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jmherbener
ParticipantRothbard is responding to the mainstream literature on tax incidence. In that literature, incidence refers to who bears the burden of a tax, i.e., whose income is lowered when the tax transfers income to the state. With a general sales tax collected from the entrepreneurs, Rothbard shows that producers income is lowered not that of entrepreneurs or consumers. Entrepreneurs will not raise prices for output because, given preferences, they are already at their revenue maximizing levels. And entrepreneurs will not lower the interest rate (i.e., the spread between output prices and input prices) to the capitalist because, given time preference, its current level is necessary to clear the time market. After paying the tax, entrepreneurs have less revenue and thus, their demands for factors of production must fall and the prices of producers goods fall to maintain the interest rate.
Incidence, therefore, is only part of a larger analysis of the overall effects of taxation. The harm to consumers is not directly from the tax revenue transferred to the state but indirectly from the suppression of production that results from the tax.
ParticipantInternational trade began to flourish in the West during the 13th century. The medieval fairs brought traders together with goods acquired from around the world. There was no hegemonic power protecting this trade.
Even after the rise of the nation states, international law as formulated by Hugo Grotius gave protection to trade. There was no hegemonic power protecting this trade either. In fact, in the age of mercantilism, England was chief among the mercantilist nation states.
After the age of mercantilism, trade restrictions were relaxed in the 19th century. The reason for this was that classical liberal ideas became more widely accepted. The political winds in Western nations blew in favor of free trade. But nation states persisted in their interference with international trade. Where is the evidence that England protected free international trade in the 19th century? In fact, England moved unilaterally toward freer trade in the first half of the 19th century without regard to what other countries did. What English sea power did to open up the Chinese markets in the late 19th century is called imperialism, not free trade. Moreover, it’s a non-sequitur to argue that because the English political class desired freer trade and England had the most powerful armed forces in the world they must have enforced freer trade on all other countries of the world.
Nation states destroyed international trade and disintegrated the world economy during the First World War. Things remained the same until after the Second World War when nation states partially rolled back their interventions into international trade. The reason for this was that politicians throughout Western nations desired a return to normalcy in international relations. Freer trade was part of their vision to avoid another world war. But nation states still managed international trade instead of making it completely free. Where is the evidence that America protected free international trade in the 20th century? Again, it’s a non-sequitur to argue that because the American political class desired freer trade and America had the most powerful armed forces in the world they must have enforced freer trade on all other countries of the world. I wonder if Iranians or Syrians think that American power has generated free international trade in the 21 st century.
All the world needs for free trade is international law based on private property and contract. Nation states, however, will not allow us to have free trade. They persist in their interventions. You might take a look at some of the works of Ludwig von Mises on free trade. He discussed both the theory and the history of international trade. One example is chapter 9 of Money, Method, and the Market Process:
ParticipantYes, new stages would be added between extraction of raw materials and production of cars.
ParticipantLengthening the structure of production means adding stages so that it takes more time from the extraction of raw materials to the sale of consumer goods.
Murray Rothbard gave the example of whaling. The primitive production structure of building a canoe and making a spears and killing a whale has a certain number of stages and takes a certain amount of time. Through saving and investing, it can be supplanted with a longer production structure of mining iron, producing steel, building each component part of a whaling boat outfitted with harpoon launchers, building the production processes to produce complementary producer goods (like fuel), assembling the boat, manning the boat and then killing a whale.
The longer production structure is physically more productive. Therefore, even though a smaller portion of income is spend on consumption, standards of living rise through saving and investing.
The process of lengthening the production structure for the entire economy results in thoroughly reconstituting it. Just compare production processes of 1950 to those of 2000 or of 1850 to 1900.
ParticipantBeing merely an economist, I think it prudent to defer to philosophers on this issue.
Here is David Gordon’s monograph, “The Philosophical Origins of the Austrian School.” It has an extended discussion of method. You’ll find it nearly midway through the article.
I would also suggest you post your question under the “Introduction to Logic” forum for Liberty Classroom’s resident philosopher, Professor Casey, to answer.
ParticipantThere is no strong correlation between the endowment of natural resources in a country and the standard of living people enjoy. America, Canada, Russia, China, and Africa are all well endowed with natural resources but have widely divergent standards of living. China, with the same natural resources, had very low standards of living before 1980 and steady rising standards of living since 1980. Hong Kong and Singapore have no natural resources to speak of and yet very high standards of living.
The key to economic progress is giving legal sanction to private property and contract. Then people can enter into the international division of labor and process of capital accumulation. They can be the beneficiaries of the greater productivity of everyone else in the world by selling to them and buying from them.
Thus, in countries with low standards of living like in the Middle East, which have few natural resources, and in Africa, which have many natural resources, need market reform. With private property and contract protected, people there could enter into the international division of labor and process of capital accumulation. Five hundred million people have been lifted out of poverty in China in the last three decades.
ParticipantFor real wages to increase across the economy, there must be capital accumulation and greater productivity. But for real wages to rise in one sector of the economy, like restaurants, all that’s necessary is for demand to shift away from other areas into restaurant meals.
Yes, increased real wages of workers from rising productivity in sectors that use machinery can raise the real wages of workers in sectors that don’t use machinery but only by increasing demand for the products they produce as we have both said.
In either case, the key is increasing demand for the products produced by workers in the sector without machinery.
ParticipantA worker’s wage is the same as the Marginal Revenue Product of his labor, which is the combination of its physical productivity and the market value of what he produces. Thus, a worker’s wage will increase if the market value of what he produces increases, even if his physical productivity doesn’t rise.
The money wage also depends on the purchasing power of money. A worker’s money wage can rise even if his “real” wage, i.e., the purchasing power of his wage, doesn’t.
In 2012, the BLS estimate of the average wage for Waiters and Waitresses was $9.95 and employment was 2,332,020.
http://www.bls.gov/oes/current/oes353031.htm#%283%29
In 1999, the average wage was $6.46 and employment was 2,039,950
http://www.bls.gov/oes/1999/oes353031.htm
That’s a 54 percent increase in the average wage and a 14 percent increase in employment over 13 years.
The CPI was 229.8 in May 2012 and 166.2 in May 1999. Prices increased 38 percent over those 13 years.
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Thus, the real wage of waiters and waitresses increased from $6.46 to $7.21 or 11.6 percent over those 13 years.
Without knowing any relevant details about this labor market, including the extent and type of government intervention, I would say that demand for restaurant meals has increased, pushing up their prices and increasing the demand for waiter and waitress services. The larger demand has modestly increased employment and real wages.
ParticipantYes, as long as excess reserves pass some threshold and are widely held by commercial banks (instead of concentrated in small number of them), then the demand to borrow reserves will be small and the resulting interest rate to borrow reserves will be low.
It should be remembered, however, that interest is paid on all reserves, not just excess reserves.
http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm
Currently, the Fed pays 1/4 percent on both required and excess reserves.
http://www.federalreserve.gov/monetarypolicy/0AD345FADDDD49A8878308C9D9202BA4.htm
Thus, unless the Fed increases the interest rate it pays on excess reserves, there is no penalty to commercial banks that convert their excess reserves to required reserves by issuing more fiduciary media through credit creation. That the Fed is paying interest on reserves, therefore, is not the reason banks are not lending.
ParticipantIn normal times, the Fed “targets” a level for the Fed Funds rate because it thinks that upward movements in the FF rate beyond the target rate indicate that reserves are too scarce and that downward movements in the FF rate below the target rate indicate that reserves are too plentiful. When reserves are too scare, the Fed supplies more to banks by stepping up open market purchases. When reserves are too plentiful, the Fed withdraws reserves by open market sales, or at least backing off open market purchases. The Fed uses the FF rate as a feedback mechanism to gauge what should be done about monetary policy. At least, this is the theory. In practice, the Fed tends to move the target rate with movements in the actual FF rate.
Here is the graph of the Effective Fed Funds Rate.
http://research.stlouisfed.org/fred2/graph/?id=FEDFUNDS
If you set the beginning date for drawing the graph to 1982-09-27, it will have the same time line as the graph of the Fed Funds Target Rate. Then you can compare the two graphs.
ParticipantThe “stag” in stagflation is already underway. Economic growth depends on investment and investment has been suppressed by government intervention and the downturn to the point that the capital stock in our economy is not expanding enough to generate economic progress. I cited Bob Higgs’s work in an earlier post.
The Fed’s expansion of its balance sheet and commercial banks’s build up of excess reserves provides the potential for the “flation” in stagflation. I lack confidence in the Fed to unwind this potential without significant price inflation. The Fed is dominated by officials who favor price inflation. If they make a mistake, they will err on the side of price inflation, not price deflation.
The purchasing power of money is determined by the money stock and the demand to hold money. If they are roughly balanced over time, then money’s purchasing power will be roughly stable. The chart shows that the CPI index in Japan has fallen from just below 103 in 2000 to just below 100 in 2012. In other words, prices were less than 3 percent lower in 2012 than 12 years earlier.
ParticipantSince 2008, the Fed has been using QE counter-cyclically. But expansionary monetary policy can be used pro-cyclically as well. Normal open market operations are used this way, i.e., to stimulate a boom. The Fed is a one horse show. No matter the economic conditions, it inflates the money stock through credit expansion.
No one knows how the Fed will unwind QE. Here is Bernanke on the topic in 2010:
http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm
Here is Bob Murphy’s response:
The only other time the Fed was faced with such a large build up of excess reserves in commercial banks was from its attempt at monetary inflation in the 1930s. Banks built their excess reserves to unprecedented levels during the mid-1930s and were still carrying enormous excess reserves into the Second World War.
Unless the government roles back its intervention and stops its expansionary monetary policy and profligate fiscal policy, I think the next 10 years will be a period of stagflation, like the 1970s.
ParticipantYes, commercial banks bought Treasuries in the past and hold a substantial portfolio of them. For the week ending Sept. 4, 2013, commercial banks were holding $1,760.6 billion in “Treasury and Agency Securities.”
http://www.federalreserve.gov/releases/h8/current/
The Fed is not permitted to buy Treasury securities directly from the Treasury. It must buy them in the “open market” and thus, the phrase “open market operations.”
ParticipantWhen a commercial bank sell Treasury securities to the Fed, its total assets are initially unchanged. However, the Fed permits commercial banks to hold less than 10 percent of the total checking account balances of their customers as reserves. With additional reserves, therefore, commercial banks are able to generate more than 10 times the additional reserves in checking accounts of their customers. They increase the checking account balances of their customers by extending them loans. So. the total assets of commercial banks increase (as do their liabilities) and the additional loans stimulate spending and production.
For example, Bank A sells $1 million in Treasury securities to the Fed and the Fed pays with $1 million in reserves. With $1 million more in reserves, Bank A can have $10 million more in checking account balances of its customers and still meet the Fed’s reserve requirement ratio of 10 percent. The bank then extends loans of $10 million to its customers and writes the loan proceeds into their checking accounts. The increase supply of credit pushes interest rates down. The lower interest rates and the spending of the newly-created money by the borrowers, pushes up prices of goods they are buying. Entrepreneur who are producing these goods expand production which increases the demand for inputs they are buying. The prices of the input they are using and the prices of the assets they are using both increase. The boom is underway.
Take a look at Murray Rothbard’s book, What Has Government Done to Our Money.
The reasons that QE3 is not producing this chain of effects are first, in a depression, when banks sell assets to the Fed the hold the reserves and do not create credit. Excess reserves, which are typically between 5 and 10 percent of checking account balances are currently well over 100 percent. And second, in a period of unpredictable policy measures, investors hold cash instead of investing in production.
Take a look at Robert Higgs’s article, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War.”
ParticipantCommercial banks don’t hold “securities accounts” at the Fed. The Federal Reserve Bank of New York has a “System Open Market Account” in which it holds securities that the Fed has purchased in Open Market Operations.
http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html
The Federal Reserve’s balance sheet shows that its liabilities do not include “securities accounts” held by commercial banks. Commercial banks hold “reserve balances” with the Fed. For the week ending on Sept. 11, these were $2,265,831 million.
The balance sheet shows that the Fed’s assets include “Securities Held Outright.” For the week ending on Sept. 11, these were $3,394,176 million.
http://www.federalreserve.gov/releases/h41/current/
Here is a description of how the Federal Reserve Bank of New York conducts open market operations.
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