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Prosperity and Inflation

from Steve Forbes, The Fed Needs A New Leader–And New Policies, Too:

Yellen openly and unapologetically made clear that our central bank still hews to the discredited theory that prosperity causes inflation. “The economy is operating relatively close to full employment at this point,” and therefore higher interest rates will be warranted. The idea is that a hike in the cost of money would ensure that the economy didn’t get too strong. Otherwise, employers would aggressively bid up wages, which could fuel too much inflation.

Yellen confuses changes in prices that come in response to supply and demand in the marketplace with movements in prices that result from changes in the value of the dollar. It’s the dollar changes that wreak havoc. When the Fed and the Treasury Department began weakening the greenback in the early 2000s, commodity prices took off. The price of oil, for example, went from around $25 a barrel to over $100. That head-spinning surge wasn’t a result of oil shortages but of the dollar losing value. In contrast, the price of wide-screen TVs has plummeted from $10,000 to a few hundred dollars today. That’s a result of productivity, not deflation.

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The True Function of the Corporate Income Tax

From Holman Jenkins at The WSJ, Harmonize this Eurocrats, 

What about the undoubted problem of companies like Apple shielding their globally earned profits behind a small country’s friendly tax regime? There’s a remarkably sanitary solution: Get rid of the corporate income tax.

Companies receive their revenues from their customers and distribute them to their suppliers, investors and employees. Thus corporate taxes can be eliminated in complete comfort that the revenue will pop up elsewhere as taxable personal income or taxable consumption expenditure.

The only real function of a corporate income tax is non-transparency. Taxing a company is a way for politicians to pretend they are not taxing any actual voter to pay for programs that voters find desirable as long as they seem not to come with a price tag.

Drop the pretense that citizens don’t have to pay for the amenities they want, and real harmonization becomes possible: The harmonization of tax and spending priorities in the direction of efficiently fostering the clean, peaceful, orderly and civilized countries that productive citizens enjoy living in.

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The New Trusts

from The Great Regression in The National Review by Victor Davis Hanson

As a result of liberal hyper-wealth, the new trusts are given veritable media and political passes on their embrace of practices once seen as illiberal and self-serving, like excessive electronic monitoring of our daily lives, offshoring and outsourcing wealth, monopolizing, and giving lavishly to candidates for public office to win exemption from regulations and tax law. Just because a master of the universe wears jeans, sneakers, and a T-shirt and tips his hat to Solyndra, sanctuary cities, or Black Lives Matter, that does not mean that his telos is any different from that of a Gilded Age monopolist. Hillary is Wall Street’s hedge-fund heroine; she resonates with Big Money in a way not seen since Warren G. Harding.

Yet for some reason, Silicon Valley’s products are deemed exempt from liberal notions of consumer liability, although it might be as easy for a nanny-state regulator to insert a motion-activated shut-off device in a smart phone as it is to install a trigger lock on a gun or to reduce the tar content of a cigarette. It is a toss-up as to which is the more deleterious to teenagers’ health: three daily cigarettes, or six hours on the sofa addicted to a video-game console, or walking in a busy crosswalk hypnotized by a smart-phone screen.

We should not delude ourselves that because a cocooned scientific elite has made startling gains in consumerism and technology, that therefore we the public are any freer, more socially and politically advanced, or somehow more ethical human beings.

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The True Cost of Low Rates

From Barron’s Stephanie Pomboy: A Grim Outlook for the Economy, Stocks by Leslie Norton

In the past rates that were too high were the trigger (for a financial crisis). Not this time. No. 1, we have basically bankrupted corporate and state and local pensions by having rates at these repressive levels. If you lay on top of that a decline in equity prices, there will be a scramble to plug holes in pensions. Obviously if a state or local government has to divert funds to plugging its pension, it won’t build more roads. The corporate sector has the luxury of kicking the can down the road, and because their spending has been on buybacks, not plants and equipment, the economy would suffer less. For S&P 1500 companies, the pension deficit is roughly $560 billion, but for state and local governments, it’s $1.2 trillion. According to the Center for Retirement Research, if you used a more conservative discount rate, the unfunded liability would go to $4 trillion.

No. 2, you’re pushing consumers to the brink as they try to save enough for retirement at zero rates. You’re already seeing a reluctant return to credit-card usage, a clear sign of distress—they are charging what they previously paid with cash. The credit-card delinquency rate is picking up.

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Stifling Inflation and Productivity

From The Reasons Behind the Obama Non-Recovery by Robert Barro in The Wall Street Journal

The main U.S. policy used to counter the Great Recession was increased government transfer payments. Federal social benefits to persons as a ratio to GDP went from 8.7% in 2007 to 11.7% in 2010, then fell to 10.9% in 2015. The main increases applied to Medicaid, Medicare, Social Security (including disability) and food stamps, whereas unemployment insurance first rose then fell. Unfortunately, increased transfer payments do not promote productivity growth.

The 2007-08 financial crisis was also followed by vast monetary expansion involving increases in the balance sheets of the Federal Reserve and other central banks. The Fed’s expansion featured a dramatic rise in excess reserves, used to fund increased holdings of Treasury bonds and mortgage-backed securities. Remarkably, the strong monetary growth came without inflation.

The absence of inflation is surprising but may have occurred because weak opportunities for private investment motivated banks and other institutions to hold the Fed’s added obligations despite the negative real interest rates paid. In this scenario, the key factor is the flight to quality stimulated by the heightened perceived risk in private investment.

HKO

High monetary growth without inflation happened because:

  1. High friction costs stifled investment. Included is the accumulation and addition of regulations and the uncertainty; every increase in regulation and taxation is followed by calls for more.
  2. The combination of low interest rates and higher friction costs meant that the prudent use of the cheap money was stock buy back rather than increases in productive investment. Misguided corporate incentives that pay for increased shareholder value rather than higher productivity or better return on assets (as opposed to equity) exacerbated this trend.
  3. Low velocity of money. Related to the above, individuals reduced debt and curtailed both consumption and investment.  The individuals still have some control.