The rise and fall of the Gold Standard

George Selgin, prominent monetary theorist and blogger at Freebanking.org, who recently gave an excellent talk at the ASI on "good deflation", wrote a history of the gold standard in the USA, explaining that there is no one narrative or theme throughout the history, with the fortunes of gold rising and falling with the times. While he pokes holes in some of the common garden arguments against a return to gold he also has his own reasons for distrusting a new regime founded on the yellow metal:

The claim that the real price of gold has become too volatile to allow that metal to be relied upon as a standard, for example, overlooks the extent to which gold’s price depends on the demand for private gold hoards, which has become both very great and very volatile precisely because of the uncertainty that fiat money regimes have inspired. The claim also overlooks the tendency for a metal’s price to become more stable as it becomes more widely adopted as a monetary standard.

Nor is it the case that there is not enough gold in the United States to support a new gold standard. According to Lawrence White, the Treasury’s gold stock, assuming that it is indeed what the Treasury itself claims, would at an official gold price of $1,600 per troy ounce be worth almost 20 percent of 2012 M1, making for “a more than healthy reserve ratio by historical standards.”

There are, however, some more compelling reasons for doubting that a return to gold would prove worthwhile. One is the prospect that any restoration of the convertibility of dollars into gold might be so disruptive that the short-run costs of the reform would outweigh any long-run gains it might bring. A second compelling reason has to do with the specific disadvantage of a unilateral return to gold. Here, once again, it must be recalled that the historical gold standard that is remembered as having performed so well was an international gold standard, and that the advantages in question were to a large extent advantages due to belonging to a very large monetary network.

Finally and perhaps most importantly, it is more doubtful than ever before that any government-sponsored and -administered gold standard would be sufficiently credible to either be spared from or to withstand redemption runs.

Read the whole thing.

Health inequality isn't all caused by income inequality

Chris Snowden has picked up on something that has long been a bugbear of mine. I shouted about it back when the Marmot Review on health inequality came out. It simple isn't true that all health inequality is as a result of income inequality: but that was the stance that the Review took.

Poor health will likely lead to low incomes, for example (reverse causation)

Absolutely: there are two effects going on. Getting some ghastly chronic disease in your 40s is obviously going to make you poorer in your 60s than if uyou'd been able to continue your meteoric rise up the career ladder to glory and a CEO's paycheque. I have no doubt that income inequality leads to some health inequality: I'd be surprised to find rich children suffering from vitamin deficiencies for example (assuming that Mother doesn't try all of the Mail's diet advice on her anklebiters) for example. But it's also true that health inequality leads to income inequality.

There's another effect going on as well. We're annually reminded (when the figures come out) about the geography of health inequality too. Men in Manchester or Glasgow die younger than those in Eastbourne for example. But again we're not being told a very important part of the story: people do move around you know. So it isn't true that someone born in Glasgow is destined for an early death: rather, it's those who don't climb the ladder up out of the slums who are. And the reason that lives are so long in Eastbourne or other retirement hotspots is that people only move to them when they are indeed retiring. And age expectations at 65 are very much higher than expected life span at birth. Simply because you've already survived, by definition, all of the things that were going to kill you before you got to 65.

Along with Snowden I tend to think that there are certain sets of statistics that are deliberately misrepresented in order to lead to a desired political conclusion. And those on health and age at death inequality are two sets of them.

The costs of regulation and why we're not creating enough jobs

We all know that regulation has benefits. We all also know that regulation has costs. The usual political mantra is that the costs are minimal while the benefits are huge. That may not in fact be true:

Regulation’s overall effect on output’s growth rate is negative and substantial. Federal regulations added over the past fifty years have reduced real output growth by about two percentage points on average over the period 1949-2005. That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.

It's worth thinking about that for a moment. Each individual American, the society as a whole, would be three times richer than they are if there had not been that explosion of regulation of the economy since WWII. That sort of increase in wealth buys quite a lot of people harmed by the lack of regulation.

But it's possible to use this to explain a disturbing feature of today's problems as well:

Why the change? The arguments rooted in technological developments sound like this: "Technologies like the Web, artificial intelligence, big data, and improved analytics—all made possible by the ever increasing availability of cheap computing power and storage capacity—are automating many routine tasks. Countless traditional white-collar jobs, such as many in the post office and in customer service, have disappeared. W. Brian Arthur, a visiting researcher at the Xerox Palo Alto Research Center’s intelligence systems lab and a former economics professor at Stanford University, calls it the “autonomous economy.” It’s far more subtle than the idea of robots and automation doing human jobs, he says: it involves “digital processes talking to other digital processes and creating new processes,” enabling us to do many things with fewer people and making yet other human jobs obsolete.

It has always been true that technological advance destroys jobs. But it has also always been true that technological advance creates other jobs as well. There's a worry that this isn't happening in the current economy. And that first paper gives us a clue as to why. There's simply too much regulation. If the economy were three times larger than it currently is then I do rather doubt that there would be much unemployment. And even if we take their numbers as being a tad fantastical, their basic point is obviously sound. Regulation restricts economic growth. It's economic growth that produces jobs. We're not creating enough jobs thus we've not got enough growth (and do recall, growth must be above labour productivity growth for there to be any expansion in employment) and over regulation is at least a part of that problem.

So let's hang the bureaucrats in order to get the unemployed back to work.

Check your fallacies

The latest game on the left is called "check your privilege," and if you make any point about others perhaps less advantaged than you, you are given to understand that you cannot really comment objectively, given your advantage.

It’s quite an old game.  Marxists used to call it "sociology of knowledge", but the rules were similar.  All of your opinions were alleged to be only the product of your class interest, and could therefore be discounted.  If you advocated market economics and classical liberalism, for example, this was simply an expression of your class interest as a member of the bourgeoisie.  It has the advantage that the intellectual content of your views can be ignored.  Opponents do not have to argue with what you say; since it represents only your class interest it can be ignored.  There is an exception.  One group is sufficiently detached from the class system that their views have objective import.  These are the Marxist intellectuals, of course.

The fallacies in "check your privilege" are straightforward and easy to identify, though Herbert Marcuse (remember him?) would no doubt have dismissed them as part of "bourgeois logic."  First is the argumentum ad hominem In which what is said is discounted, not because of any flaw or fault in its argument, but because of something pertaining to the arguer.  It is not the substance or sense of what is said that is being criticized, but the status of the person putting it forward.  The fallacy lies in the fact that the argument itself is not addressed, but irrelevant material is considered in its place.

The second fallacy is the genetic fallacy.  Despite the name this has nothing to do with Darwin or Mendel, but involves a dislike of where an argument comes from.  People are less inclined to accept views from those they dislike, whatever the merits of the actual views.  The mistake is to suppose that the source of an argument affects its validity.  A common meme is to assume that eventually someone will associate one side of an argument with Adolf Hitler, but it is still committed if you think that the views of rich white males can be discounted because of the three categories of those holding them. 

Other fallacies are touched on, but all belong to the category of informal fallacies of relevance (intrusion), and represent considering that qualities pertaining to the arguer somehow undermine and diminish the argument.  They don't.  In its latest form it is simply an anti-intellectual way of doing down what the other side is saying without facing the difficulty of considering their argument.

A Hayekian argument for equality of wealth

According to Friedrich Hayek, star of interwar economics, and recently star of two excellent rap battles with his contemporary John Maynard Keynes, the type of equality that matters is equality before the law. Equality before the law—and not equality of opportunity, outcome or anything else—is absolutely central to his political philosophy. But I think his economic work, particularly his crowning achievement, "The Use of Knowledge in Society" (cited a mere 9,496 times), points to the importance of a different kind of equality.

In "The Use of Knowledge in Society" and in earlier work in the socialist calculation debate Hayek shows that scientific knowledge isn't the totality of knowledge in society. In fact, a much bigger body of knowledge—information about peculiarities of time and place and preferences—is dispersed extremely widely across individuals. The only effective way of using this knowledge is a market system. Market participants act on the information embedded in different prices, and in doing so send yet more information back in other prices. But each participants learns only what she needs to know.

The market system Hayek envisions is a great practical means of organising society to achieve high social welfare. The flaw with this system is that participants with more money get to send stronger signals than others.

Markets measure how intensely we want things much more accurately than most democratic systems, because individuals have to bid against others for desirable goods or services. But this breaks down if individuals lack equal wealth. Ten pounds spent by a pauper is likely to represent a much more intense preference than that same £10 spent by a billionaire, a millionaire, or even the average middle class homeowner. However, producers will treat these £10s the same, and the economy will be skewed towards satisfying wealthier people's preferences.

Actually, it's not as simple as that. One feature of the market system is that people get rewarded with more money income (and potentially wealth) if they choose less leisure, or a riskier or less satisfying job. These sorts of inequalities, even if they produce wealth inequalities, would not subvert the system. These individuals have paid for their higher wealth with lower utility in work—and extra wealth merely evens out the overall extent to which the economic system is tilted to their advantage.

But endowments of talent or wealth through better upbringing, genetic advantage or inheritance do subvert the system, and undermine Hayek's argument for the efficiency and rationality of the market order by counting some people's preferences as more than one.

Now, by no means am I saying it's easy to disentangle these "good" sources of unequal wealth from the "bad" sources, or even that we ought to try to do so, and then even out endowments. But I do think that the effect inequality of wealth has on the market functions as a strong—and Hayekian—reason to desire a flatter distribution.

The starting point in the immigration debate

At the Telegraph, Conservative MP Gavin Barwell says what for many Conservatives is the unsayable: that immigration is great for the economy:

Last week, the Organisation for Economic Co-operation & Development published a report which showed that immigration makes a positive contribution to the public finances of many countries, including the UK. Yes, you read that right: migrants in the UK pay more in tax than they consume in public services (that’s not true of every migrant of course, but collectively they make a net contribution). Without them, we would have to make further cuts to public services or pay higher taxes or both. . . .

We have to find a way to earn a living in an increasingly competitive world. Allowing the best and the brightest from around the world to come and study and work here can help us do that. So yes let’s make sure we have control of our borders, yes let’s tackle abuse, yes let’s talk about how many people and who we should allow to move here – but don’t let’s delude ourselves that immigration is always bad news.

And that's the point. The one point I disagree with Barwell on is when he says that "nobody is claiming immigration significantly increases" GDP per capita. Well, I am. Letting immigrants locate in rich countries deepens the potential division of labour: hiring a Tanzanian accountant to look after my firm's finances instead of doing them myself frees me up to focus on whatever I'm best at.

That minor quibble aside, I'm delighted that Mr Barwell has decided to be brave about immigration policy. While there are legitimate debates to be had about access to public services and social cohesion, the starting-point in any discussion about restricting immigration should be that restrictions make us poorer.

Austrian Business Cycles and Neutral Money

The proponents of Austrian Business Cycle Theory (ABCT) are often very critical of the diagnosis offered by monetarism: that sharp and substantial contractions in the money supply are the cause of major recessions. Rather, according to ABCT, a recession is a painful medicine curing the disease monetary policy already caused, as Professor Jesús Huerta de Soto, Spain’s leading Austrian economist, explains:

"[Money] is always injected into the economy in a sequential manner and at various specific points…..only certain people will be the first to receive the new monetary units and have the chance to purchase new goods and services at prices not yet affected by monetary growth….which can only lead to changes in society’s entire structure of relative prices." (Money, Bank Credit, and Economic Cycles, p. 533)

The argument here is that money isn’t neutral, that is, changes in it’s quantity affects peoples’ behaviour as price changes aren’t uniform. If money were perfectly neutral; doubling the quantity of money would cause all prices and wages to instantly double and people would go about their lives exactly as they would otherwise. When money isn’t neutral the failure of prices to adjust ubiquitously sends the wrong signals to entrepreneurs, creating mal-investment (capital allocated according to misleading price signals) and a following period of correction/recession. That’s ABCT in a nutshell.

So far, so good. However, Austrians like Soto seem to contradict themselves in their criticism of the aforementioned monetarist diagnosis:

"Attributing crises to a monetary contraction is like attributing measles to the fever and rash which accompany it." (Money, Bank Credit, and Economic Cycles, p. 527)

According to this criticism, monetarists have confused cause and effect; monetary contractions don’t cause recessions, recessions cause monetary contractions. It’s as if Soto is claiming that any sharp contraction in the money supply, even if we accept the premise that it was caused by the recession, had no further effect on the economy - that any sharp monetary contraction is neutral.

If ABCT aims to explain recessions whilst denying monetarism it must state, then, that money isn’t neutral and also neutral. Even more problematic is the apparent claim that money is far from neutral on the way up when growing at a fairly steady rate, but neutral on the way down when declining rapidly. Anyone worried about money supply growth prior to the crisis should also be worried about the fact it tanked in 2008. Soto joins Mises, Rothbard, Schlichter, and perhaps Hayek on the list of popular Austrians who are especially critical of monetarism.

On the other hand, some economists who identify as Austrians, such as Professor Steve Horwitz of St Lawrence University, have accepted some broad form of monetarism. Horwitz goes so far as to suggest that ABCT doesn’t explain every recession, and is only a theory of unsustainable boom. This clearly departs from the classical ABCT which did seek to explain all recessions and is very specific in it’s explanation thereof. And though I mostly agree with Horwitz’s interpretation, it can’t be labelled ABCT, because a theory of unsustainable boom is only a theory for half the cycle. So it leaves the question: can we create a version of ABCT which is consistent in its treatment of money throughout the cycle?

Putting bankers in jail cannot prevent mistakes

The Parliamentary Commission on Banking Standards has published its report on how to make bankers act less irresponsibly. Among other things, it recommends making bankers criminally liable for reckless professional conduct. “Too many bankers”, it says, “especially at the most senior levels, have operated in an environment with insufficient personal responsibility”.

The assumption here is that bankers acted recklessly because they were insulated from the negative consequences of their actions. I don’t know if that’s true. During the 2008 crisis, plenty of executives at failing financial institutions made the same mistakes that their firms made. AIG’s former CEO kept much of his net worth in AIG stock, most of which he lost. The CEO of Lehman Bros lost $1bn. Citigroup’s Sanford Weill lost $500m. Between them, Bear Stearns’ executives lost billions.

There are many other examples like these. If bankers had known that they were acting recklessly in business, they would not have done the same thing with their personal holdings. That so many executives' personal losses were so great suggests that they did not realise what they were doing. Their bad business moves were errors, not calculatedly reckless decisions.

Indeed, Jeffrey Friedman has shown that the real error was on the part of regulators. Financial regulations such as the Basel capital accords that were designed to make banks act more prudentially in fact did the opposite, incentivizing banks to load up on government-backed mortgage debt and, particularly in Europe, government bonds. And, unlike mistakes made by individual firms, these mistakes were compounded across the entire global financial system.

Making the punishment for failure harsher will only improve behaviour if the people affected already know that they’re doing wrong. If they’re simply mistaken – as I would imagine you’d have to be to lose billions of dollars of your own net worth – regulations like this will not have the effect we want them to.

But what about the ones who really did know what they’re doing? We used to have a mechanism for punishing reckless business practices — it was called bankruptcy. In banking, at least, this seems to have been abandoned in favour of unlimited bailouts. If we had let bad banks go bankrupt, as Iceland did, we might not be in such a bad situation today.

Throwing a few scapegoats in jail to satisfy an anti-banker mob ignores that the crisis was largely about regulators' and bankers' error. It is no replacement for letting bad firms go bust and punishing them the old-fashioned way.

What kinds of inequality should we be worried about?

Most political theorists are egalitarians of some sort. While I personally find Derek Parfit's argument in "Equality and Priority"—that egalitarianism sometimes says making others worse off without making anyone better off is good in one way, or even required—extremely convincing, and hence call myself a "prioritarian", I have trouble dealing with the arguments in Michael Huemer's "Against Equality and Priority". Nevertheless, I am very sympathetic to the basic claims of luck egalitarianism, i.e. that those advantages in life that are down to pure luck are undeserved. Combined with the fact that others are in desperate need, there is a strong case for redistribution before other complicating factors are brought in. But even egalitarians should (and often do) favour wealth or income inequality in the three following cases.

1. When inequalities come about as a result of different levels of effort. Some people are born with vast natural talents (e.g. Wilt Chamberlain) while others are not, or their talents are not in such high demand by the market. Some are born to dedicated, loving parents while others are raised in far less supportive environments. No one could claim they bear most of the responsibility for their genes or upbringing. But even if we could even out the differences in income or wealth due to different upbringings and talents, we'd want to leave in the differences from different levels of work. This is because leisure can be seen as a form of income, as it adds to utility. To give those who take more leisure the same money income as those who take less would be subverting equality, rather than enforcing it.

2. When inequalities derive from differences in job satisfaction or riskiness. People who do more dangerous jobs are paid more. This is exactly what economists would expect; extra money compensates the worker for the extra risk of injury or death. But it's also what we should want. A more satisfying, less risky job (like teaching or creating art) should pay lower by justice, and this is one of the really good and egalitarian elements of the market economy. This ties in with the previous point as one extremely undesirable element of certain high-paying jobs is the extreme hours they demand. If typically people's willingness to do extra hours begins to decline at an accelerating rate, we would expect high hours occupations—in a just, egalitarian system—to be paid disproportionately well.

3. When inequalities are necessary, due to the infirmities of current human nature, to produce a greater total pot to help the needy. A prominent element of John Rawls' A Theory of Justice, the book that kick-started the recent era of social justice theorising, was the difference principle, the idea that inequality in society should only be as much as is necessary to make the worst-off person as well off as possible. But driving inequality any narrower would harm the worst-off and would thus be unacceptable. Of course, as G.A. Cohen shows in "Incentives, Inequality and Community" and his book Rescuing Justice and Equality, this isn't a demand of justice—it's just a practical consideration when we have the welfare of the badly-off in mind. But in the real world pragmatic considerations are often appropriate, and it may well be that certain inequalities in a given society can be practically justified on these grounds.

The really interesting question is this: how much of the inequality in real-world capitalist societies is down to these three legitimate sources, and how much is down to undeserved luck?  The key difference between 'bleeding heart' libertarians and traditional left-wingers may come down to this crucial (empirical?) question.

Chart of the week: Target 2 imbalances

Summary: Target 2 imbalances narrow but remain wide

What the chart shows: The chart shows that Target 2 imbalances, while narrower than a year ago, remain wide – and have stopped narrowing

Why is the chart important: Target 2 balances are the net claims and liabilities of banks in the euro area on each other by country. If the monetary union runs smoothly and is believed to be permanent, imbalances will be minimal – as indeed they were until the financial crisis erupted in 2008. If, however, there are concerns about the stability of the banking system in one country or about that country’s continued membership of the single currency, imbalances will widen, with ‘safe havens’ building up claims. Target 2 imbalances peaked when German banks had claims of more than 750 billion euros in August 2012. Although lower, German claims were still close to 600 billion euros in May this year. Whatever politicians and central bankers may claim, markets, companies and households do not believe that the euro area multiple crises are over,The chart shows that Target 2 imbalances, while narrower than a year ago, remain wide – and have stopped narrowing