Central Blunder

Friends who bother enough to listen to my whining tend to think me an extremist. All this talk of dismantling the welfare state, repealing harmful licenses and regulations and taking the power away from the executive and giving it back to the market is scary. So if I were to be more moderate in my demands to address all these mistakes in our present sociocapitalist arrangements and content myself with only one issue and one campaign, I do not hesitate to say it would be directed against central banking. No other flaw in our system causes more damage, in my view.

Central banking is a relatively recent innovation. It is not the oldest “central banks”, the Dutch Wisselbank, the Sveriges Riksbank or the Bank of England of the 17th and 18th centuries, but rather that same Bank of England’s 1844 monopoly charter that started the idea that a nation can and should have only one currency issued by only one bank. This monopoly on the supply of money is at the heart of the problem with central banks.

The other main problem, is the usual hubris that comes along with central bureaucracy, the idea that some genius can concoct a better outcome than the market. Always use the right tool for the job. A hammer is the right tool for any job and anything can be used as a hammer. The central bank has two related tools at its disposal: interest rates and money printing. And boy, do they use them!

Without any competing banks to issue any competing currencies and with the law enforcing the payment of debts, display of prices and the settlement of all contracts and taxes to be in the monopoly central-bank issued currency, the amount of money issued by the central bank (mostly done only digitally) and the amount of interest it charges commercial banks for money advances have an enormous impact on the economy and society at large.

The central bank’s tool is in a sense just one: inflation. Inflation in the original and correct meaning of the term, is an increase in the money supply. Such inflation causes increases in prices, often in unpredictable ways. This is not just “inflation”, now redefined as an increase in the price of consumer goods, although it does plenty of this. This type of price increase is part of most western central bank’s stated goals: the ECB’s 2% inflation target and the Fed 2%-ish target. I won’t spend too much time here analysing why paying 2% more per year for rent, petrol or food does anyone any good (it doesn’t). Another stated policy goal of our central banks is to create a wealth effect by boosting asset prices. That’s a nice way of saying that they want to make people spend money they don’t have because of the confidence they get from seeing the prices of their stocks and real estate artificially high. Great policy, genius.

Of course, these asinine policies have the desired effects. Stock market and real estate bubbles cover up a steady decay of the real productive economy. When interest rates are artificially low, people are forced to make investments they would otherwise never make. Hair-brained schemes like $300m meal-kit companies and mortgages for unemployed imprisoned felons get funded. The ultimate and predictable cause of the 2008 crisis was the too-low-for-too-long interest rate policy designed to stimulate the USA out of the dotcom bubble crash (itself the result of central bank stimulus).

Oh and how little we’ve learned. 2008 ushered in an even more ridiculous zero-and-negative-interest-rates-for-a-decade policy. This, obviously, created a massive rise (inflation) in asset prices, leading to a totally predictable crisis coming soon to a newspaper near you. These over-inflated asset prices create wealth disparities that fuel popularity for socialism. They prevent younger and less wealthy individuals from acquiring assets in the first place while benefiting those who already have the assets and a pile of debt. They do this in plain sight, and who do we blame? Speculators. Foreigners. Foreign speculators even more so. Greedy banks and corporations. All the while missing the elephant in the room: the central banks whose “independent” policy actions are the only thing keeping the bubble economy from imploding (yet) and from keeping their sponsor, the government, solvent.

And this is why I say central banks are our biggest problem. Because apart from creating bubbles and panics, apart from preventing failed companies that make bad use of the factors of production from going bankrupt and releasing that capital for new businesses, the central banks enable their biggest fan, the government, to take on mountains of debt and spend gazillions of eurodollars.

If we take away the central bank monopoly, if we return to the relatively recent past where several banks competed to issue currency and boasted about the amount of reserves they had and strength and constancy of their issued notes, we would instantly defang government excess. Where now we have no choice but to use the increasingly worthless currencies spewing forth from profligate central banks, we could choose among the safest, soundest most reputable banks in a market of confidence.

Enabling currency competition will do more than any other policy I can think of to solve our biggest problems. Note, that this will also have to come with an end to bank deposit guarantees to be effective. If the regulators, so obsessed with breaking the free market with “anti-monopoly” regulation would instead focus on our biggest and most problematic monopoly they might not be quite as irritating. And if these central blunderers think they are so clever, think that their degrees and Philips Curves are so grand, why is it that they are so afraid of a little competition?

Bhubaneswar, October 1st 2018

Alas, nobody is still alive to remember what could be accomplished without a central bank

TLDR: Central banks are the biggest problem in our economy

Government Inc.

Ever since Prussia put the welfare state into practice for the first time in 1883, the paternalistic facet of government has been actively running aspects of the economy like a monopoly corporation. This, the birth of the first socialist state, told the world that central direction is superior to the whims of the market and dared it to disagree. But when the jury came in, the facts spoke very disparagingly of Berlin, and Moscow, and Beijing, Hanoi, Warsaw, Havana, Phnom Penh, Lusaka, Caracas and everywhere else. Central direction didn't work and doesn't work.

Socialism was down, but not out. Everyone agreed, by 1989 that the government was very bad at running the means of production. Socialism had to change its definition, from the confiscation and central management and planning of a nation's resources, to a social safety net based on the confiscation and redistribution of the people's wealth to causes deemed worthy by the administration. This thinner definition of socialism is the one we have today. With the smallest of cursory nods to the undeniable history of the tyranny, murder and misery created by government control, socialism has given up on controlling the means, but clings on to the ends.

Unfortunately this break with the past has left several relics. A number of industries are administered and executed directly by government in a number of countries, including ours. Schools, hospitals, housing, energy, development projects and transportation are just some of the areas were the government competes with the private sector using taxpayer money or monopolises the delivery of a service completely. All of these endeavors are run at a loss and render a service inferior to private sector alternatives. Sometimes it is hard to even see or imagine a private-sector alternative, as it is crowded out by government provision.

The government is really bad at running things. Even something as simple as delivering mail, it used to be said that "my local post office has four counters, unless they're really busy, then they have one". Pooling our resources centrally to then distribute them out again minus the administration fee is inefficient and requires planning. Planning is the ultimate conceit of the bureaucrat who thinks she can create a better outcome than the market. She cannot. With no profit motive and possibility of failure, government-run services ever increase their losses and decrease the quality of their services.This is logically inevitable when the entity's customers are not the tax paying consumers, but other bureaucrats who decide their budgets.

So privatise the lot of it. Sell the government enterprises at auction to the highest bidders and take the tax money that was wasted in their administration and use it to pay for a massive tax cut. As long as people are free to choose and regulation is light, competition and the threat of competition will create better schools, hospitals, power stations and airlines.. just like it does in every other untainted sector of the economy. Can you imagine the disaster that would be a government mobile device? Or supermarket? They can't even run a post office, why would we trust bureaucrats with the education of our children and our health?

The main objection to returning to the situation before the government took over these sectors (these sectors all started out as entirely private concerns) is "what about poor people?" Will a greedy, profit-seeking private interest look after the little guy? Whether this second, weaker definition of socialism, is indeed a good idea is a debate I leave for another occasion. The truth is you can be for providing housing, health-care, education and many other "rights" to unprivileged people without having the government run them. I am talking about the government running services, not providing a safety net.

The problem with poor people is that they don't have a lot of money. This might sound obvious, but the point is entirely lost on the socialists of today. Through government, that is the forceful confiscation and inefficient redistribution of wealth, we provide poor people with education, housing, health-care and a dozen other things. It would be much more logical, efficient and humane to provide them with money, and then allow them to purchase these services in a free market. Instead of relying on the "zipcode lottery" that means your children can go to a better school, or paying twice (once in taxes and once again) to send them to a private school, let us give everyone the same choices.

If we take all the money that is spent on poor people in welfare programs from pensions to schools to housing, and simply gave them the money, they would be among the highest earners in the country. You can be for welfare and against government administration of it. If you take the money spent/wasted on these services and gave it back to the people in the form of vouchers, they could then purchase these services in a relatively uninhibited free market. The resulting competition would increase quality and availability and reduce costs.

I would go one further. Instead of treating poor people like children, children who have the misfortune of having the worst parents in the country; the state, let us treat poor people with respect. A respect that says "you are poor, that may or may not be your fault, but here's some money to help you out". That is far better than saying "you are poor, live here, eat here, learn this, shut up". If you give poor people money instead of services then they are rewarded by their agency. They can make better or worse use of it and they have the constructive incentives that the cradle-to-grave welfare state denies them. This money, instead of the increasingly popular universal basic income, which incentivises leisure can come in the form of a negative income tax, that would at least not disincentivise working.

If we think so little of poor people that we do not trust them to make the right budgetary choices, that we think they will drink and smoke their money instead of spending it to send their children to school. Fine, vouchers will restrict their budget to the “correct” allocations. But please, let us not pretend that they are better served by the government rendering the service instead of them shopping for it with a voucher. It would be better and cheaper for everyone.

But do not give people a false choice! Voucher systems and privatisation have often failed in the past. The failure has been due to an inability for the government to fully let go. If an industry is privatised but still heavily regulated, the markets becomes tainted. If we are to privatize the public schools, they need to be free to experiment and innovate. The national syllabus needs to be scrapped. Why should everyone the same age learn the same Shakespeare play? Different schools could specialise and localise. What is true for schools is true for other industries the government has its tool in. Selling a monopoly to the private sector without opening up the sector to real competition by keeping the monopoly or through licensure will result in even worse outcomes.

Of course, any transition to a better state of affairs, where we abandon this soviet-style government provision in as many sectors as we dare should be gradual. Turbulence has a cost too, after all. A lot of bureaucrats need to lose their jobs and get new ones in the productive part of the economy. In many cases, deregulation, followed by privatisation of state assets and a gradual reduction of state subsidies and an increase in vouchers or a negative income tax can be phased in. Unfortunately, the zeitgeist seems to be dragging us back to an increase in state-run enterprise.



Amsterdam, July 11th 2018

The river Amstel

TLDR: The plight of poor people is not an excuse for government-run enterprises