Lessons from Venezuela, Part I

After a long period finalizing a book manuscript, I now have time to return to this blog. I developed this forum to discuss issues in the interface between economics and reality - a place where a surprising number of economists have never set their foot - and I have been yearning to get back to writing here again... 

Economics - and its less-recognized brother called "political economy" - can help us a great deal in making the world a better place. The problem is that most of modern economics is too quantitative to give people a chance to see its applicability. I want to use this blog to highlight the older, more useful side of economics. 

Ending Endless U.S. Budget Deficits

My latest peer-review article is published in Journal of Governance and Regulation, Vol. 5, Issue 4. Its title is: "Balancing the Budget: Can the Swiss Debt Brake End Endless U.S. Deficits?" Here is the abstract:

The United States is the world’s leading issuer of treasury bonds, and according to current forecasts there is no end in sight to annual budget deficits. Evidence strongly suggests that persistent deficits are closely associated with depressed growth, raising the possibility that a permanent end to U.S. deficits would permanently increase the country’s economic growth. However, with nearly a half-century long, almost unbroken line of deficits it is unlikely that Congress will rise to the occasion and end borrowing on its own. Suggesting that the United States needs budget-balancing regulations, possibly at the constitutional level, this paper explores two types of balanced-budget measures: deficit-elimination and debt-capping.

Click this link for the full article: 

http://virtusinterpress.org/BALANCING-THE-BUDGET-CAN-THE-SWISS.html

Trump Is Right on Obamacare Reform

After his convincing election win, President-Elect Trump has already begun talking about policy reforms. First on his agenda is Obamacare, which he wants to remove and replace with a more market-oriented model. This is promising; as I explained in 2007, and again in 2009, interstate competition on the health insurance market is a very good way to let market forces reduce the cost of health insurance while increasing quality and choice for insurance buyers.

Single-Payer Health Care in Colorado?

This article consists of two blogs I wrote elsewhere last year about the proposal for a single-payer health care system in Colorado. I am republishing them for the convenience of my friends in Colorado. 

Please read this article keeping in mind that the texts were written one year ago.

PART 1

Regardless of whether one wants more entitlement programs, or would like to do away with the welfare state entirely, one cannot escape economic realities. Opponents of the welfare state tend to ignore the enormous economic instability that would follow if they got their will and could shut down tax-paid entitlement programs overnight.

Should Welfare Really Pay Living Wage?

Three years ago Michael Tanner and Charles Hughes at the Cato Institute published an excellent update of a 1995 study of the actual value of welfare in America. Tanner and Hughes went to great length to explain how a person could live on the many welfare programs that the federal government and the states offer for people who are defined as living in deprivation one way or the other.

Among their findings (p. 3):

Mainstream Economics Has Failed, Part 3

[Full disclosure: this blog is the very first draft - a sketch - of an article submitted to a peer review journal. A reference will be added upon publication.]

In graduate school, most economics students are discouraged from reading anything that is older than five years. The reason for this is that modern-day economics has evolved into a heavily technical profession where methods are more important than methodology, even theory. Applications are often closely limited to what good old Friedrich Engels would refer to as "eclectic flea killing". I emphasize "often", because this is a general trend, not an absolute fact. 

Mainstream Economics Has Failed, Part 2

From the 1950s to the 1980s economics was transformed methodologically. The ambition among leading economists was to elevate their academic discipline to something that resembled physics in methodological rigor. The transformation included the creation of the Swedish central bank's Nobel Memorial Prize in Economics in 1968.

Disdainfully referring to good old political economy as "chit chat" and "opinionizing", the modern breed of economists built their entire professional existence around the formidability of econometrics. Regressions, it was said, could tell truth from falsehood and establish a system of laws in economics that would have the same reliability as the system of laws in physics. 

Quantitative analysis is never wrong in social sciences - on the contrary, it is necessary to establish a bridge from theory to reality and, not to forget, in the other direction as well. But the difference between quantitative analysis in physics and in economics is that physics does not deal with matter that has a will of its own. The laws of classical mechanics, which stood model for the methodological transformation of economics, always apply - as opposed to laws of economics which apply only when individuals are motivated to act in accordance with them. 

Basic Income Is Not Libertarianism

In politics, some issues are more important than others. Some ideas are better than others. If you want to participate in the public policy arena, the proper way to allocate your time is to concentrate on the important and the good, as it will help you build positive messaging and a constructive dialogue. 

Sometimes, though, it is not possible to ignore the bad ideas. Ever since libertarian presidential candidate Gary Johnson announced, back in June, that he likes the idea of a "universal basic income" I have tried to ignore it. However, the idea of a basic income refuses to die away, and has in fact gained some troubling support among libertarians in general. 

After having received a couple of questions about Johnson's support for the basic income idea I therefore decided to look into the debate over the issue. What I found prompted me to write this article. 

What is "basic income"?

Mainstream Economics Has Failed, Part 1

One of the long-standing themes in my macroeconomic writing is the structural decline in growth in the Western world. Recently others have slowly began to give the sluggish growth the attention it so desperately needs. One of the better examples is a new report for JP Morgan where economic analysts Michael Hood and Benjamin Mandel write:

Considerable dissatisfaction among policymakers and voters surrounds economic performance in developed and merging economies alike. Despite very supportive monetary policy stances, growth is running at a weak pace by historical standards. To a large extent, this sluggishness reflects a structural slowdown in potential growth, driven by demographic changes. Given that estimates of these trend rates are uncertain, though, central banks have continues to explore ways of boosting demand, acting in increasingly unconventional fashion ... But now these actions appear to have come close to their limits. As a result, calls for greater use of fiscal stimulus have grown louder. 

Before we move on, a note of caution.

The Structural Weakness of the U.S. Economy

Yesterday, Monday Sept 23, the Wall Street Journal noted:

[Donald Trump] wants to raise spending for the Pentagon and triple the number of immigration and customs officials; double the amount rival Hillary Clinton proposes for infrastructure; allocate $20 billion to expand school choice and $2.5 billion for guaranteed paid maternity leave. And more. He is proposing more than $4 trillion in tax cuts, and vowing not to cut fas-growing entitlement programs like Medicare and Social Security. ... Mrs. Clinton is proposing a far bigger expansion of government spending than Mr. Trump, with tax increases to pay for it. She wants to spend more to lower or fully eliminate college cost for many young Americans, for example, and has proposed a big boost in spending for early childhood education. The result is a presidential campaign where neither of the two major party candidates is making a serious push to reduce the size and scope of government.

Clinton's tax-and-spending plans are well within the realm of what the modern Democrat party represents: a steady advancement of the American welfare state right up to the point where it equals, even surpasses, its Scandinavian brethren. 

Basel III: A Key to Perennial Deficits?

In the aftermath of the 2008 global economic crisis, governments around the world adopted new capitalization requirements for financial institutions. Known as Basel III, these regulations have been sold as a way to strengthen shock absorption in the banking industry, to improve its risk management and enhance transparency.

However, just like most government regulations, Basel III comes with unintended, and potentially catastrophic, consequences. At the heart of the problem is the new structure of capitalization requirements that give strong preferential treatment to government debt – regardless of its credit rating.

The core of the problem is that financial institutions do not need the same rate of own capital in purchasing bonds from governments as they do for buying private equity. The lower capitalization rates apply to government bonds generally with at least AA- rating.

The big can of worms is opened by the proviso saying that banks can buy domestic-government debt at any credit rating, with less own capital than if they buy prime-credit private equity.

Is Life After the Welfare State Possible?

My paper for the Institutional Research conference in Boston Sept 2-4 has been accepted and published by the Journal of Insurance and Financial Management. Here is the abstract:

Recent macroeconomic trends primarily but not exclusively in Europe suggest that the welfare state is not conducive to growth and prosperity. European welfare-state economies have experienced a longterm decline in GDP growth, private consumption and domestic absorption; and a long-term increase in unemployment. Macroeconomic data suggest a correlation between the expansion of the welfare state and the decline in economic growth. Given that the welfare state is antithetical to growth and prosperity, is it possible to reform it away? This paper develops a framework for this question, identifying strict conditions under which welfare state retrenchment or termination is possible.

Productivity and the Welfare State

Recently the problem of declining productivity in the U.S. economy has made front pages. On June 1 U.S. News reported:

The U.S. economy is sick, and analysts aren't entirely sure where the ailment came from or how they should go about treating it. What is certain, though, is that domestic productivity gains have ground to a halt, and even the most senior Federal Reserve official is now worried about where the economy can reasonably go from here. "We have a lot of jobs being created in the face of not much output growth. Unfortunately, that means that productivity growth, which is the growth in output per worker [per hour worked], is very slow," Fed Chair Janet Yellen said recently during a speech at Harvard University. "Since productivity growth ultimately determines the pace of improvement in living standards for society as a whole, that's a serious and negative development."

Structural Consequences of the Welfare State

Last week I wrote about the Sovietization of money, explaining how the obsession with various kinds of quantitative easing is slowly destroying our monetary system. My point was not based in hawkish monetarist theory, nor in Austrian theory of intertemporal interest rates. No, it was simply a conclusion based on common-sense macroeconomics and liquidity theory as developed by, among others, John Maynard Keynes and Arthur Okun.

Today, let me elaborate on this point. The reason why we have irresponsibly easy monetary policies from all the world's major central banks is simple: government spending. Almost every industrialized economy is struggling with budget deficits, and the reason is invariably the welfare state. For a good 40 years now the Western economies have experienced slow growth and persistent budget deficits. In fact, deficits are so pervasive today that they have become a third form of funding government, as permanent as taxes and fees. 

This is of course bad for many reasons, one being the inescapable correlation between deficits and GDP growth. Take a look at this chart over the U.S. economy and the balance of the federal budget (columns represent five-year annual averages):

The Sovietization of Money

On August 5 the Wall Street Journal reported (p. C1 print edition):

Central banks have a new favorite tool for boosting lackluster growth: corporate-debt purchases. Two months after the European Central bank started buying corporate bonds, the Bank of England announced Thursday that it would adopt a similar strategy. ... The move, investors and analysts say, is likely to drive down borrowing costs even further around the globe for large companies already benefiting from ultralow interest rates. 

This program comes on the heels of the ECB's Public Sector Purchase Program (PSPP), a European version of the Federal Reserve's much-criticized Quantitative Easing. The PSPP, in turn, comes on the heels of the ECB's 2014 treasury bond buyback guarantee, where the bank promised to purchase any amount of bonds issued by any euro-zone government.

The Price for Bad Economic Forecasting

Last winter I met with one of America's better known governors, a man whom I think has the qualities to become a good president. When I introduced myself as an economist he said:

"You know why God made economists? To make astrologers look good!"

The first time I heard that joke I was in graduate school. It was told to me by a political scientist, whose discipline is of unknown academic origin and merit. Therefore, back then, almost 20 years ago, I was a bit annoyed at the joke. Not so when Governor X told it to me. In fact, I am the first to admit that the profession of economics has gone awry and marginalized itself from much of the current political and public policy world. 

Higher Interest Rate Necessary

Last week I asked whether or not the Federal Reserve should raise interest rates. I did not answer the question, suggesting instead that the reasons for higher interest rates put forward in media - namely that our economy is doing better than expected - are actually not accurate. I pointed to weak growth in GDP and consumption, to a stagnant job market and to clearly weakening business investments. I especially pointed to the sharp decline in business investments in structures and equipment. Both of these variable indicate that our businesses have excess capacity, indicating production is at a peak for this business cycle.

I still maintain, though, that the Federal Reserve should raise interest rates. There are, primarily, four reasons for this. 

Should the Fed Raise Interest Rates?

The eternal question "Is the Fed going to raise interest rates?" was asked again in the Wall Street Journal on Wednesday. In a piece stretching across most of page A2 the Journal predicts one or two interest rate increases over the next six months:

Many [Federal Reserve] officials have said they can be patient before raising rates again, meaning a July move is highly unlikely. But new rounds of strong economic data - particularly on hiring or on an uptick in inflation - could increase their sense of urgency in the months after their next meeting. Atlanta Fed President Dennis Lockhart, a centrist at the central bank whose views often represent a middle ground among officials, told reporters last week it remains likely that the Fed will raise interest rates this year, adding "I wouldn't rule out as many as two" increases.

An interest rate hike has been in the making for quite a while now, almost since Janet Yellen succeeded Bernanke in 2014. It is needed, but not for the reasons alluded to by the Wall Street Journal. 

There are several reasons to be skeptical of the "strong economic data" argument.

Thoughtless Regulations Jeopardize Car Buyers

The car industry is one of the most regulated parts of our economy, especially when it comes to the design and performance of the final product. For this reason, the car industry is also an excellent place to study the negative effects of government regulations. 

At the forefront of government incursions into the manufacturing, sale and consumption of motor vehicles is the political desire to reduce emissions of, primarily, carbon dioxide. To bring the industry into compliance with political emissions demands, the federal government imposes gradually tighter mileage standards. In response, car manufacturers have to put more and more of their resources toward finding new ways to meet these standards. 

Since the miles-per-gallon standards are strictly political and do not take into consideration other objectives with car manufacturing, one should not be surprised to find that car manufacturers are ready to cut corners to meet those standards. We have all heard about Volkswagen's systematic cheating with mileage numbers for its turbo diesel engines; today we can report three more scandals that belong in the line behind the VW scandal.

First out is another diesel engine story, one that will not affect U.S. car buyers:

Weak GDP Keeps Oil Prices Down

The decline in oil prices has been anywhere from tough to catastrophic for states relying on severance taxes for their budgets. Alaska has taken a brutal beating and is on the brink of bankruptcy. North Dakota has experienced one of the largest contractions in GDP any state has seen in recent memory, shrinking the tax base as well.

Wyoming is having a slightly different experience, with a lighter dependency on oil than Alaska but a coal production that at its peak made Wyoming the world's second largest coal producer. The combination of gradually tighter regulations on coal, a global drop in energy demand thanks to recessions in Europe, China and Japan, and on top of that depressed oil prices has been a death-by-a-thousand blows experience for the Cowboy State.

In all the states where severance-tax revenue has declined substantially there are political wishing wells where legislators go to find a glimmer of hope that the good old severance-tax days are going to come back. Some of them think that the recent rebound in oil prices is only the beginning. 

Some media stories seem to reinforce that hope. For example, according to CNN Money:

New Entitlement Bigger than Social Security

With the federal debt exceeding GDP, a predictable return to trillion-dollar deficits and two credit downgrades, the last thing Congress should do is expand the welfare state in the United States. Yet that is exactly what Hillary Clinton hopes they will do if she is elected president in November. It is her ambition to add three new, major entitlement programs to the American welfare state. 

One of her new programs is a federal paid-family-leave program, also known as general income security. Nobody should be surprised at this: as I explained in my 2010 book Remaking America, Democrats in Congress have been pushing for general income security programs for many years. 

To find out what a federal paid-leave program might look like and what it would cost, it is a good idea to study the state-level programs that are popping up around the country. The best study object is the federal pilot program in the District of Columbia, which, if implemented at the federal level, would cost American taxpayers more than Social Security.

Completing the American Welfare State, Part 2

Yesterday I discussed one of Hillary Clinton's three welfare-state reforms, namely a federal paid-family-leave entitlement program. I used the recently-created program in New York as an example. I explained how enormously under-funded that program is. 

New York is not the only state enacting or considering a paid-leave program. With the threat of a federal program it is important to explore the state-level models already enacted or being considered. Emphasis should first and foremost be on the fiscal side of these programs, a side that seems to go completely unnoticed in the national debate.

Perhaps the most important example of a paid-leave entitlement is the pilot program in the District of Columbia. Sponsored by the U.S. Department of Labor, the program has "enthusiastic support from the Obama administration". Back in October 2015 the National Law Review presented the program:

Completing the American Welfare State, Part 1

While the public conversation is centered around Secretary Clinton's e-mails, no attention is being paid to what kind of welfare-state reforms she would like to impose on the United States. It may be worth keeping in mind that she was the ideological driving force behind President Clinton's attempt at single-payer reform in 1993 - the reform earned the "Hillarycare" nickname for a reason - and as recently as in May this year she declared that she once again wants the American people to accept single-payer idea. 

She is also a champion of general income security programs - known to Americans as "paid family leave" programs - and government-provided universal pre-school programs for all children in the country.

Privatizing the Regulation State

The American welfare state differs from its European counterpart in two ways: it still lacks a couple of major entitlement systems that have tipped European economies over the edge into perennial economic stagnation; and government's regulatory incursions into the economy are in some instances even worse here than in Europe. 

There are exceptional instances when market regulation can actually preserve the free market itself, such as to shield entrepreneurs and consumers from the destructive consequences of predatory capitalism. History is full of examples of how private businesses have used their might to drive competitors out of the market, for example by means of below-cost pricing, vertical integration to control key production inputs, etc. However, those examples do not dominate the history of capitalism and the free market - far from it - but they do remind us that the protection of economic freedom is an ongoing process, even when government is no longer its adversary.

Brexit and Beyond

With the signing of the Maastricht Treaty in 1992 Europe shifted focus from integration and inter-nation cooperation to the construction of a so called super-state. The European Union, which in the Maastricht Treaty replaced the European Communities, is not a "United States of Europe" as it is not a federation; it is a new nation-state. 

As a nation-state structure, the EU's existence is directly contradictory to the continued existence of nation states as its members. By logical and political necessity Brussels would have to become the real, and only, capital of Europe. It was this inevitable future that the British people rejected. They were wise in doing so, because their vote may cause a turnaround and partial or (less likely) complete reversal of the super-state project.

If the British people had voted to stay in the EU they would have been part of a project where three things would have happened, each one serious enough to sink the entire continent, economically and socially:

End of the Government Credit Line, Part 3

In the first two installments of this article series I explained that the budget problems in, primarily, the European welfare states are caused by a combination of long-term decline in GDP growth and unending spending. The spending problem, in turn, is caused by a more than a little stubborn refusal among political leaders to reform away the welfare state, or even parts of it.

It is hard to blame those who are reluctant to entitlement reforms. The welfare state itself is the root cause of the economic decline, yet it is also a formidable political lock-box, almost impossible to remove without major political and social consequences. 

Almost, but not completely impossible. The reforms that will save Europe - and eventually the United States - from perennial economic decline will require courage, fortitude, persistence and humility on behalf of the politicians leading the way. I will leave the search for such courageous men and women to others; what matters here is to explain the economics of why we are on the long-term path to stagnation and decline. 

End of the Government Credit Line, Part 2

For decades, Europe's welfare states have continued to grow despite a long-term trend of economic stagnation in the economies that feed those welfare states. The weakening trend of GDP growth began in the 1970s, at a point in time when the European welfare state had reached its point of maturity. It offered comprehensive, tax-funded, often single-payer health care; universal K-12 schooling, often with government-run universities monopolizing or dominating academic education; pre-K child care and elderly care on government's tab; and last but not least: elaborate income-security systems providing both poverty relief (welfare, unemployment and pensions), income redistribution (progressive income taxes) and redistribution of consumption (child benefits, housing subsidies).

At first the growth slowdown was thought to be a passing problem related to the first oil crisis (1973-74) or the second oil crisis (1979). However, as the 1980s unfolded with its 7+ percent annual expansion of global trade, the lower growth rates in Europe in general - and in Sweden in particular, being as it was the epitome of the welfare state - began taking a toll on the fiscal solvency of Europe's welfare states. Debt levels increased steadily as temporary borrowing turned into a permanent source of government funding. Over the 40 years from 1965 to 2005 every European-Union member state increased its debt-to-GDP ratio, in many cases dramatically.

End of the Government Credit Line, Part 1

It has been a long-standing conventional wisdom in global finance that treasury bonds are the safe low-risk "anchor" you should always keep in your portfolio. That is still predominantly true, but the Great Recession shook that conventional wisdom and weakened investors' confidence in debt issued by governments.

Since the depth of the recession in 2009-2010 things have not gotten much better. The Greek debt write-down in 2012, sold to investors as a structural necessity to permanently turn things around, only led to a net loss among investors and a continuation of the underlying, reckless fiscal policies that created the government debt problem in the first place.

During the recovery, which started in 2011, the world should have seen a reversal of government borrowing. Deficits should have gone away, or at least shrunk so drastically that countries with large debt and less-than-perfect credit could be upgraded again. That has not happened.

Low-Tax Antagonists Strike Again

What has made Monaco such a crowded little piece of real estate? What made Switzerland one of the most prosperous nations in the world? Why have so many people from around the world parked their money in places like the Bahamas, Cayman Islands and Panama? How does a piece of wind-torn prairie called Wyoming attract so many high net-worth residents?

The answer is simple: low taxes and high privacy.

Taxpayers from high-tax jurisdictions, primarily welfare states in Europe, have flocked to low-tax countries and territories to be able to keep more of their savings. Unfortunately, the freedom for people to choose where to keep their money has been dwindling over the past 10-15 years because of an international campaign against low-tax jurisdictions. The campaign has been very well funded through the Organization for Economic Cooperation and Development (OECD) and the European Union.

On the other side, trying to fight back and defend financial freedom, is a tiny little think tank in Alexandria, VA called the Center for Freedom and Prosperity. Now, though... 

When Conservatives Save the Welfare State

The welfare state is a global problem, slowly bringing the entire Western world to an economic standstill. There are two reasons why this is happening. First, lack of long-sightedness among economists and other social scientists, leaving the long-term trends in our economy unexplored; there is no analysis of long-term causal trends. Since the decline in growth and stagnation of prosperity in the Western world is a long-term phenomenon, very few people pay attention to it. 

Secondly, Even when there is some insight into the problem, the welfare state prevails. In Europe, this is due entirely to destructive ideological attachment to our modern systems of redistributive entitlements. In the United States, this ideological impairment of analytical thought only accounts for part of the reason why the welfare state persists. A more likely explanation why there are no major movements to reform away our big entitlement programs is that we simply have not yet suffered an urgent fiscal-panic style crisis. 

So, how would America's conservatives - who adamantly state that they are for limited government and against the big redistributive state - react when faced with a real fiscal-panic situation? Be aware: the answer may shock you.

The Disappointing Libertarian Party

The Libertarian Party got a fair amount of media attention over the Memorial Day weekend, thanks to their convention in Florida. The libertarians nominated former New Mexico Governor Gary Johnson and former Massachusetts Governor William Weld as their ticket for the presidential election. 

Judging from the discussions in libertarian-leaning online forums, the Johnson-Weld ticket is more than a little controversial. Most critics focus on Weld's Democrat background, questioning his libertarian credentials. Few seem to want to raise concerns regarding the credentials of Gary Johnson, though his spending record as governor of the Land of Enchantment should grab the attention of all true-to-the-core libertarians: on average, total state spending increased by more than nine percent per year under Johnson's gubernatorial tenure.

Industrial Poverty: The U.S. and Canada

Yesterday I gave an updated, condensed version of the concept of "industrial poverty", a new era of economic stagnation that began in the late 20th century. It gradually replaced the decades-long era of unprecedented economic expansion that began after the Great Depression.

My conclusion was that large parts of Europe are dangerously close to, or at risk of falling into, the trap of industrial poverty. This means that the era of stagnation that first made itself known in the 1980s, then spread like a bonfire in the 1990s, has gradually become the norm in Europe. Half of all EU member states exhibit three or four of the five characteristics of industrial poverty: 

Industrial Poverty: The European Wasteland

My 2014 book about the European crisis (which I shamelessly market here on this blog) actually discussed an important topic: the long-term consequences of a large, burdensome welfare state. I was inspired to write the book by the Great Recession, but also the fact that Europe, unlike the United States, for a long time has been trending toward economic stagnation.

The thesis of my book was that Europe has left the era of growing prosperity of the mid-20th century. That was the era when children almost certainly would grow up to live a more prosperous life than their parents. It worked for two, maybe three generations. Then Europe left that era and entered a new one where the future of the growing generation is considerably more pessimistic than it was during the era of growing prosperity.

I dubbed this new era "industrial poverty" (which was also the title of my book). The term has both a rhetorical meaning and testable analytical content. Rhetorically, it distinguishes an era of stagnation in a developed nation from the living conditions in developing nations, but also from the experience from a developed nation with a strongly growing economy.

Macroeconomics and the Welfare State, Part 3

In recent years the welfare state has become a non-issue in both academic and public-policy literature. This is especially the case among its supposed critics: conservatives and libertarians. 

There are isolated exceptions. In academia, they are a dying breed; in public policy, Cato Institute Senior Fellow Michael Tanner is the most noteworthy of very, very few exceptions. Through a relentless stream of op-eds, policy papers and research reports, Tanner keeps the public aware of the big cost of our entitlement programs and reasonable reform ideas.

But not even Tanner can break through what seems to be a universally accepted premise among conservatives in the United States, namely that...

Macroeconomics and the Welfare State, Part 2

The welfare state intrudes on people's ability and desire to provide for themselves. Its intrusion comes in three different forms: by providing work-free income; by regulating individual and corporate activity; and by excessive taxation.

According to assorted reliable data sources (Eurostat, Bureau of Economic Analysis, Office of Management and Budget, Bureau of the Census) total government spending equals 40 percent of GDP in the United States and 48 percent in the euro zone. These are frighteningly large numbers, especially for the U.S. economy which historically has been saved from Europe's excessively burdensome government. 

Macroeconomics and the Welfare State, Part 1

The Western world is facing a major economic problem: the growth rates of the European and American economies have fallen to historically low averages. I highlighted this problem in my 2014 book Industrial Poverty, where I pointed to how GDP growth has essentially been cut in half over the past 50 years. 

On May 2 University of Chicago economist John Cochrane made somewhat the same point in the Wall Street Journal:

Anarcho-Capitalism: A Libertarian Nightmare

The fight for economic freedom goes in many different directions. Some of its proponents concentrate on tax cuts, others on reforming government spending. Another target is government regulations, which according to some estimates cost the U.S. economy some $1.8-2 trillion per year.

It is tempting to say that all venues to advance economic freedom are worth the while. After all, less government is always better, is it not?

The Marxist Origins of Income Redistribution

After my series of articles on the role of government under, respectively, Keynesian and Austrian economic theory, it has been claimed that I am downplaying the analytical ties between Keynesian theory and arguments for redistribution of income. 

I always welcome critique, even when, as in this case, it is unfounded (for reasons that my article on a Keynesian, libertarian government explains). But since the issue was brought up, let me explain where to find the true origins of arguments for income redistribution: in Marxist economics.

Marxist theory is built around the so called labor theory of value. A product earns its value not through a market evaluation of what buyers are willing to pay for it – also known as the equilibrium price – but through the labor that workers put into making the product. Here is how it works, in a nutshell:

The Corruption of Scientific Inquiry

Many years ago, when I was a freshly baked Ph.D. with an internationally published dissertation and my first peer-reviewed article on the resume, I was asked to review an article for a journal. It is common practice to use published authors as double-blind referees in that author's field of expertise, so I happily accepted. The article was about the possibility of applying the Scandinavian welfare state to the Chinese economy, a topic that I found intriguing back then and I still think is interesting today (though for very different reasons than I did some 15 years ago). 

To my disappointment, the article was poorly written, the research behind it was spotty and there were significant factual errors and unsubstantiated conclusions in it. I pointed this out to the editor of the journal and expected the usual cordial "thank you for your effort". 

Instead, I got an e-mail lambasting me for having reached the wrong conclusion. Not only did this editor think the paper was of adequate scholarly quality, but it deserved to be published and maybe even lead the next issue of the journal. 

Needless to say, I was never invited to referee papers for said journal again.  

Fast forward a dozen years, namely to 2014.

Austrian Economics and Big Government

In my recent articles I explained that there are two theories on how the economic system operates:

One theory says that the system is inherently stable, prices are perfectly flexible and if left alone, the economy will always operate at full utilization of available resources;

Another theory says that economic agents prefer so called sticky prices to flexible prices - namely prices that only change a couple of times per year - and that even if left alone, the economy is not at all guaranteed to operate at full capacity utilization.

The first theory serves as the foundation for mainstream neoclassical economics as well as Austrian theory. The second theory is the microeconomic foundation for Keynesian economics.

On Econometrics and Forecasting

After a series of articles on Keynesian economics, libertarian philosophy and the role of  government in our society, it is time to shift gear. There are so many important issues to talk about in modern economics, political economy and the practice of economic theory. One issue that often pops up is the role of econometrics in economics. Here is an article I wrote in 2014 on a now-defunct blog. Enjoy!

A Keynesian, Libertarian Government

Finally... we have arrived at the actual answer to the question: what does government look like under the combination of libertarian moral principles and Keynesian economic analysis?

To summarize the theoretical foundation for this question:

• Libertarianism implies a minimal government, focused entirely on the protection of life, liberty and property. It is the government that Robert Nozick refers to as "minimal", distinguishing it from the ultra-minimal state in that the minimal state also has a monopoly on the use of force. 
• Keynesianism implies a government that has one and only one role in the economy, namely to address and minimize macroeconomic - or fundamental - uncertainty. 

In order to build any political theory on the role of government, we need both a theory of political philosophy and an economic theory.

Government and Macroeconomic Uncertainty

Economics is probably both the most over-rated and the most under-rated science at the same time. It is under-rated because when done right, it holds the answers to how we can eradicate poverty, protect liberty and build prosperity. 

On the other hand, when done wrong economics quickly becomes a vastly over-rated science. Economists have a penchant - verging on mass hypnosis - for getting lost in seemingly sophisticated mathematical analyses. Mainstream economics journals today are inundated with "rigorous" problems and narrow applications of carefully selected deductive methods. Mathematics classes are not only mandatory, but revered among economics graduate students and the faculty teaching them. 

Yet the applicability of their technically slanted methodology is inversely related to its mathematical sophistication. The more complex the mathematical reasoning becomes, the narrower the problem they can define.

On the Proper Role of Government

One of the most persistent myths about Keynes is that he was some kind of statist, even a socialist. Nothing could be further from the truth. Ideologically, Keynes dwelled somewhere in the free-market main stream of the 1920s and 1930s. Scholarly, his work was solidly planted in free-market capitalism, a system that he studied and analyzed at great length and with increasing sophistication throughout his career.

What sets Keynes apart from other economists of his time - and frankly from most modern-day economists - is that he had an unrelenting interest in understanding the limitations of the free-market system. Working part of his career inside the realm of politics and public policy, Keynes had a pragmatic understanding of how the economy actually worked, and his research aimed to provide an economic theory that had real-life applicability in a way that was not the case with dominant economic theory of that time (during and between the two depressions in the Intebellum years).

Keynes and Libertarianism, Part 2

The question that we left hanging at the end of the first part of this article is: how can traditional Keynesian economic theory be a better companion to libertarianism than Austrian theory?

As mentioned in the first part, both Keynesianism and Austrian theory are built upon a microeconomic foundation of free markets. That foundation is more pronounced in Austrian literature - or, to be exact, less pronounced in Keynesian literature. The reason for this is that most modern Keynesians are of some sort of some kind of American liberal conviction, which by illogical implication also means that they regard the free market not as a virtuous institution, but as a necessary bad.

Again for illogical reasons they disregard much of the free-market related components of Keynesian economics, giving many modern readers of economic literature - and especially economic-policy material - the impression that Keynes was some kind of collectivist.

Keynes and Libertarianism, Part 1

There are only two Keynesian libertarians in the world (the other is in Australia). This scarcity of our breed is easily explained by conventional wisdom, according to which both Keynesians and libertarians adamantly refute the idea that Keynesianism can be mixed with libertarianism. It is almost written in stone that if you are a Keynesian, you are either a social liberal or an outright socialist; on the other hand, if you are a libertarian you adopt Austrian theory as your guide through the world of economics. 

However attractive conventional wisdom can be as a guideline through the world of ethics, politics and economics, it does have its strict limitations. One of them is that while it may help you explain conventional phenomena, it is the unconventional parts of reality that tell real analysis from - yes - conventional wisdom. 

This is very much true in economics.

Money, Liquidity and the Gold Standard, Part 2

As I explained in the first part of this article, the theory of money is an essential part of macroeconomics. Just like economic theory in general, monetary theory provides a systemic understanding of:

• how the economy works; and
• the consequences of economic policy.

Without a systemic understanding, solidly founded in economic theory, our policy recommendations will sooner or later fail. History is filled to the brim with ill-founded fiscal and monetary policy endeavors that have hit the proverbial iceberg because its navigators had not studied the map well enough. In some instances these failures have caused major problems for the economy where the policies were applied.

Money, Liquidity and the Gold Standard, Part 1

Money and monetary policy are among the "hotter" topics in economics. The one man to thank for this in good part is Milton Friedman, the de facto founder of monetarism as a sub-theory of economics. 

Friedman's career, long and worth every ounce of respect, brought monetary thinking and the policies of central banks to the forefront of economics. He was certainly known for much more than monetarism, but his contributions there alone are enough to count as lifetime achievement. Yet partly because of the field he chose, he also became a politically controversial figure. 

That, however, was not entirely because of his work.

Austrian Economics and the Real World

I have really tried to give Austrian economics a fair chance. My libertarian friends are without exception dedicated followers of Austrian theory, and since I highly respect them and their scholarship and research I have really tried to take Austrian economics seriously. 

In fact, I wrote favorably about it in my book Industrial Poverty, one reason being that I do indeed find some promising elements in Austrian economic theory, and I wanted to give those elements a fair chance. However, the more I look into the works of Carl Menger, Ludwig von Mises, Murray Rothbard and other Austrians, the less useful the theory seems to get. 

It seems as though the pieces, which are well defined in and by themselves, do not form a coherent, workable system. Maybe it can be used at the microeconomic level, but since we already have a well-working mainstream theory for the analysis of individuals, markets and industries, I do not see much room for Austrian theory to distinguish itself there. 

Recessions and Economic Theory

Few real-world circumstances are as challenging to economists as recessions. First of all, economists are notoriously unable to predict recessions, a fact that became glaringly obvious when the Great Recession began eight years ago. The reason is their over-confident reliance on one kind of forecasting tool and their weak, even non-existent reliance on economic theory for their analytical work. (Some of my peers would protest here by challenging the meaning of "economic theory"; for the record, I do not consider a recursively soluble equation system "economic theory".)

Beyond that, you will also find a surprisingly large number of practitioners of macroeconomics who are simply uninterested in the business cycle. They tend to specialize in a small area of macroeconomics, such as the labor market, monetary theory and policy, or public economics. Nothing wrong with that, but for every specialist there should be a macroeconomic generalist out there who can analyze and explain the entire macroeconomic system. We are too few and too far in between to be heard when it really counts...

Keynesianism: The Real Story

Ask any mainstream, modern economist about Keynes and his contributions to economics, and chances are you will be told that “he’s the guy who said you should expand government in recessions”. This is such a well-established story that the very question in itself would motivate the economist to raise an eyebrow or two and carefully examine you for signs of delusion.

Depending on political leaning, economists will either say that Keynes was a socialist/statist (conservatives, libertarians) or a liberal (socialists, statists).  Both will agree, though, that Keynes’s contributions were all about expanding government. Austrian economists, who are often libertarian by political leaning, will confidently say that their theory is the one that preserves limited government and free markets. In fact, most economists would habitually tell you that Austrian economics is the free-market theory and Keynesian economics is the “grow government” theory.

Time for Economists to Wake Up

Last year I had the privilege of meeting one of America's best governors. This man has decades of experience with government budgets, fiscal policy and economics - or, more appropriately, with economists. 

When I told him what I do for a living, he said: "You know God invented economists to make astrologers look better". I chuckled and had a good few minutes conversation about the federal budget and the case for a balanced-budget amendment. 

The governor's tongue-in-cheek attitude may cause a few good laughs, but there is more than a grain of truth behind it. When I started as a measly undergraduate in economics back in the 1980s I learned theory, reasoning, methods of analysis and even some history of economic theory and policy. And then we learned the mathematical and statistical methods.