Friday, May 26, 2017

More Taxes or More Borrowing are Both Immediately Bad

"which means there will be no cut in government spending"
This is the heart of the problem, whether the spending is paid for by taxation now or by new borrowing. Though, I suppose I slightly prefer the latter, since the fool who loans the government more money will get stiffed, while if it's paid for by taxation, I get stiffed.
I have discussed this view before, It is incorrect but it requires further comment since it is a prevalent view.

Taxation or government borrowing hurt the overall economy immediately---borrowing does not put the pain into the future. With taxation it is noticed immediately, that is, the taxes are taken directly from our paychecks.

Government borrowing is not as easily noticed with regard to its immediate impact, it is thought of only as "a debt our grandchildren will owe."

But when the government borrows, one of two things occur, Either savings are diverted to government borrowing, that is crowding out private sector borrowing, or the Federal Reserve monetizes the debt by printing new money.

If the Fed monetizes the debt, that means the government has more funds to bid for goods and services against consumers. It is an immediate hidden tax against consumers as prices are higher because of the government bidding.

If government borrowing occurs, it results in less funds available for private investment. This means less investment in capital goods which means less consumer products are made. Thus also immediately impacting consumers.

Holders of government bonds almost always get paid back, unless it is a final crisis stage.  They get eventually paid back by new taxes, new borrowing or Fed debt monetization, a circle within a circle.

But this is later stage stuff. In the here and now, government spending, regardless of how it is funded, hurts consumers immediately.

The classic guns versus butter model of the production possibilities frontier is useful in understanding this. Think of gun spending as government spending and butter spending as private sector spending.

The more spending (regardless of how it is funded) on guns (government) the less is available for butter (private sector) production.

The eye should always be on TOTAL government spending because it means there is less for the private sector immediately one way or another.


Thursday, May 25, 2017

Trump Loses It:Tells EU Leaders "The Germans are bad, very bad"

 Weeks ago, I advised EPJ Daily Alert readers that if they were considering buying a German made car they should buy now. Trump is going to slap a huge tariff on German made cars.

Trump has no understanding of trade economics, not even such a fundamental concept as comparative advantage,



From Spiegel via Google translate:

At the meeting, EU Commissioner Jean-Claude Juncker took the side of the Germans and disagreed with Trumps Schelte. Free trade is a good thing for all, said the Commissioner. Juncker had tried a friendly tone, but was hard on the matter, says the participants....

According to a report from the "Süddeutsche Zeitung", the EU side was terrified about the lack of awareness of the Americans about trade policy. Apparently, it was unclear to the guests that the EU countries concluded trade agreements only jointly. Trumps economic consultant Gary Cohn is said to have said in the conversation between the US and Germany tariff tariffs other than between the USA and Belgium.

Google's Surprisingly Playful $5,000 Whiteboard

Is the Chinese Stock Market About to Crash by 30%?

In today's issue of the EPJ Daily Alert, I take a look at key indications that point to trouble for the Chinese stock market and what a Chinese crash would mean for US and global stock markets.

Subscribe to the ALERT today and you will receive today's analysis on the possibility of a China stock market crash of 30%.

There are four ways to subscribe to the ALERT, details here.

Member of Mises Cuba Beaten by Cuban Government Agents

By Tho Bishop

Mises Cuba has announced that Nelson Rodríguez Chartrand is missing. The organization believes he was taken by state security forces.
In February, Ubaldo Herrera Hernandez, another member of Mises Cuba, was arrested by an undercover state agent along with fellow human rights activist Manuel Velazquez Visea. Since then, the two have been charged with additional crimes and placed in the notorious Melena II maximum security prison. Other libertarian activists on the island have been threatened and temporarily detained by Cuban officials.
Chartrand, an attorney and fierce critic of the Castro regime, was last seen on Monday at 11 p.m. heading toward the Benjamin Franklin libertarian library. He never made it to the building, the same location where Hernandez and Visea were arrested in February. Calls placed to hospitals in the area have found no record of Chartrand being admitted. He has also not turned up on any official arrest records.
If Chartrand was taken by state security, it may be in response to recent actions taken by Mises Cuba and other libertarian organizations on the island. Also on Monday night, a new libertarian library was launched in the province of Camaguey. This followed the recent launch of the Cuban Libertarian Party founded earlier this month. Mr. Chartrand’s own article about the launch ominously noted that state security told a member of the organization “the project will last until the regime allows it.”
As he went on to write:
We will not be overcome by fear. As the Greek saying goes:
“Society grows great when old men plant trees whose shade they know they shall never sit in.” We do not fear reprisals about our bodies, because our ideas will transcend and I will get freedom. We do not fear any attacks against our bodies, because our ideas will transcend and achieve freedom.
Our hopes and prayers are with the family and friends of Mr. Chartrand, Hernandez, and Visea, as well as with all those willing to risk their safety promoting liberty in communist Cuba.
Tu ne cede malis, sed contra audentior ito.

Update from Mises Cuba:

Nelson Rodriguez Chartrand, who disappeared Monday night, appeared this morning. He was beaten and spooked, but alive and in one piece. Details in a few days. Sincere thanks to the supporters of our international wing who mobilized on his behalf.

The above originally appeared at

US Government Could Run Out of Money This Summer

Things could get very tricky for the Trump administration bu mid-summer.

Trump officials, testifying on Capitol Hill Wednesday on their 10-year budget plans, pointed to a more pressing fiscal problem: They could run out of room to pay the government’s bills within the next few months, reports The Wall Street Journal.

Government debt, at nearly $20 trillion, hit Congress’s self-imposed limit in mid-March. Since then, the Treasury Department has been employing cash-conservation measures to keep funding itself, steps it has taken routinely in recent years after repeated breaches of the ceiling. But those measures, which include redeeming some investments in federal pension programs, are temporary and can typically only keep funding the government for a few months.

Notes the Journal: Analysts expected the measures would allow Treasury to keep paying its bills until the fall, but Mnuchin suggested lawmakers should act before the end of July.

Earlier Wednesday, White House budget director Mick Mulvaney said the date by which Congress would need to raise the debt limit may come sooner than the administration had anticipated. “My understanding is that the receipts currently are coming in a little bit slower than expected,” he told a House panel.

Congress is scheduled to recess Washington around July 28 and won't return until after Labor Day.

According to the Journal, before Wednesday, the Bipartisan Policy Center projected Treasury could keep financing government operations until October or November, and pointed to Oct. 2 as a challenging date with a bundle of payments the government must make. But if funds are coming in slower than anticipated the July 28 deadline becomes very important and might prove a major obstacle given the various Congressional groups with different agendas. Stay tuned.


A Response to an Intellectually Abused College Student

By Walter E. Block

A young man wrote me stating that he had given a presentation of Henry Hazlitt’s book Economics in One Lesson for a college class assignment, and his teacher gave him a very poor mark. These were her words:

“Author discredited, has no formal education in economics. Not a best seller. Not current. 72% match. The study of macroeconomics is not haunted by fallacies nor does it focus on the short-term. Macroeconomics guides government policy decisions for ALL parties within a marketplace, evaluating the effects of supply, demand, output, pricing, and other variables amongst all constituents in an economy.”

This student asked me how he could get a better grade. Here was my four part response to him:

1. Ingratiate

If you want to get a better mark from this invincibly ignorant person, I suggest you get (back?) into the closet. Free enterprise views are obviously not acceptable to this ignoramus. For your next assignment: pick a lousy book she will like, e.g., something written by John Kenneth Galbraith, and praise it to the skies. Better yet, choose Thomas Piketty’s recent book, he is more “current,” although this teacher would never in a million years upbraid you for choosing a non-current book by Galbraith. And tell her, if you can bear this degree of sucking up, that you owe it all to her that you now see economics in a better socialist light than before. Maybe, better yet, present again Hazlitt’s Economics in One Lesson, one of the most magnificent books in economics ever written. Only this time, attack it, along the lines she herself mentions! This book will still not be “current” but she will LOVE your critical presentation of it.

2. Fallacy

On the other hand, if you want to get to the truth, if you want to try to educate her, you might tell her she is guilty of a basic fallacy in logic, the ad hominem. Just because Hazlitt has no formal credentials in economics does not render his views fallacious or superficial. There are other highly respected economists, in the modern era, who do not have a PhD in economics: David Friedman (physics PhD), Henry Manne (law degree), Gordon Tullock (law degree). Gary Becker wrote a lot about sociology, but his PhD was in economics. Several non economists actually won Nobel Prizes in economics, several with degrees in psychology. Nobel Prize Winner Elinor Ostrom’s PhD degree was in political science, not economics. Many economists in history had no formal training in this subject. This disproves their views? Then, on matters of substance, ask her to give you some cites to buttress her fallacious claims. As for not being current, nor on the New York Times best seller list, this applies, too, to the two greatest books on economics ever written: Ludwig von Mises’s Human Action and Murray Rothbard’s Man, Economy and State. Tell her that Ayn Rand’s novel, Atlas Shrugged, although not “current” was indeed a best seller for many years, and still is, even though first published in 1957. Does this professor of yours therefore support the message of that book?

Further, mainstream neo classical macroeconomics is indeed haunted by fallacies. Two of the best books that demonstrate this are these:

Hazlitt, Henry. 2007 [1959]. The Failure of the “New Economics.” Auburn, AL: Mises Institute
Hazlitt, Henry, ed. 1983. The Critics of Keynesian Economics New York: New York University Press
Neither are exactly “current.” However, the first of these is a page by page, no, paragraph by paragraph, no, line by line, and sometimes word by word refutation of one of her undoubtedly favorite books (even though, it, too, is not exactly “current”). Ask her, also, if any of her books have been published by those that published Hazlitt.

Tell her that her treatment of you was shameful. Inexcusable.

3. Justice

If you want to be nasty, tell her you do not think women should be even allowed to take economics courses, let alone teach them. That will get her to sit up and take notice. It will also get you kicked out of school for committing a micro aggression, and maybe even arrested for “hate speech” so I really don’t recommend it. But it would be so much FUN! And, she will so richly deserve the back of your hand in this manner. Hey, wait; accuse her of committing a micro aggression against you. It would be great to see her hoist by her own petard. Of course, this will not work (you are male, she is female, so, obviously, only you can be guilty, not her), but, it, too, will be enjoyable.

4. My background

I guess the reason I am being a bit vehement about the treatment accorded you is because I, too, was victimized by this sort of thing when I was a student. As a professor, I swore a solemn oath that I would never treat my students in this horrid way. I have co authored in refereed journals almost 100 student term papers of mine. I am most proud of the fact that some half dozen of these publications were direct attacks on me. They were well written. Their authors all earned A’s in my class. Of course, I could not co author them, but I helped polish them, edit them, add bibliography to them, and shepherded them through the arduous publication process.

I have got another suggestion for you: transfer to Loyola University New Orleans. I guarantee you will not be mistreated in any such manner by me or my three fellow Austro-libertarian colleagues. Yes, our entire department is oriented in this direction.

The above originally appeared at Lew

Wednesday, May 24, 2017

Here is the Step-by-Step on the Huge Error in the Trump Budget

Former Treasury Secretary Larry Summers has already penned an op-ed pointing out the double-counting in Trump's budget.

He called it the biggest budget "accounting error in at least 40 years."

I am told that in a just recorded interview, Summers continued to pound on the Trump error---and he should, it's huge.

The best way to think about the error is this way.

As Summers puts it:
The administration asserts that it will propose revenue-neutral tax cuts, with the revenue neutrality coming in part because the tax cuts stimulate growth! This is an elementary double count. You cannot use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue. At least not in a world of logic.

The Trump team prides itself on its business background. This error is akin to buying a company assuming that you can make investments that will raise profits, but then, in calculating the increased profits, counting the higher revenues while failing to account for the fact that the investments would actually cost some money to make. The revenue generated by the investments might exceed their cost (though the same is almost never true of tax cuts), but that does not change the fact that the investment has a cost that must be included in the accounting.
In other words, Summers is saying the initial tax cut will "cost" X and we don't know if it will result in an X increase in tax revenues because of growth, less than X or more than X but whatever it comes in at, from a government perspective it cost X, the original tax cut.

That said, I am not against tax cuts, but my expectation is that the tax cuts will be replaced with hidden tax increases and deficit spending--which means there will be no cut in government spending and the damage and misdirection in the economy will continue but in a more hidden manner. You will be robbed in a more sophisticated manner. The Trump budget despite the optimistic forecasts says as much when it plugs in 2018 government outlays at  $4.094 trillion, which is greater than projected 2017 outlays. If spending is going up, it is coming out of your hide one way or another despite the blaring "Tax Cut" headlines/

That's an even bigger scam than what Summers is pointing to.

The Summers' interview will be on "Wall Street Week" on Fox Business, Friday at 8:00 PM ET.


Trump's SoHo Hotel Cutting Rates and Laying Off Staff

The five-star Manhattan hotel is planning to lay off workers and reduce some of its services, WNYC's Ilya Marritz and Andrea Bernstein reported Wednesday.

WNYC reported that Trump SoHo is preparing to lay off 12 of its 80 housekeepers and get rid of nighttime turn-down service.

Hotel room rates have also dropped. Deluxe and Superior rooms at the hotel, which have views of Manhattan and the Hudson River, now cost less than $400 per night on weekends. According to WYNC, in more popular times rooms cost around $700.

If Trump could only cut the government budget in the same fashion.

But politics works differently than business.


(via Business Insider)

BIZARRE CLAIM Budget Director: We Did the Double Counting on Purpose

Office of Management and Budget Director Mick Mulvaney has responded to the criticism of former Treasury Secretary Larry Summers who exposed the double counting in Trump's just released budget.

Axios reports:
Straight face: Trump budget director Mick Mulvaney was asked about the double-count today during a press briefing, and didn't directly address the issue. First he blamed the Obama Administration for its own faulty economic projections ― namely because former Obama economic advisor Larry Summers raised the double-count in the Washington Post ― and then said that the budget numbers also did not assume any shrinkage the so-called "tax gap," or the number of people who should pay taxes but don't (something he expects personal tax simplification to help achieve).
More Mulvaney:
"We did [the double count] on purpose... I'm aware of the criticisms and would simply come back and say there's other places where we were probably overly conservative in our accounting. We stand by the numbers."

Some Data to Ponder Now That Calling America ‘A Land Of Opportunity’ Is Considered to Be A Microaggression

All You Need to Know About Trump's First Budget

While mainstream media continues to focus on cuts in certain sectors of President Donald Trump's first budget, there is little focus on the big picture.

When the big picture is considered, we see that Trump's budget will actually increase government spending from  from2017 to 2018, from $4.062 trillion to $4.094 trillion.

Further, even with Trump's wildly optimistic income projections, which no economist believes, his budget shows a deficit of $440 billion min 2018. It is likely to be much larger.

Trump is not cutting government at all, he is increasing spending and shifting the sectors where spending is focused, primarily moving spending from various welfare type programs to military spending.


Former Chairman of the Council of Economic Advisers Warns on Trump Budget: It Looks Worse Than Reagan's Disaster

Jason Furman, chairman of the White House Council of Economic Advisers under President Obama, correctly cnotes:
President Trump has outdone Ronald Reagan in at least one respect: unrealistically rosy forecasts for economic growth. In 1981, President Reagan’s first budget predicted growth well above the consensus of private forecasters, in a bid to justify large tax cuts and increased defense spending. When the promised growth did not materialize, the deficit and debt ballooned.
Now Mr. Trump is leading the economy down a primrose path that is even more unrealistic.
It should also be noted that Trump's thinking is very much in line with the thinking of the godfather of neoconservatism Irving Kristol, who was a major driver behind the Reagan budget that exploded the deficit. He justified the deficits, just like Trump is now with his talk of priming the pump.

David Stockman who was OMB director at the time wrote in his 1986 book, The Triumph of Politics: Why the Reagan Revolution Failed:
In 1980, before any of this fiscal disaster had happened, Irving Kristol was a guest speaker before the House Republican Caucus....
"Don't be foolish!" he told the Republican politicians. "Your constituents are the elderly, the farmers, and the veterans. Don't alienate them, don't cut their programs.
Kristol had always been a trend setter, and that day he outdid even himself, Standing before the nation's conservative party, he invented the most fabulous free lunch fiscal theory ever proposed... 
How you were supposed to have the giant tax cut he also endorsed that day and still exempt two thirds of the welfare state from spending cuts he didn't explain. 
[F]or five years Kristol has not altered his message: Don't cut spending it's bad politics. Don't raise taxes its bad politics. Don't worry $200 billion deficit nothing to fear because they'll go away on their own...

Kristol's free lunch economics is the worst kind of intellectual sophistry there is. The politicians inherently go for free lunches anyway, For one of the nation's leading conservative intellectuals to rationalize such destructive policies and urge the conservative political party to adhere to them is unpardonable.

Every several months now Kristol appears right on schedule on The Wall Street Journal Op-ED page, with another tiresome rendition of It's all going to be okay, Jack.

VIDEO Protester Set on Fire in Venezuela

Protests continue on the streets of Venezuela as food is in short supply and the economy collapses, thanks to a socialist government, hyperinflation and price controls.

The Miami Herald reports that  hungry Venezuelans are even killing flamingos for food.

According to reports from Venezuela, the protester that was set on fire is in the hospital with second-degree burns after other protesters put out out the flames.


Tuesday, May 23, 2017

BREAKING Moody's Downgrades Chinese Government Debt

China’s credit rating has been downgraded by Moody’s Investor Services on expectations the country’s financial strength will “erode somewhat” over coming years as debt rises, but there is no indication of further immediate downgrades from Moody's at the service after the downgrade lifted the country's outlook to stable from negative.

The cut has put Chinese stocks on track for one of their biggest one-day drops this year.


(ht Felix Bronstein)

Former Russian Economy Minister Charged with Taking Large Bribe

Former Russian minister of economic development Alexei Ulyukayev was officially charged with large-scale bribery charges, Russia's Investigative Committee said Tuesday.

"The former minister of economic development, Alexei Ulyukayev, has been ultimately charged with 'taking an especially large bribe by a person holding public office in the Russian Federation'," the committee's spokeswoman Svetlana Petrenko said.

The Investigative Committee said in November 2016 that Ulyukayev was caught in the act of taking a $2-million bribe for a positive appraisal that allowed Russian energy company Rosneft to buy the state's shares of the Bashneft oil company.

Ulyukayev has been placed under house arrest for the duration of the investigation.

Russian President Vladimir Putin has dismissed Ulyukayev from the post of economy minister.


Rick Manning Needs to Learn Some Economics

Don Boudreaux writes:

Champions of keeping markets free and government limited typically have a solid grasp of economics.  The same cannot remotely be said of the people who run the oddly named “Americans for Limited Government.”  Here’s yet another letter to the president (Rick Manning) of that organization:
You say today in your now-daily e-mail plea for Trump to punitively tax Americans who buy low-priced Mexican sugar that “This is the perfect opportunity for President Trump to prove that what it will take to protect American jobs is through tough trade enforcement.” [sic]
Before pronouncing publicly on trade you really should learn some economics.  Contrary to your insinuation, to protect American jobs in the U.S. sugar industry is not remotely “to protect American jobs.”  Restricting Americans’ purchases of imported sugar destroys jobs not only in America’s export industries and in those American industries whose costs of production are artificially hiked by restrictions on sugar imports; the restrictions that you demand destroy jobs also in those many other American industries whose sales fall because the prices that American consumers pay for sweetened foods are driven artificially higher.
Yet you’re totally blind to the jobs that tariffs destroy.
It’s disturbing that you and your colleagues, who claim to defend individual liberty and economic prosperity, are as economically ill-tutored and misguided as are the likes of Bernie Sanders, Chuck Schumer, and Elizabeth Warren.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

The above originally appeared at Cafe Hayek