: 10). On May 18, 1998, the United States and the EU signed an MRA, which is currently in the process of being implemented.
In effect, this MRA provides for harmonized regulatory reviews, rather than harmonized regulations; each country retains its own regulations within its own borders. In announcing the US-EU agreement, however, the FDA declared that the MRA "may … enhance harmonization of US and EC regulatory systems" (Federal Register 63, 36247). Implementation of the US-EU MRA has not been smooth sailing. Once the agreement went into force in December 1998, the FDA threw up a series of obstacles, and European observers concluded that "the FDA only intended to follow through with the MRA on its own terms":
For some Europeans involved in the process, the FDA's insistence on dominating the implementation of the US-EU MRA rendered the arrangement "little more than a charade" (Maxwell, "European Industry Fears," 3). European industry representatives have begun to view the MRAs as failures and to characterize them as detours from, rather than way stations on, the road to global harmonization. According to Ian Cutler, the director of regulatory affairs at Smith & Nephew,
Most likely, however, such grumbling reflects little more than the frustrations normally associated with constructing any elaborate regulatory arrangement involving many interested parties in many different countries. The trend toward global regulatory harmonization in the medical device industry seems unalterable, if only because so many government bureaucracies around the world have committed themselves to it. It has been noted that "regulatory harmony, like motherhood and apple pie, is difficult to argue against" (Helen Gavaghan, "Harmony and Regulation Yield to the Need for Payment," Clinica Review 1996 [1997]: 3). Especially for the bureaucratic mind, enforcing one set of regulations seems to make more sense than enforcing many. Business people always resent the costs associated with regulatory multicompliance. With the affected business interests demanding regulatory harmonization and the world's legislators and regulators willing to supply it, who will oppose it? The answer, all too often, is no one. The absence of organized, vocal, political opposition, however, does not signify that regulatory harmonization harms no one. On the contrary, it holds the potential to harm multitudes. For regulatory harmonization is a species of cartelization, and just as successful cartelization in ordinary markets harms the consumers, so successful cartelization across regulatory jurisdictions tends ultimately to harm all those whose freedom of peaceful, voluntary action the regulations restrain. During the first half of the 1990s, when the FDA became even more outrageous than usual in its regulation, many people fled to Europe to gain access to the medical devices to which the FDA denied them legal access in the United States. Medical device companies began to shift their operations, especially their clinical trials, from the United States to Europe (Higgs, "FDA Regulation," 73–77). In those days, Americans had somewhere to seek refuge from intolerably harmful regulation. Their pathetic flight served as important evidence when, after the 1994 elections, certain members of the Republican-led Congress took the FDA to task, causing it to moderate its most outrageous actions—a reactive "reinvention" eventually codified in the FDA Modernization Act of 1997. Once global regulatory harmonization has been achieved, however, the FDA's victims will have nowhere to run. They will have no choice but to suffer in silence, or, should they incline toward expressing their political "voice," to plead pitiably for the mercy of their governmental overseers. For the most part, the victims will remain unaware of the relation between their plight and the worldwide cooperation of those who claim, counterfactually, that they are only protecting people's health and safety. The costs of regulatory harmonization will have to be counted not only in dollars but in freedom, physical well-being, and life itself (see Robert Higgs, "Should the Government Kill People to Protect Their Health?" Freeman 44 [January 1994]: 13–17). Even the critics of regulatory harmonization make an exception for regulations affecting the public health and safety. In so doing, they are turning matters upside down. Whereas the public can endure the costs of, say, securities regulation or cable TV regulation, the costs of government regulation of medical goods are far greater. It has been said that war is too important to be left to the generals. Likewise, people's health and survival are far too important to be left to office-holding politicians and their smiley-faced henchmen. This article originally appeared in the Independent Review, vol. 4, no. 3 (Winter 2000).  |
| The Real Trickle-Down Effect: Making "Luxuries" Affordable to Regular People Posted: 24 Jun 2021 09:00 AM PDT Most readers are familiar with the notion of the "trickle-down effect." This caricature is usually employed by left-leaning economists to denounce tax cuts for the entrepreneurial class. Writing for the Washington Post, Christopher Ingraham tells readers that slashing tax rates for the wealthy fails to stimulate employment, though rich people become more affluent. Unfortunately, free market economists often respond by demonstrating that there is a positive link between low tax rates and economic growth. Although their efforts are commendable, such writers are employing the wrong strategy. Instead of showing that tax cuts benefit ordinary people, they should highlight the well-documented trickle-down effect of capitalism. In general, capitalism reveals a trickle-down effect by making luxury goods affordable to the masses. Through intense competition, capitalism drives down costs, thereby allowing ordinary people to access luxuries. For instance, in 2011, 35 percent of Americans owned a smartphone, and today the figure is 85 percent. Furthermore, the allure of profit motivates entrepreneurs to cannibalize the market with their products, and when the aim is to gain wealth, the social class of consumers becomes irrelevant. Economist Tim Worstall describes Henry Ford as one such entrepreneur: "Henry Ford didn't make the Model T because he thought rich people wanted a car in any colour they liked as long as it was black…. He was deliberately making cars cheaper in order to maximize his sales and profits…. Because gaining a few pence or pennies from hundreds of millions of people is a bigger pile of cash than catering to the few billionaires out there." Also, of note is that capitalists lower costs by innovating, and innovations unleash a ripple effect throughout the economy. A case in point is the creation of the steam engine. Not only did the steam engine make it possible for people to travel within countries, but decreasing transportation costs resulted in the advent of international tourism. According to Marian Tupy: "Early steamships cut the sailing time from London to New York from about six weeks to 15 days…. But today an aeroplane can fly between the two cities in 8 hours." Yet it should be noted that capitalism also fuels entrepreneurship by ensuring the widespread availability of luxury goods. For example, many use their phones to launch businesses with an international scope. Moreover, the cellphone has promoted financial inclusion by increasing the involvement of poor people in the financial sector. Kelsey Piper of Vox reports:
In fact, studies indicate that the effects of mobile money are overwhelmingly positive:
Conversely, despite criticisms that capitalism inculcates a workaholic mindset, the truth is that the efficient use of technology results in higher productivity; therefore, we work less to purchase commodities. According to Marian Tupy and Gale Pooley in their study titled "The Simon Abundance Index: A New Way to Measure Availability of Resources," we are working less to acquire cheaper goods. Tupy and Pooley note: "Between 1980 and 2018, the average time price of our basket of 50 basic commodities fell by 72.3 percent. The time it took to earn money to buy one unit in that basket of commodities in 1980 bought 3.62 units in 2018." Based on the evidence provided, capitalism produces a trickle-down effect. So, whenever, you hear a critic mock the trickle-down effect of capitalism, you should remind him that the trickle-down effect is not only real, but it also elevates working-class people to living like elites.  This posting includes an audio/video/photo media file: Download Now |
| Pregnant Woman Tries to Comply with Police Orders, Then the Cop Attacks Her Posted: 24 Jun 2021 07:00 AM PDT Pregnant Nicole Harper was doing what she was supposed to do: she was slowing down and signaling that she was looking for a safe place to pull over. That's when a state trooper decided to flip her car over. Original Article: "Pregnant Woman Tries to Comply with Police Orders, Then the Cop Attacks Her" This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.  |
| Why Producer Prices (Like Lumber Prices) Are Rising Faster Than the CPI Posted: 24 Jun 2021 04:00 AM PDT "Homebuilding rebounded less than expected," NBC reported recently, "as very expensive lumber and shortages of other materials continued to constrain builders' ability to take advantage of an acute shortage of houses on the market." Lumber isn't the only material that has experienced significant price increases over the past year. The same NBC article notes that steel and copper prices are also hampering the housing market. The general pattern of price inflation is that higher-order goods—those furthest from the consumer in the production process—tend to react sooner and more significantly to changes in the money supply. We can see this trend in the dramatic disparity between the Producer Price Index (PPI) and Consumer Price Index (CPI).  When people discuss inflation, they rarely have in mind monetary expansion, which is an important driver of price inflation. Instead, they think almost exclusively of consumer prices. The Myth of Monetary NeutralityThe theory of monetary neutrality justifies this mindset, under the assumption that prices adjust evenly to changes in the money supply. Monetary neutrality is a relic of the age before the marginal revolution, when objective theories of value—most notably the labor theory of value—were standard among economic thinkers, including liberals such as Adam Smith. In fact, this idea was given early expression by one of Smith's greatest influences, David Hume, who posed a thought experiment in his Political Discourses:
This idea made sense under theories of objective value; prices should always trend toward their "natural" value, derived from the same original source of value (labor), so equilibrium prices would logically adjust proportionately. Two decades before Hume offered this thought experiment, Richard Cantillon, a French physiocrat, had already shown that this assumption didn't hold in the real world, where prices adjusted unevenly—a phenomenon that now bears his name: the Cantillon effects.2 After the marginal revolution, economists gradually accepted the subjective theory of value, but the Austrian economists have been virtually alone in considering the implications this held for classical theory. For this reason, Austrian economics is the only school of thought that rejects monetary neutrality for its inability to explain real-world prices. The Problem with Unrealistic Mainstream AssumptionsMainstream economists, by contrast, will defend monetary neutrality as an "unrealistic assumption" that "approximates reality." This is the standard explanation for problematic economic assumptions, as there is no way of objectively defining what constitutes a sufficient "approximation" of the real world, but the graph shown above might call into question the usefulness of this assumption. If it approximates reality, we should expect to see the PPI and CPI reasonably close together and following roughly the same pattern of change. Instead, what we see is remarkable volatility, with the PPI fluctuating wildly from the CPI and often in the opposite direction. What reality, then, does monetary neutrality approximate? Standard economic theory is unable to explain this, outside of particularistic explanations that offer no insight about general economic phenomena. The current excuse for the current dramatic disparity in price indices is (of course) covid-19. The pandemic, so goes the explanation, disrupted the economy, leading to a scarcity of goods, thus driving up the price of lumber, steel, and other producer goods. Covid—or, more accurately, governments' response to the pandemic—certainly did disrupt the economy, but this still fails to explain why the CPI was less affected by these disruptions than the PPI. The massive expansion of credit over the past year, largely driven by President Trump's record-breaking stimulus bill prior to his abrupt change in attitude toward lockdown policies, also offers an explanation for price inflation, but this again fails to explain the disparity between the indices. Why Consumer Prices and Producer Prices Are So DifferentAustrian economics is again alone in its ability to explain this phenomenon. Because Austrians consider time a relevant variable in economic theory, they recognize that credit expansion, by artificially lowering interest rates, will encourage businesses to assume debt to expand lines of production, therefore shifting resources toward the higher stages of production. This means the new dollars are disproportionately spent on producer goods. Understanding this point is what allowed Ron Paul, writing of Alan Greenspan's policy of setting the target interest rate at 1 percent, to note in 2002 that "it is well established that, under certain circumstances, new credit inflation can find its way into the stock or real estate market, as it did in the 1920s, while consumer prices remain relatively stable." In 2008, when Ben Bernanke was defending the Federal Reserve's track record of maintaining stable prices, Paul pointed out that the PPI was at a whopping 12 percent, a figure far exceeding the CPI numbers that the Fed chairman was touting. The dismal implication of the PPI-CPI comparison in the above graph is that the last time we saw a disproportionate spike in PPI similar to what we're facing now was in 2008. The policy of the Federal Reserve over the past year has been, in conjunction with the federal government, to pump money into the economy to prop up the stock market. Failing to learn any lessons from past crises, both Republicans and Democrats overwhelmingly accept the fallacy that the stock market is an indicator of economic health.
 This posting includes an audio/video/photo media file: Download Now |
| You are subscribed to email updates from Mises Wire. To stop receiving these emails, you may unsubscribe now. | Email delivery powered by Google |
| Google, 1600 Amphitheatre Parkway, Mountain View, CA 94043, United States | |
No comments:
Post a Comment