Excess Reserves and Price Inflation

In my last post, I discussed the different factors of price inflation.  These factors are the money supply, the demand for money (also known as velocity), and fractional reserve lending.  Even this third thing really fits into one of the first two categories.

(It should be noted that production also has an effect on prices in the long run.  If there are increases in production, it can actually lead to a decrease in prices.  For the sake of this discussion, we are assuming that productivity and technology remain constant.)

One of the reasons that some people have been wrong in their prediction of imminent high price inflation is because of the massive excess reserves held by commercial banks.  When the Fed tripled the monetary base starting in late 2008, most of this newly created money went into excess reserves.  This has helped keep a lid on price inflation.
With that said, for today’s post, I would like to discuss the possibility of high price inflation with excess reserves remaining high.
I have heard some people say that the Fed created new money for the banks (or something along these lines).  While part of the Fed’s purpose of massive money creation in 2008 and 2009 was to save the banks, I want it to be clear on how the Fed creates money out of thin air.
I get the feeling that there is this perception among some people that the Fed just prints new money or creates digits out of thin air and puts it with the banks.  But this isn’t really how it works most of the time.  The Fed is actually buying things in order to create new money.  Usually, the Fed buys government debt.  The Fed is basically creating new money (in the form of digits) to buy government bonds.  It is the government’s spending that injects the money into the economy.  It should be said though that the Fed doesn’t exactly buy the government’s debt directly.  It goes through a broker, which is usually a large bank or financial institution.
The one exception to this is the Fed’s purchasing of mortgage-backed securities.  The Fed did this unprecedented action starting in late 2008 and bought these at their original value.  Therefore, they paid a much higher price than would have been paid in the open free market.  Therefore, the Fed’s purchases of these junk assets really was a direct bailout of the banks and financial institutions.
It needs to be understood though that the Fed has still created new money out of thin air, even if this new money is being held by banks as excess reserves.  It represents money in someone’s account.
If an individual were to buy government bonds with money he had saved, then this does not affect the supply of money.  Money is being transferred from the person’s account who buys the bonds to the Treasury Department (whether directly or indirectly).  So when the government spends this money, there is no additional money in circulation.
But if the Federal Reserve buys government bonds, it is creating new money to do this.  The Fed does not actually produce and save anything.  It is just creating digits out of thin air and transferring them from its account to the account of the Treasury Department.  It represents an increase in the money supply.
So even though this is not exacerbated by fractional reserve lending because of an increase in excess reserves, it is still an increase in the money supply.  It is not the bank’s money that is just sitting there.  It represents people’s checking accounts or those of businesses.  It is from new money that has already been spent by the government.  (I suppose state and local governments could have a rainy day fund that might be a small part of this.)
Any way you slice it, this new money is there to be spent, even if it is not being lent.
The point here is that we could still see severe price inflation even if excess reserves remain high.  If the Fed keeps buying government debt like crazy, there will be consequences, and it will eventually be in the form of higher prices and a lower standard of living.
There will also come a time where if the money supply increases enough, then velocity can, and probably will, change rather quickly.  Once people perceive that prices are going up faster and they are losing purchasing power by having their money sitting in a checking account, then they will start to spend it.  Some will spend it foolishly on certain consumer goods.  Others will spend it to protect their wealth.  It may be in stocks, real estate, gold, fine art, or any number of other commodities.
So while excess reserves are certainly a major factor in the discussion of price inflation, it is important to know that we can still see high price inflation even with excess reserves remaining high.  If the Fed keeps monetizing government debt, there will be a day of reckoning.

Economics and Price Inflation

While some Austrian school economists predicted the housing bubble, many have not been as accurate with their prediction of price inflation, or at least not yet.  This is the danger of making predictions.  It gives a little ammunition to people like Paul Krugman.  The ironic thing is that Austrian (free market) economics should make us careful in making bold predictions.  Austrian economics teaches that economics is really the study of human action and human action cannot be predicted with certainty.

So what has happened with price inflation?  While many claim that it is understated in the government statistics and they may have a valid claim, it is obvious that price inflation has not been severe.  We are not anywhere near the 1970’s, or at least not yet.

Milton Friedman said that inflation is always and everywhere a monetary phenomenon.  This is essentially correct with a long-term view.  However, in the short term, it is more than just monetary policy that dictates consumer price inflation.

One thing that is important to note is that inflation is not uniform.  Monetary inflation can cause pockets of high price inflation and it doesn’t just have to be in consumer goods.  It can also be in stocks, bonds, gold, or any number of other things.

There are basically three things that will affect overall consumer prices.  One is the money supply.  Two is velocity, or the demand for money.  Three is fractional reserve lending.

Actually, number three really fits in with the first two.  Velocity can drive the degree of fractional reserve lending and the degree of fractional reserve lending affects the money supply, at least in a sense.  While the actual supply of money doesn’t increase with fractional reserve lending, it gives multiple people the claim on the same money.  Therefore, the actual digital bank accounts of people and companies are higher than they would be without fractional reserve banking.

I say that velocity affects fractional reserve lending and we can see that with the current situation.  The commercial banks have built up massive excess reserves over the last 4 years and it is not because their reserve requirements have gone up.  Due to the hard economic times, there is more demand for money. In other words, velocity has slowed down considerably.  People are scared and are trying to build up cash reserves and pay down debt.  The same goes with businesses.  The banks are also scared of making bad loans and would rather sit on the money than risk lending it out.  So the overall recession and the scary economic times have slowed velocity and built up excess reserves.

This is what was missed by people who predicted imminent and severe price inflation.  The Federal Reserve has tripled the adjusted monetary base since the fall of 2008, yet we have not seen a corresponding increase in overall prices.  I believe this is due to the high excess reserves, which prevented another de facto increase in the money supply from fractional reserve lending and I believe it is also due to the low velocity.

When there is a higher demand for money, this is the equivalent of lowering the money supply.  Therefore, an increase in the money supply can be offset by a higher demand for money.  The Fed can control the money supply.  It has a certain amount of control over excess reserves with its policies.  The Fed has far less control over the demand for money.  However, I won’t say that the Fed can’t affect the demand for money at all, because it could if it went crazy enough with money creation.  The Fed could also cause velocity to drop even more if it stopped buying government debt.

Unemployment is high and people are still spooked from 2008 and rightly so.  Therefore, they are paying down debt and trying to build up cash (or the equivalent of cash in their bank accounts).  This means that they are spending less.  This means they are not bidding up prices as much.  It means that the higher money supply is being offset by a higher demand for money.

This is the reason that we have not seen high price inflation.  It is possible that it could continue and it is possible that it could reverse quickly.

In my next post, I will discuss the possibilities of price inflation with excess reserves remaining high.

Willard vs. Barry – Does It Matter?

This presidential election gives us Willard Mitt Romney against Barack Obama (supposedly known as Barry Soetoro as a child).  Since the Ron Paul news has quieted down, I haven’t spent as much time on presidential politics.  For today’s post, I am going to discuss the possible implications of either one of these two winning the presidency.

First, unless there is some major event, it will be one of these two men.  I know that Romney isn’t officially the Republican nominee yet.  I know that people like Gary Johnson are running on a third-party ticket.  However, barring something huge, there is no way that someone like Johnson is going to come anywhere close to winning.

Most Republicans are absolutely terrified of Obama.  While I somewhat concur, I don’t find him any more terrifying than most others running for that office.  Obama probably really does have Marxist roots.  He truly believes in big government.  He believes that government is the primary reason for prosperity in our society.

With that said, Obama is a politician first.  He rarely let’s his philosophy interfere with his political calculations.  He did overstep his bounds when he said that if you have a business that you didn’t build it; that someone else did.  He let his true philosophy slip out of his mouth.  It wasn’t a good political calculation.  But when it comes to policy, Obama probably isn’t even the one making the decisions.  It is his advisors around him.  It is the establishment telling him what to do.

Many Republicans fear that if Obama is given a second term that he will be out of control.  They believe that if he doesn’t have to worry about another election, that he will do whatever he wants.  The problem with that theory is that it simply hasn’t been true in the past.  Bill Clinton, at least domestically speaking, was actually probably better in his second term.  That was when the budget actually came close to being balanced.  (It was really borrowing from the Social Security fund, so there wasn’t truly a surplus, but it was still much better than we have seen since.)

If Reagan was really a great conservative who believed in small government, then why didn’t he act that way in his second term?  Government spending and deficits were still obscene in Reagan’s second term.

I doubt that Obama will be out of control in a second term.  He will probably do less.  Also, if there is a Republican majority in Congress, then we will actually have some opposition to big government, even if just in rhetoric.  While I don’t expect a Republican Congress to control spending any better than it is doing now, we wouldn’t see any more disasters like Obamacare.

While Obama has been bad on foreign policy, he hasn’t been as bad as he could be.  While he has continued Bush’s wars and started some smaller ones, at least he hasn’t directly attacked Iran.  I’m not saying it can’t still happen under Obama, but I would hate to see what the world might look like if John McCain had been elected 4 years ago.

That brings us to Romney.  I have no idea what Romney’s foreign policy will look like.  He sounds belligerent now.  He just visited Israel to show his support there.  He seems like a war hawk.  Again, it is impossible to say what he will be like in office.  Because of that, I would give a slight edge to Obama on foreign policy in terms of liberty.

Now you would think that Romney would at least be much better on economics than Obama.  But I don’t think this is the case at all.  He may have been successful in business, but he doesn’t understand free market economics at all (unless he is a complete liar).

I heard Romney on Sean Hannity’s radio show today.  Hannity asked him about cutting spending.  The only thing Romney said was that he favors entitlement reform in the form of means testing.  In other words, he wants to deny Social Security checks (or reduce them) to rich people.  Regardless of whether this is right or wrong, it is a drop in the bucket.  I hate to break it to you conservatives out there, but even if he got through that reform, we would still have trillion dollar budget deficits.  Romney has not offered one other specific cut that is anything of significance.  He has not called for the elimination of any departments.  How could he when he hasn’t even called for any cuts in them?

The other thing I heard Romney say is that China is not playing fair.  I remember him saying this multiple times during debates.  This means that Romney is a Keynesian.  He is not a monetarist in the mold of Milton Friedman.  He is a Keynesian in the mold of Keynes.  He does not understand free market economics at all (again, unless he is lying).  Either way, Romney is sounding like a mercantilist. Does he think that China’s currency is harming Americans?  Does he think that having the Chinese sell inexpensive products to Americans is harmful?  Does he not understand that this is beneficial to the American consumer?

If Romney is saying these things now, I can only imagine what his policies will look like.  If a candidate is already talking like a lover of big government before he gets into office, then it isn’t going to get much better when he is elected.

So for economics, I can’t even say that Romney will be better than Obama.  If Romney is president, then we lose all opposition to big government in Congress, just as we saw during the Bush years.

In conclusion, if you love liberty, there is no way you should vote for either one of these two.  If I were absolutely forced to pick between the lesser of two evils, I think Obama may actually be the lesser of the two evils.  At least we know what we are getting.

FOMC Statement of August 1, 2012

The Federal Open Market Committee (FOMC) released its statement today regarding the economy.  It stated that information received since June “suggests that economic activity decelerated somewhat over the first half of this year.”  With that said, there was no announcement of a new quantitative easing (QE) or any other kind of major stimulus.  The stock market was only down slightly on the news.

The statement said, “The Committee anticipates that inflation over the medium term will run at or below the rate it judges most consistent with its dual mandate.”  I find it hard to believe that they believe this.  If inflation is expected to be at or below its dual mandate and the economy is still showing weakness, then why wouldn’t the Fed inflate more?

As I have discussed recently, the Fed is holding back right now on purpose.  The monetary base has been flat for over a year now.  They are walking on a tightrope right now and they would prefer a controlled liquidation over any of the other options.  The Fed is saving any additional QEs for something more major than a minor stock market downturn or 8% unemployment (at least based on the government’s statistics).  In addition, as I recently discussed, the Fed does not care about re-electing Obama.

The Fed will buy more government debt to keep rates low and to keep the big banks afloat.  Right now, rates are at or near all-time lows and the banks are still technically solvent.  Therefore, the Fed will wait for something more major before creating more new money out of thin air.

The FOMC statement said, “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate more consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.  In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

This means that the federal funds rate will be near zero for at least 6 years.  That is unprecedented.  However, it is misleading for the FOMC to say that it is being highly accommodative by keeping rates so low.  While the original Fed monetary inflation contributed to the situation, it is not really the Fed that is holding rates low now.  The federal funds rate is near zero because the banks have built up massive excess reserves.

The FOMC decision was almost unanimous, with one person dissenting because he “preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.”

Yes, these are the people controlling our economic future right now.  It is not consoling.  The good news is that I don’t think the Fed/ FOMC will go to hyperinflation.  I see that with their actions now.  If I see anything new that changes my mind, I will be sure to write something about it.  But for now, the Fed is sitting tight and we should too.

The Permanent Portfolio and Government Bonds

I am a big proponent of the permanent portfolio as described by Harry Browne in his book Fail-Safe Investing.  I believe you should have a majority of your investments in a setup like the permanent portfolio.  For more conservative investors, it should be closer to 100% of your investments (not counting any investment real estate).

The one thing that scares many people, particularly libertarians, is the bond portion.  You are supposed to invest 25% in long-term government bonds.  Many libertarians (and others) are convinced that rates will be going up.  This would drive down the value of the bonds.  Ironically, I have heard this for many years now, even about 7 or 8 years ago when Harry Browne was alive.  Yet, bonds have done quite well over this period of time.

I understand the fear that people have of government bonds.  You shouldn’t be afraid of an outright default, as we see coming in Europe.  I’m not saying it isn’t possible, but I think we still have quite a bit of time before the U.S. government considers an outright default.  The main threat is rising interest rates.  If we hit a period of higher price inflation and the Fed is forced to stop buying government debt, then higher interest rates will probably occur.

The problem here is that the future is unpredictable.  Japan has really high debt and yet interest rates have stayed very low there for decades.  The bond portion of the permanent portfolio is designed to keep the portfolio performing well in the face of a deflation/ depression.  It actually kept the portfolio from falling too dramatically in the fall of 2008 when stocks and gold tumbled down.

So I have come up with a compromise for those interested in the permanent portfolio, yet too scared to put such a big portion in bonds.

Earlier this year, I wrote a special report titled, “Should You Pay Down Your Mortgage?“.  It is available on kindle for just 99 cents and can be read in less than an hour.  I have mixed opinions on this subject and I laid out the pros and cons of paying down or paying off your home mortgage.

One thing I mention is that paying down your mortgage is somewhat of a hedge against deflation.  While actually selling your house might be a better hedge, that isn’t a realistic option for many people.  Some people don’t want to rent.  Plus, it wouldn’t make much sense to sell your house in anticipation of deflation when you can’t be certain of the future.  If the deflation doesn’t come, then it was a bad decision to sell.

So here is my proposal, assuming you have a mortgage and assuming you have money to invest.

Instead of investing 25% in bonds, take half of that portion and make a payment towards the principal balance on your home mortgage.  In other words, let’s say that you have $20,000 to invest.  You will take $5,000 and buy gold or gold investments.  You will take $5,000 and buy a broad stock market index.  You will take $5,000 and put it in some kind of a money market fund.  For the remaining $5,000, you will take $2,500 of it and put it in long-term government bonds and you will take the other $2,500 and pay down the principal on your mortgage.

Assuming you have an interest rate of 4% on your home loan, you will get the equivalent of a 4% return on this money.  You will essentially be locking in that return with compounding interest, so it will benefit you if interest rates go lower. In other words, it is somewhat of a hedge against deflation.  If you have trouble thinking of it this way, just think that having a big mortgage is a hedge against inflation.  You can pay off your mortgage in depreciating money as time goes on.

With that said, I wouldn’t recommend taking the full 25% and paying down your mortgage.  You have more leverage with the bonds.  In addition, paying down your mortgage makes that money illiquid.  If there is a deflationary depression, you need to be able to rebalance your portfolio.  That’s why you should still leave a portion in bonds in your permanent portfolio, even if it is a smaller amount.

This is not an exact science, but neither is the permanent portfolio.  It is just a suggestion for those of you who are really scared of buying bonds with rates so low.  If you have a mortgage, then you can hedge against deflation by paying that down.

Federal Reserve Policy and Elections

There seems to be an assumption that is held by a large number of people that the Federal Reserve tampers with its monetary policy prior to an election in order to juice the economy.  I have heard people say that they don’t expect a crash until after the election because the Fed won’t let it happen.

While I can’t say for certain that this hasn’t happened in the past, I don’t believe it is necessarily true.  Making this assumption could really guide someone the wrong way.

The Federal Reserve is a political organization.  Its website ends in “.gov”.  While the Fed is certainly there to benefit the big banks, it is also there to benefit big government and deficit spending.  It has a monopoly on the production of dollars, which we must use in many cases because of the legal tender laws.  In addition to all of this, the Fed chairman is nominated by the President and confirmed by the Senate.

While the Fed is a political organization, I’m not sure why people would think that it has to favor the incumbent.  The Fed is in bed with the establishment, not any one particular party or incumbent.  Why would Bernanke and the Fed care about saving Obama for re-election when the alternative is Romney? Does is really make any difference?  If anything, the establishment might actually prefer Romney at this point.  Obama seems to be overplaying his hand lately with comments about businessmen not really building their own business.  Obama is so philosophically wedded to big government, he is giving it a bad reputation.  The establishment might prefer someone like Romney who talks about capitalism and entrepreneurship, because they know his policies will still favor the establishment.

Now, if Ron Paul were the Republican nominee, then certainly Bernanke and company would be doing everything in their power to get Obama re-elected.  If they had to triple the money supply again just to get things looking good before the election, they would do it.  But since that is not the scenario, the Fed and the banking establishment don’t really care about Obama.

The current Fed policy proves that they don’t care about Obama winning again.  The adjusted monetary base has been flat for over a year now, since QE2 ended in June 2011.  If the Fed really wanted to cause an artificial boom prior to the election, they aren’t doing a very good job of it now.

I think another interesting point in all of this is to look at the past.  Paul Volcker came in as Fed chairman in 1979 and threw the hammer down.  He stopped the printing presses and let interest rates rise well into the double digits.  This sealed the deal for Jimmy Carter.  Volcker’s policy brought about a deep recession.  He was not concerned about Carter winning his re-election.  He was concerned about saving the dollar.  This was in spite of the fact that Carter nominated Volcker to his position.  It just shows that not even the president is really running the show.

I would not time your investments based on the election.  If you think there will be a stock market crash, I wouldn’t wait until after the November election to sell.  There is a lot of concern building that higher taxes will really hurt the economy in 2013.  These are expiring tax cuts and new ones from Obamacare.  When you couple this with the flat monetary base, there is certainly reason to be concerned about trouble in the short term.  Regardless, I wouldn’t count on the Fed going to QE3 just because Obama needs a boost.  They might do it for other reasons, but it won’t be for Obama.

What To Do For A Market Crash

I received this comment/ question recently:

“Any chance you could write a post about what a person could do if they see a collapse coming.  For instance, what would I do with my 401k if the market started tanking or if I felt like it was about to crash?  What has been the smart thing to do in past recessions?  Those are questions I’m sure a lot of people right now are worried about.”
That last statement is probably quite accurate, so I am addressing this question as a post, because I do think it is on a lot of people’s minds.
First, it is important to remember that we cannot predict the future.  The market is made up of millions of buyers and sellers and it is impossible to predict the actions of these people.  It is also quite difficult to predict the actions that will be taken by the government and the Federal Reserve.
While a lot of people may be worrying about such a scenario, it doesn’t mean it will happen.  The day after this comment was written, the Dow surged past 13,000.  We must not forget that the Fed tripled the monetary base after the fall of 2008.  Some of this may be leaking out now and it could easily cause a boom in asset prices such as stocks.  Again, it is impossible to predict with certainty.
For that reason, I continue to advocate the permanent portfolio as described by Harry Browne in his book Fail-Safe Investing.  It is designed to protect your investments in any economic environment.  While it probably has its poorest performance during recessions, we have to remember that recessions are usually short-lived.  They will turn into depressions or rebounds.  In addition, price inflation tends to be low during recessions, so you are not losing much to inflation.  In an inflationary recession like we saw in the 1970’s, then gold will probably do well.
But what if you are a good speculator and you really strongly believe that the market is about to tank?  What can you do with the speculative portion of your investment portfolio?
If you are really brave and you think you can time the market crash, then you should be playing the futures/ options market.  If you buy put options on the stock market, then you are betting on it to go down.  But it would have to hit a certain strike price before the option expires, otherwise it will be worthless.  (You could technically make money if the market goes down and it doesn’t reach your strike price, if you sell it early enough before expiration.)
Again, the problem with options is timing.  If your prediction of a market crash is a little early, then it will probably cost you the full premium that you paid for the option.  However, if you are correct, then the leverage can be very powerful and you can make a lot of money in a short period of time.
If you believe a market crash is coming but aren’t certain about the timing, then you have a number of choices.  You obviously want to be out of stocks completely.  Bonds will most likely do well if interest rates go down.  I understand that this is a scary investment to some people right now because rates are already so low.
Another choice is to buy ETFs that short the market.  You can even leverage your money and buy double or triple inverse funds.  SDS is twice the inverse of the S&P 500.  DXD is twice the inverse of the Dow.  You can even buy something like SPXU that is three times the inverse of the S&P 500.  These funds will all go up in a down market.
One warning I have about these funds is that they have management/ expense fees and they also don’t always correlate perfectly with the index in question.  For that reason, I would try to avoid holding these for a long period of time.
Another option in anticipation of a market crash is to buy the VIX.  There are different ETFs you can buy, including leveraged ones.  This is a measure of the volatility index.  It tends to spike up during a market crash.  You can make big gains in a short period of time with this if you guess correctly.  Just be aware that the reverse is true and that you can lose quickly too.
One of the specific things mentioned in this comment was about what to do in a 401k plan.  This is hard to say because these plans vary so much.  Aside from the above suggestions, there are mutual funds you can invest in that benefit from a down market.  However, if your options are really limited in your 401k plan, then the best thing to do might just be to move it to a money market fund, if you anticipate a coming recession.
The most important thing in investing is capital preservation.  You don’t want any really big losses that will make it hard to recover.  That is why I recommend the permanent portfolio.  But if you are really anticipating a stock market crash, then the most important thing is to sell your stocks before everyone else starts selling.  Any profit you can make in such an environment is really just icing on the cake.

Who Invented the Internet?

The Wall Street Journal ran an article earlier this week about who invented the internet.  The author says it is an urban legend that the government launched it.  The article describes a brief history of some of the individuals and companies (like Xerox) that helped bring about what we have today.

I have always thought it was a ridiculous claim by statists to point out the internet as an example of something in which the government created or helped innovate.  The internet itself would be nothing if not for all of the contributing individuals and companies in the free marketplace.  How could anyone seriously ever compare the government to Google, Apple, Amazon, Ebay, or Yahoo when it comes to innovation?

The other thing that has always annoyed me about this claim that the government invented the internet is that it completely ignores what Bastiat taught.  A good economist should not just look at the things we can see, but consider all of the unseen things that never came about.  Government at all levels in the U.S. takes almost half of our income.  With that much money, it is actually surprising that the government can’t innovate more and invent more, especially with help from private companies.

If I had a trillion dollars per year at my disposal, I would think that I could hire enough people that I could at least cure a few diseases each year and invent some great new gadgets.  You could do a lot with even just 1% of that.  With 10 billion dollars per year, you could probably come up with some great things.

If the government hadn’t been taking all of this wealth out of society and misallocating it for the last several decades, it is hard to imagine what luxuries we would enjoy now.  Twenty, or even ten, years ago, nobody could have imagined an iPad because there was no such thing at that time.

The other interesting thing to note about this article is a fact that is missed on most people.  It was hard for the author of the article to pinpoint who exactly invented the internet.  It is hard to get it down to one company and even harder to get it down to one name.  That is because most things are not really invented by one person.

Most of the great things we have in our lives today were not invented by one person or even one company.  People are constantly building off of the works of others.  Chip speed and storage are getting better exponentially.  Yet, how many people could explain why?  How many techies do you know who could actually give you a coherent explanation as to why this is occurring?  A few might be able to tell you something, but they will probably just be blowing smoke.

There is nobody who knows how to make a car from scratch.  There is nobody who knows how to make a computer from scratch.  As Leonard Read told us in I Pencil, nobody even knows how to make a pencil.

This is the way civilization works.  We are constantly building off of the ideas and works of others.  This is how society can progress at such a rapid rate.  Most people specialize in one small thing.  They cannot tell you how all of the other parts work in the process.  They don’t need to.  It somehow all comes together.

In truth, nobody invented the internet.  It was millions of people who contributed.  Some people were more important than others, but it still would have happened if any one person had not existed.  It is rare that you have someone like Steve Jobs who makes such big contributions.  But even if Jobs had never existed, we would still have many great gadgets today.  It is hard to say if we would have iPads, but I’m guessing we would have other things similar.

Just imagine if the government ever got out of the way and all of the bright minds in this world were allowed to flourish.  Technology could grow even faster than it is today.  We can only imagine what might exist in another ten years.

Mitt Romney and the 10th Amendment

There are two human beings in the history of America to have signed legislation mandating that individuals buy health insurance.  It just so happens that those two individuals are the two major candidates in the presidential election this year.

Mitt Romney and many of his conservative defenders like to point out that Romneycare was just done in Massachusetts.  They point out that it is a state issue and that while Romney passed such a plan for the state while governor, he would not support such a thing for the entire country.  In other words, there are many Republicans who are actually claiming that Romney is a states’ rights kind of guy.

Of course Romney only signed legislation affecting Massachusetts.  He was a governor.  There was no way he could pass something for the whole country.  And of course Romney is against Obamacare.  The hatred of Obamacare is the one thing that most unites Republicans and Mitt Romney is running on the Republican ticket.  Do you think he would have gotten the nomination if he said he supported Obamacare?

So the one major difference between Obamacare and Romneycare is that Romneycare only applies to one state and not the whole country.  But does this make Romney in favor of states’ rights?  Is he a big supporter of the 10th Amendment.

The 10th Amendment reads, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

If Romney really supported the 10th Amendment, then he would not support 90% or more of what the federal government actually does.  In fact, he would be calling for the elimination of entire departments like Education, Housing, and Agriculture.  Unfortunately, Romney is not calling for the elimination of any departments or really any specific cuts at all.  He didn’t even do this while campaigning in the Republican primary, so you know he is certainly not going to cut anything if he is actually elected.

Romney can’t even get it right with another medical related issue.  He implies he is against Obamacare because he is in favor of states’ rights, but he doesn’t even respect the right of states to determine their own laws regarding medical marijuana.  He says he would fight against medical marijuana tooth and nail.  Watch the video below (thanks to Lew Rockwell):

Romney has no interest in smaller government.  He talks about it a little bit to pander to his base.  Anyone who is going to vote for Romney thinking they might get smaller government is simply naive.

The only way anything will be cut under a Romney presidency is if the Federal Reserve makes the decision to stop buying any more government debt and let interest rates rise.  That may force the government to cut back, or at least slow down.  Government spending will not be cut because of any philosophical principles that Mitt Romney holds.

The Case Against School Vouchers, Part II

Yesterday, I made a case against school vouchers using a moral argument.  Today, I will continue to make a case against school vouchers, but this time will use pragmatic arguments.  There could be a lot of unintended consequences (as with so many government programs) and these possibilities need to be explored.

Let’s say that in a particular school district or in a particular county, the average spending per student is $12,000.  Conservatives (and unfortunately, some libertarians) see the failing schools and unaccountable teachers and propose to institute school vouchers.  This means that every parent of a school-aged child would receive a voucher worth $12,000, to be used for the school of their choice.  Let’s explore some of the problems that could arise.

First, let’s say that you already send your child to a private (slang for non-government) school.  As a parent, you realize this is a rip-off because you already pay property taxes and other taxes that fund government education, which you choose not to use but are still forced to pay for.  Now that every parent/ child has a voucher, you will save money.  However, you weren’t part of that $12,000 per student before.  So if every child is given a voucher, the education costs will go up quite significantly, depending on the percentage of kids who go to private school.  There will now be more children to spend $12,000 per year on because the number will now include those not attending government schools.

It would be completely unjust to not offer a voucher to those already in private schools.  These parents would be really mad if that happened.  But either way, there would come a point where every child would receive a voucher.  In other words, government spending just went up and taxes will have to go up too.

Second, there are several reasons why parents might choose to send their children to a private school, even though they are double-paying (once through taxes and once to the private school).  They probably think the education is superior.  However, if vouchers are instituted, then that means any child could attend their school.  Now, I’m not against poor kids going to a good private school if the parent/ child really cares about getting a good education.  However, it is not hard to imagine that your school would all of a sudden be interrupted by troublemakers.  The parents who didn’t care before, probably still don’t care.  The same goes for the child.  Perhaps the school could kick out big troublemakers, but we can’t even be sure of that (see reason three next).

Third, if virtually all schools are receiving their revenue from vouchers, then politicians will start to exercise control over these schools.  It is not hard to imagine a politician saying that since these schools are receiving government funding, then they should have to meet certain criteria.  Perhaps they can only teach a certain curriculum.  Perhaps they can no longer teach anything about religion.  Perhaps they cannot kick kids out of their school for misbehavior (see reason above).  Perhaps they will have to give certain tests to make sure the children are learning the “right things”.  When the government has control, there are endless possibilities.  The really bad thing is that virtually all schools will be under government control in a voucher system, whereas at least now private schools do not have as many government rules and regulations to follow as government schools in most places.

Fourth, if every parent now has $12,000 per year to spend on each child for education, why wouldn’t education prices go way up?  It would be hard to imagine a school charging anything less than this amount.  Isn’t this the reverse of what libertarians want?  It isn’t complicated that when government subsidizes something, prices usually go up.  We can see this with medical costs and higher education.

These are just a few of the major reasons that libertarians should be against school vouchers.  Not only are they not ideal for libertarians, they are not even a step in the right direction.  They may actually be a step in the wrong direction, leading to government control over all schools and completely out-of-control government spending on education.

In conclusion, libertarians (and even conservatives) who advocate school vouchers should be careful what they wish for.  It could be a dream come true for the advocates of big government.

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