Wednesday, February 25, 2015

Money and Gold

An article by John Tamny gives me an opportunity to opine on some topics I've been thinking a lot about. Mr. Tamny expresses an opinion common on the libertarian Right, also held by people like Steve Forbes and Rand Paul. These are people I respect because they get the biggest of the big issues right, namely that economic freedom is the most effective way of reducing poverty and improving living standards. So I'm distressed to have to disagree with them.

The problem is that they are looking for utopian simplicity. Thus they take a grain of truth and exaggerate it into absolute certitude. In extreme forms this leads to completely stupid policy suggestions such as going on the gold standard or abolishing the Fed.

For example, Mr. Tamny makes a claim that is simply not true. He argues that money is money is money, and that the euro is just as good (or bad) a currency as the mark or the franc or the drachma. Greece's problems were not caused by the euro, nor would they be solved by leaving the euro. Indeed, Greece leaving the euro is just as unreasonable as Mississippi leaving the dollar, even though it's vastly poorer than New York or California.

He writes:
In truth, money is solely a measure. I have bread, I want your wine, but you don’t want my bread. Money makes a transaction possible between a baker and vintner with differing wants simply because it’s historically been viewed as a stable “ticket” that allows producers of actual wealth to measure what they produce on the way to trade. Money facilitates exchange, and that’s why a common dollar has long made so much sense. That’s why the euro still makes sense.
He uses an analogy from physics. Whether one measures the distance from Chicago to Milwaukee as 90 miles or 150 kilometers, it's still the same distance. The same is true of money: drachmas, dollars, or euros--there is no real difference.

Of course Mr. Tamny is right on some level. Printing up bits of colored paper does not produce wealth. Devaluing a currency changes no comparative advantage between countries. But he's also wrong. While good money creates no wealth, bad money can certainly destroy it. A country that lacks liquidity or secure banks will be neither productive nor wealthy. And that's the difference between Greece and Mississippi. The latter has good money, while the former doesn't.

Let's count the advantages of Mississippi. Many payments are made independently of Mississippi's wealth. Social security recipients receive the same benefits in Ole Miss as they do in the Big Apple. Military pay is the same, as are payments for civil service and postal employees. Thus a significant fraction of Mississippi's income does not depend on current economic circumstances. By using the dollar they are essentially insured against temporary misfortune.

Greece has none of those benefits.

People in Mississippi can move to New York and vice versa. We both speak the same language, share much of the same culture, drive the same cars, and eat the same food. I could move to Mississippi and within a couple months establish residency, obtain a driver's license, register to vote, join a church, and find a job. In a word, in the dollar zone the labor market is very liquid.

Nominally, Greeks have many of the same rights in Germany, but in practice they don't. Very few Greeks speak German, and even fewer Germans speak Greek. Political institutions are completely different in the two countries. Apart from the exceptional few, Greeks working in Germany can't aspire to anything more than the most menial, low-paid job. And Germans have almost no reason ever to move to Greece. By comparison with the dollar zone, labor markets in the EU are massively inefficient.

Even worse, land title, property rights, investment opportunities, taxes, and almost everything about money do not mean the same thing in Greece as they do in Germany. It's likely not possible to accurately translate the word collateral from one language to the other. That means banking customs have to be different between the countries. A German bank working under German rules will not be successful in Greece, and vice versa. They can't do business the same way.

In order to have a functioning banking system there has to be a lender of last resort. Walter Bagehot describes that necessity precisely in his famous 1873 book entitled Lombard Street. Then the (privately owned) banking department of the Bank of England served that role. In New York and Mississippi it is the Federal Reserve Bank system that does the dirty. Without that guarantee of liquidity all banks in any country will inevitably collapse, credit will disappear, and the economy will shrink.

Mississippi has access to liquidity from the Fed. Deposit insurance applies there as much as it does in New York. Greece, on the other hand, has no guarantee of liquidity unless it follows banking rules set by Germany. Accordingly, Greek banks will eventually fail and everybody knows that. You can't have a growing economy without stable credit markets.

Greece will eventually have to repatriate its banking system. That is, it will have to establish an institution similar to the Fed or the ECB that operates under rules consistent with Greek labor and financial customs. In a word, it needs a drachma. The drachma will not cause economic growth--on this Mr. Tamny is correct--but it is an essential prerequisite before economic growth can occur.

(Mr. Tamny discusses smaller countries that peg their currencies to the dollar or the euro. That works as long as those governments possess sufficient foreign reserves to be a credible lender of last resort. Failing that, the peg will eventually fail. See, e.g., the Argentine peso - dollar peg in effect from 1991 to 2002.)

So it is not true to say that money makes no difference. It makes a huge difference.

Another common simple fix to all our economic woes is to re-institute the gold standard. Mr. Tamny only hints at this in this article, but I'd like to take the topic full on.

Unlike what Mr. Tamny claims, money is not a fixed measure of value in the way a mile is a fixed measure of distance. Money is instead a social convention. You can spend dollars because I'm willing to accept them. That's all there is to it. The value of money is determined by social convention, otherwise known as expectations. I expect a dollar to buy me a donut tomorrow morning. If tomorrow the price of a donut went up to $5, and then the following morning down to thirteen cents, then my faith in the dollar would waver. I'd look for another way to settle my debts.

Inflation is caused when people expect their dollars to buy less tomorrow than they buy today. So they will spend their dollars today. Inflation is not caused by the Fed, or by Congress, or by the price of gold.

Deflation is caused when people expect their dollars to buy more tomorrow than they buy today. So they will stash their dollars and spend them tomorrow. Deflation is not caused by the Fed, or by Congress, or by the price of gold.

Inflation and deflation are caused by changes in expectations. Now in extreme cases--e.g., helicopter drops of massive amounts of currency--the Fed can change expectations. And the Fed certainly tries to change expectations. Mr. Tamny undoubtedly recalls the famous words that Janet Yellen uttered on July 15th of last year. Did she say something about "patience" and "data-driven analysis?" Or was it the other way around? Every speech ever made by Ms. Yellen (or Mr. Bernanke before her) sounds exactly the same. Some days the market moves up. Other days the market moves down.

The Fed is irrelevant. Nothing they do matters at the margin. (Nothing, that is, except their role as the lender of last resort.) All these people who hyperventilate about how the Fed is doing it wrong (or right), or who care about what magic words the Chairman will utter next week or next month, are wasting their time and breath. The Fed has nearly zero control  over inflation, velocity, exchange rates, money supply, interest rates, or anything else.

So now the gold bugs want to have the Fed regulate the price of gold. The largest consumers of gold are jewelry buyers in India. How regulating the jewelry business in India is going to help the US economy is a big mystery to me. But it gets worse. Any regulatory agency is eventually captured by the industry it is trying to regulate. So the Fed (which has no other important function except to serve as the lender of last resort) will eventually kowtow to the needs of Canadian miners and Indian jewelers.

In Mr. Bagehot's day gold was used to reconcile debts between countries. So if an Englishman owed money to a Frenchman, the debt would be settled in the common currency--gold. That led to all sorts of opportunities for arbitrage and fraud, as the book describes.

Today it's much more efficient. We have a foreign exchange market that trades more than $5 trillion dollars every day. It's the biggest, most liquid, most efficient market on earth. But the gold bugs don't like it--they want to force all trades to go through gold first. Why?

Compare that amount with what the people who fret over the feckless Fed are worried about. At the height of quantitative easing, the Fed was pushing less than $3 billion per day into the economy. Our Fed fretters predicted imminent inflation and forecast a rise in the gold price to over $2000/oz. But it's less than 0.1% of the daily currency trade. It's a gnat on the back of an elephant. QE had absolutely zero impact on inflation in the US. It was a complete non-event.

Further Reading:

Saturday, February 14, 2015

Working on the Railroad

This post is inspired by Guy Miller's reminiscence reprinted (from Counterpunch) in Socialist Viewpoint, entitled Blood on the Tracks. The title is misleading. Despite Mr. Miller's efforts to be angry at capitalists like Warren Buffett, I sense more an overwhelming pride in his profession. This fellow loves the railroads and all they stand for.

I knew Mr. Miller--more an acquaintance than a friend--back in the days when the Chicago branch was at 180 N. Wacker. I vaguely recall a conversation I had with him after he first got a job with the Chicago & Northwestern. I was one of those College Boys who didn't know too much about real work, so he and I didn't have much in common. But I was genuinely curious what railroad guys did all day.

I confess that I underestimated him. I thought his getting a union job was just a political ruse and that eventually he'd get tired of it and go back to college like the rest of us. So I'm pleased to read that he retired 37 years later from the Union Pacific. That actually squares with my impression of him back then. Mr. Miller was a man you could trust.

You don't work for the railroad for 37 years unless you're trustworthy, reliable, and sober. The best thing the Socialist Workers Party (SWP) ever did for me was the drug discipline--its absolute prohibition on using any illegal drugs. No doubt that was true for Mr. Miller as well. Even today, a primary criterion for employment at the Union Pacific is that you be drug-free. How many children of the 60s could meet that standard?

Railroading is not like working in a factory. It's a skilled job that requires close attention. There is little room for error (as the accident at Lac-Megantic, Quebec, illustrates, where 42 people died). Mr. Miller describes it nicely.
You’re given a stack of track bulletins, each one with specific, complicated instructions. Each one of these bulletins can be a question of life and death. In the course of your run you are constantly interacting with dispatchers, train masters, yardmasters, track foremen, control operators, other trains and emergency personnel. Many of these radio conversations require exact wording, and a long ritualized formula: “Engineer on UP7215 East calling foreman Brown in charge of track bulletin 624 issued on September 24, between mile post 281.6 to mile post 285.7, over.” And so on back and forth the exchanges go over and over, with every word repeated exactly.
It's like being an airline pilot.

Or at least it was like being an airline pilot. For as in that profession much of the work is being computerized and automated. Voice radio communication is what we, today, would call low bandwidth. Much more efficient is the high speed, digital communication from computer to computer. Both the track bulletins and the operator's response can be computerized, and you can take humans out of the equation. Just as the military flies drones all over the world piloted from a bunker outside Las Vegas, so the Union Pacific could drive trains from a control room in Omaha.

Mr. Miller recounts how train crews have gradually been shrinking over the years. Firemen got off in the 1960s. Apprentice engineers disappeared with the shift from steam to diesel. Brakemen and helpers left the tracks with the caboose. Today trains are run by two-man crews: an engineer and a conductor.

Recently the union signed a tentative agreement with BNSF to move to one-man crews--just an engineer. The conductor would work from an office off the train. The company added all kinds of bennies to sweeten the pot, buying off the union negotiators. But, as Mr. Miller reports, it wasn't good enough. The union rank & file voted down the deal, so BNSF is stuck with the two-man crews for the moment.

But only for the moment. Automating trains is a compelling project. Most accidents are caused by human error, so taking humans out of the loop will surely improve safety. No longer will one need to worry about misunderstanding static-filled radio lingo, fatigue, or lack of complete information. A computer can track sensors on every wheel every second--no human could do that. Engineers will stay on board for a few more years as a sentimental relic, but soon they, too, will be gone.

Factory jobs are increasingly done by robots. Over-the-road truck drivers will be displaced within a decade. Airline pilots have ever less and less to do (though they're furthest from redundancy). That railroads should be exempt is impossible.

And now the rot spreads into the white collar workforce as well. Us College Boys can't sleep well anymore, either. Computers have eliminated my dad's old profession--travel agent. Human lawyers are increasingly unemployed because of computers. IBM is working hard to displace the doctor. And we professors are finding our jobs increasingly automated.

So Mr. Miller, retired, speaks fondly about the job he did in the past. And his pride is well-placed. He is an honorable man who did an honorable job. And judging from his article he must have done it very well. But the times they are a changing, and the job that Mr. Miller did doesn't need to be done anymore. That's sad, but that's the way it is.

Further Reading:

Tuesday, February 3, 2015

The SWP Defends Civilization

The following official statement of the Socialist Workers Party (SWP) campaign for DC city council appeared in the February 9th issue of The Militant.
The Socialist Workers Party opposes Jew-hatred and joins in fighting it whenever it raises its head. We support the right of return for all Jews to move to Israel if they choose. And we demand Washington open its doors to all who seek refuge here.

The conspiracy theorists among us will proclaim an evil plot by Jack Barnes to betray the principles of not just Trotskyism, but Marxism as well. They will say that the Party is moving to the Right.

I have no clue about how the Party reaches decisions these days, and maybe this is an edict from Mr. Barnes himself. But why? Why would the Socialist Workers Party--long a champion of the Palestinian cause--all of a sudden come out in support of the Jewish right of return?

Did they just lose their marbles? Is Mr. Barnes a secret Republican? Does Mr. Barnes have such hypnotic sway that he can make 180 degree turns with no objections from the rank and file? Is Glova Scott (the African-American woman charged with issuing the campaign statement) a mentally-ill, unthinking person trained to spout off whatever words Mr. Barnes puts into her mouth?

No, no, no, and no.

The statement is a break from the past, but as we shall see, perhaps not a very big one. It is entirely consistent with the history of the SWP.

The Party has never been antisemitic. It wasn't when I was a member. It has not been antisemitic since I started writing about them on this blog (or its predecessors). It isn't now. The Party has always tried to be pro-Palestinian and anti-Zionist, without being antisemitic.

It's a pretty narrow needle to thread. When I was a member we called for a democratic secular state in Palestine in which the rights of both Palestinians and Jews would be respected. That was a completely impractical demand, but I can attest to our sincerity. I believed it myself, and I have no reason to think my comrades thought differently. It was not a fig leaf for antisemitism.

So it is possible (at least with some mental gymnastics) to be anti-Zionist without hating Jews. What is impossible is to support Hamas. Hamas is intrinsically an antisemitic organization. Any group which supports Hamas is, to the extent they understand what they're talking about, antisemitic.

The SWP has not supported Hamas for many years, as this blog has documented, most recently here. Few other groups on the Left have such a record. Apart from the SWP, all of the grouplets and blogs I follow support Hamas--and I will accuse them of antisemitism.

The grouplets defend themselves in silly ways. Louis Proyect, for example, simply claims that antisemitism doesn't exist. Even funnier is Socialist Action's (SA) efforts to condemn tiny, non-examples of antisemitism while ignoring the elephant in the room.

In a recent article about Greece, SA expresses displeasure with Syriza's new coalition partner, a conservative group known as ANEL. "It has close ties with the Greek Orthodox Church, is pro-NATO, and homophobic; and its leader Kammenos has made anti-Semitic comments—accusing Greek Jews of paying less in taxes than Orthodox Greeks." Criticizing Jews, or public policy directed toward Jews, is not evidence of antisemitism. If Jews are receiving government bennies then it is fair politics to put that on the table, just as it is possible to criticize affirmative action in this country without being racist. It is hypocritical of SA to point out the mote in ANEL's eye without apologizing for their enthusiastic support for Hamas. ANEL criticizes a social benefit; Hamas advocates mass murder. SA can't tell the difference.

The SWP does understand that difference. So now let's get to the Party's novel, seemingly pro-Zionist position. While that is a change, it's not a very big one and is entirely consistent with their Trotskyist heritage.

Like all other Western political thought, Marxism grew out of the Enlightenment. It is based on a shared meaning of justice and freedom. In order for Marxism to have some slight chance of success, Enlightenment values have to prevail. Socialism--hard enough as it is--simply can't work in a pre-modern, tribal society, obsessed with a nihilistic, murderous world view. That's why Marx always held that the first socialist countries would be advanced, European ones, such as England or Germany. The Party's line has always been that the success of Stalinism was due to Russia's backwards economy and political culture.

If the odds in Russia were long, then surely they're piss-poor in any kind of Hamas-dominated country. You can't have wannabe mass murderers running the place and expect socialism to survive. In order for socialism to have a chance, civilization must be present at some level.

The only civilized country in the Middle East is Israel--by civilized, I mean a country that holds some variant of Enlightenment values. Therefore, if socialism is to have a chance, it has to go through Israel first. Accordingly, the path to socialism is not the abolition of Israel, but rather the building of a socialist revolution within Israel. So The Militant is now covering workers' movements in Israel, such as this strike by kosher chicken butchers (scroll down).

Of course as a matter of practical, revolutionary politics, this is no more realistic than empty demands for a democratic, secular Palestine. Socialism won't happen in Israel nor anyplace else. But at least it has some big principles right. The Party's new position can distinguish between mass murderers and revolutionaries. That's a big improvement over most of the American (or world) Left, who have fallen hook, line and sinker for Hamas' antisemitism.

The Socialist Workers Party--whatever the status of its internal discourse or the mental health of its members--is part of the civilized world. We can have a conversation with them. They don't support mass murder in the Middle East.

Further Reading: