In Capitalism, Nice Guys Finish First

We need to discover anew what makes free-enterprise capitalism what it has been: the most powerful creative system of social cooperation and human progress ever conceived. We next need to rethink why and how we engage in business to better reflect where we are in the human journey and the state of the world we live in today.” —John Mackey

Thanks to the sponsorship of the Adam Smith Society, I recently had the pleasure of enjoying a private dinner with Whole Foods CEO John Mackey. Molded on the lines of the Federalist Society for legal professionals, the Adam Smith Society is an ideas-centered organization that seeks to connect business students, executives, and entrepreneurs who share a commitment to free markets, individual liberty, limited government, and classical liberal philosophy. The Austin Chapter was especially fortunate to host hometown hero John Mackey given his open advocacy of libertarianism and capitalism and the recent Whole Foods-Amazon merger.

Of course, Mackey was asked for his opinion regarding that particular “elephant in the room” during dinner but gave guarded answers, as expected. But the evening’s most rewarding aspect was the direct exchange of ideas on entrepreneurship, business ethics, and political philosophy, specifically the new movement he inspired: Conscious Capitalism.

Mackey and his coauthor, Harvard business school professor Raj Sisodia, elaborate on the concepts behind Conscious Capitalism in their book of the same name. At the fundamental level, Mackey takes pains to remind us that free-market capitalism is inherently good, and it is “the greatest system for innovation and social cooperation that has ever existed.” Billions of people have been lifted out of poverty, average life expectancy has increased, major diseases have been contained or outright eliminated, and civil liberties and freedom across the board have increased in the span of only 200 years when the Hobbesian state of nature was the norm for almost all people for most of human history. These indisputable trends are well-documented by eminent scholars such as Deirdre McCloskey and Steven Pinker, and by multidisciplinary projects such as and Our World in Data.

Despite all these major gains, capitalism remains under attack by intellectuals and political activists. In addition to the growth of “crony capitalism,” Mackey believes a major philosophical and rhetorical reason is responsible for capitalism’s bad PR:

In recent years, the myth that business is and must be about maximization of profits has taken root in academia as well as among business leaders. This has robbed most businesses of the ability to engage and connect with people at their deepest levels.

This stance can be traced to a famous article by the late Nobel-winning economist Milton Friedman, “The Social Responsibility of Business is to Increase its Profits.” Despite considering Friedman as one of his personal intellectual heroes, Mackey believes Friedman’s view is too narrow and challenged him on this topic in a debate back in 2005. This exchange is archived by Reason Magazine and is well-worth reading as it exhibits the highest standards of professionalism and respect between two accomplished gentlemen with diametrically opposed views (especially relevant for today given the significant drop in civility between political opponents).

Fast forward to 2017. Some of the most admired (and top-earning) companies today include Amazon, Costco, Google, Patagonia, Southwest Airlines, Starbucks, and of course, Whole Foods. Each of these companies is cited by Mackey as those that have embraced its “rising consciousness.” He is convinced that a “conscious business energizes and empowers people and engages their best contribution in service of its noble higher purpose. By doing so, a business has a profoundly net positive net impact on the world.”

The Four Tenets of Conscious Capitalism

To “liberate the heroic spirit of business and our collective entrepreneurial creativity so they can be free to solve the many daunting challenges we face,” Mackey outlines his vision for Conscious Capitalism which includes the following foundational tenets: higher purpose, stakeholder integration, conscious leadership, and conscious culture and management.

There is nothing wrong, per se, with wanting to make a lot of money, but it’s not particularly inspiring. Instead, a conscious business should have:

…. a higher purpose which addresses questions such as: Why do we exist? Why do we need to exist? What is the contribution that we want to make? Why is the world a better place because we are here? Would we be missed if we disappeared?

Mackey suggests that businesses look to transcendental Platonic ideals for inspiration: The Good (service to others—improving health, education, communication, and quality of life), The True (discovery and furthering human knowledge), The Beautiful (excellence and creation of beauty), and The Heroic (courage to do what is right and improve the world). A clearly defined higher purpose will serve as the foundation stone of the business and can inspire and galvanize all stakeholders.

For a conscious business, stakeholders go beyond that of only shareholders interested in short-term profits. Under a conscious business model, major stakeholders will include “customers, team members, suppliers, investors, the community, and the environment.” Each part is linked together and the success of one constituency is directly dependent upon the others. Conscious Capitalism, at its essence, “recognizes that business is the ultimate positive-sum game, in which it is possible to create a Win for all the stakeholders of the business.”

For example, a conscious firm’s higher purpose and values will attract the right team members. These inspired team members will have higher levels of creativity and be more likely to deliver superior customer service which would translate into improved market share, higher revenues, profits, and shareholder value. (For skeptics concerned with measurable objectives and the bottom line, Raj Sisodia has marshaled an impressive array of evidence showing that conscious businesses are growing faster and are bringing in superior financial returns compared to their traditional competitors.)

To achieve these goals, establishing conscious leadership is an imperative for the company. Conscious leaders are “emotionally and spiritually mature…. and primarily motivated by service to the purpose of the business and its stakeholders, and not the pursuit of power or personal enrichment. They develop and inspire, mentor and motivate, and lead by example.” These leaders must possess “exceptional moral courage” and “above all, view themselves as trustees of the business, seeking to nurture and safeguard it for future generations, not to exploit it for the short-term gains of themselves or current stakeholders.”

With conscious leadership, people within the organization derive meaning from their work, and grow and evolve as both individuals and leaders on their own. A successful leader will recognize and nurture a healthy company culture that keeps the company committed to its higher purpose and maintain the harmony of interests between different stakeholders. As an energizing and unifying force, a conscious culture will bring a conscious business to life.

Summing up his new vision for business and philosophy, Mackey reminds us that:

Business is fundamentally about people working together cooperatively to create value for other people. It is the greatest creator of value in the world. This is what makes business ethical and makes it beautiful. It is fundamentally good. It becomes even better when it is fully conscious of its inherent purposes and extraordinary potential for value creation….

Our dream for the Conscious Capitalism movement is simple: One day, virtually every business will operate with a sense of higher purpose, integrate the interests of all stakeholders, develop and elevate conscious leaders, and build a culture of trust, accountability, and caring.

Millennial Entrepreneurship and the Road Ahead

All of these everyday delights we take for granted are the fruits of the labor of free minds, free peoples, and free markets. During dinner, Mackey mentioned that he wrote his book with Millennial entrepreneurs in mind. This revelation meant a lot to me knowing that he, for all of his successes, is placing his hopes on my generation. Various polls have shown conflicting Millennial attitudes towards capitalism and socialism. But to me, the evidence is all around: we ride Uber and Lyft, we subscribe to Netflix, we expect free two-day deliveries with Amazon Prime, we take pride in being foodies, and we spend copious amounts of time on Facebook, Twitter, and YouTube. All of these everyday delights we take for granted are the fruits of the labor of free minds, free peoples, and free markets. As Brittany Hunter of FEE aptly summarizes, “Millennials Are The Most Capitalist Generation, They Just Don’t Know It.” Despite being cash-strapped, encouraging data show a large number of Millennials who still possess an entrepreneurial streak.

I encourage my fellow Millennials and entrepreneurs to read Mackey’s book, think about his message, and show this world what we can do!

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Europe Can Only Afford Its Welfare State by Heavily Taxing the Non-Wealthy

I argued last year that leftists should be nice to rich people because upper-income taxpayers finance the vast majority of the American welfare state according to government data. Needless to say, my comment about being “nice” was somewhat sarcastic. But I was making a serious point about the United States having a very “progressive” fiscal system. The top-20 percent basically pay for government and those in the bottom half are net recipients of that involuntary largesse.

I also pointed out a huge difference between the United States and Europe. Governments on the other side of the Atlantic impose much higher burdens on lower-income and middle-class taxpayers.

Here’s some of what I wrote:

…the big difference between the United States and Europe is not taxes on the rich. We both impose similar tax burden on high-income taxpayers, though Europeans are more likely to collect revenue from the rich with higher income tax rates and the U.S. gets a greater share of revenue from upper-income taxpayers with double taxation on interest, dividends, and capital gains (we also have a very punitive corporate tax system, though it doesn’t collect that much revenue). The real difference between America and Europe is that America has a far lower tax burden on lower- and middle-income taxpayers. Tax rates in Europe, particularly the top rate, tend to take effect at much lower levels of income. European governments all levy onerous value-added taxes that raise costs for all consumers. Payroll tax burdens in many European nations are significantly higher than in the United States.

So does this mean European politicians don’t like ordinary people?

I could make a snarky comment about the attitudes of the political elite, but I’ll resist that temptation and instead point out that taxes in Europe are much higher for the simple reason that government is much bigger and that means some segment of the population has to surrender more of its income.

But here’s the $64,000 question that we want to investigate today: Why are European governments pillaging lower-income and middle-class taxpayers instead of going after the “evil rich” and “greedy corporations”?

Part of the answer is that there aren’t enough rich people to finance big government. But the most important factor is the Laffer Curve. Politicians can impose higher tax rates on upper-income taxpayers and companies, but that doesn’t necessarily translate into higher revenue. Simply stated, well-to-do taxpayers have considerable ability to earn less income and/or report less income when tax burdens increase, and they do the opposite when tax burdens decrease.

That’s true in the United States, and it’s true in European countries such as Sweden, France, Russia, Denmark, and the United Kingdom.

So even if politicians want to fleece upper-income taxpayers, that’s not a successful method of generating a lot of revenue.

Which is why a shift from a medium-sized welfare state (such as what exists in the United States) to a large-sized welfare state (common in Europe) means huge tax increases on ordinary taxpayers.

I’ve made this point before, but now I have some additional evidence thanks to a new report from the Organization for Economic Cooperation and Development. The Paris-based bureaucracy is probably my least-favorite international organization because of its advocacy for statism, but it collects and publishes lots of useful statistics about fiscal policy in the industrialized world.

And here are three charts from the new study that tell a very persuasive story (and a depressing story for ordinary taxpayers).

First, we can see how the average tax burden has increased substantially over the past 50 years.

And who is paying all that additional money to politicians?

As you can see from this second chart, income tax revenues have become a less-important source of revenue over time while social insurance taxes (mostly paid by lower-income and middle-class taxpayers) have become a more-important source of revenue.

The third chart shows the evolution of the value-added tax burden. This levy takes a big bite out of the paychecks of ordinary people and the rate keeps climbing over time (and if we looked just at European governments that are part of the OECD, the numbers are even more depressing).

Now let’s put this data in context.

The United States now has a medium-sized welfare state financed mostly by upper-income taxpayers.

But because of dramatic demographic changes, we are doomed to have a large-sized welfare state. At least that’s what will happen if we don’t reform entitlement programs.

And if we leave policy on auto-pilot and there’s a substantial increase in the burden of government spending, it’s simply a matter of time before politicians figure out new ways of taking more money from lower-income and middle-class taxpayers.

Yes, they may also impose higher rates on “rich” taxpayers, but that will be mostly for symbolic purposes since those levies won’t generate substantial revenue.

Last but not least, don’t forget that European fiscal burdens will mean anemic European economic performance.

Reprinted from Intentional Liberty

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Blockchain is Making Society More Productive

Productivity growth is fueled by technological innovation. Today, it is at the lowest point today since the early 1900s. Blockchain is the technology most likely to push forward the productivity of our world in coming decades.

The late 19th century brought us electricity, the internal combustion engine, chemicals, and telecommunications. These inventions laid the groundwork for ‘the golden age of productivity’ in the USA — post-war period from 1948–1973. The end of the 1960’s also saw the seeds of the IT revolution, with inventions like the database and personal computer taking root. The Internet supplemented these in 1989.

However, productivity gains have not yet been fully realized. In fact, this US business cycle has seen the lowest labor productivity grown since the 1948 post-war period began. This low rate signifies a struggle for our economy to increase the output produced for every hour we are working. It means our companies, government, and people must get by with less than if our society was growing more productively.

Blockchain technologies have the potential to make an outsized impact on productivity growth for developed and developing societies. There are numerous fundamental characteristics of blockchain technology which make this possible, enumerated further below. The story begins with trust.

Meet Priya. She is an up and coming fashion designer in the United States. In her business, she is working with manufacturers in India and selling her products to a worldwide audience. She needs to pay these manufacturers and receive payment from her customers.

Today, upon reaching India, she incurs a transaction fee for exchanging her US dollars into Indian rupees before meeting with her manufacturer. She pays the manufacturer, and the clothes begin shipping to her customers. 

As the business gets off the ground, Priya isn’t always in India. When needed, she simply makes an order with her manufacturer and conducts a wire transfer to their bank. Her bank, however, has the following fees for moving money: 

For her next $1,000 order, she has to pay $35 (or a 3.5% fee), on the total order. She deals with it and writes it off as a cost of doing business. Instead of putting that $35 back into her business, it is fed into the world of financial institutions.

Priya’s business, in the meantime, is taking off. She’s using Shopify to launch her online store, and purchases are coming in for the Indo-Western clothing line she has been marketing. She’s really enjoying the Shopify, and has found it to be the best of many options for launching an online business. Even still — Shopify users aren’t immune to fees on money coming into the business.

She uses the normal Shopify plan for now, and has gotten 100 orders so far, totaling $5,000 in sales. Assuming each sale was $50, she pays $1.60 to the credit card companies right off the bat. On 100 orders, that’s $160. This money again, enters the world of financial institutions instead of making it back into Priya’s business.

The technology world has yet to reach its full potential.

What can Priya do, though? She doesn’t know these people who are buying her products personally, so accepting any other form of payment seems pretty sketchy. It seems reasonable to pay the credit card companies, because they are doing something invaluable. They are creating trust. In general, these institutions have allowed her to do something she couldn’t otherwise.

If there was a better way to do it though, she could create more cool products — which really is her main goal.

Stunted Productivity, Bitcoin, and the Blockchain 

The technology world has yet to reach its full potential. Data piles onto company servers, unable to communicate with data being collected down the street. Sending an e-mail across the globe is nearly costless; yet sending a dollar is, as we’ve seen, complicated. Our systems are closed to outside audit.

The biggest pain-point is the timely, cost-efficient movement of money. Even in today’s developed society, moving money from point A to point B takes time — three business days would make you lucky. Invoicing customers, paying employees, and sending payments to suppliers requires you to send money through a bank — after which it touches an unknown number of hands before making it to a final destination.

Our money flows slowly, bottlenecking our businesses and people. In the developing world, conditions are even worse. Our companies are unable to effectively communicate data, internally or externally. Our political system suffers from misinformation and distrust — not helped by US paper ballot voting system.

Enter Bitcoin in 2009— see video below.

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Bitcoin builds on decades of research in cryptography, computer science, economics, and distributed systems. It completely transformed the way we think about moving money. High transaction fees from intermediaries could be a thing of the past, sooner than later, similarly to how e-mail reduced the cost of sending information across the world 30 years ago.

Blockchain is what allows digital currencies like Bitcoin and Ethereum to exist.

Eight years after the original Bitcoin white paper, it has become clear that Bitcoin is just the start. The blockchain underpinning Bitcoin, first introduced in the white-paper, is the all-encompassing innovation.

A blockchain is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”Simply put — the blockchain ensures any transaction which occurs is inputted in a shared database, where it is validated and thereafter completely resistant to change from adversaries of any kind.

“Blockchain…is the biggest innovation in computer science — the idea of a distributed database where trust is established through mass collaboration and clever code rather than through a powerful institution that does the authentication and the settlement.” — Don Tapscott, The Blockchain Revolution

Blockchain is what allows digital currencies like Bitcoin and Ethereum to exist — each public, distributed networks, separate from existing businesses. Private blockchains within a business are also possible — and a number ofcompanies are experimenting today. The difference between the two is highlighted by IBM, below.

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The blockchain fundamentally allows unknown individuals to trust each other without the need for middlemen. Thereby, blockchain helps decrease the number of inputs needed to derive the same output, and increases productivity.

This public ledger will unlock a variety of cases which will change the way business and society operates. Productivity gains are already bearing fruits in the blockchain economy — literally.

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A Step Back in Time: Productivity & Technology

In modern-day England, if you took a time machine from 1200 to 1700, you would see little change in the technologies people used and the things people did. From Our World In Data:

Incomes remained almost unchanged over a period of several centuries when compared to the increase in incomes over the last 2 centuries. Life too changed remarkably little. What people used as shelter, food, clothing, energy supply, their light source stayed very similar for a very long time. Almost all that ordinary people used and consumed in the 17th century would have been very familiar to people living a thousand or even a couple of thousand years earlier. 

Productivity growth was stagnant. If you just went 150 years further, there were exponential gains in productivity. Why?

Technological advances in the following areas led the charge:

First Industrial Revolution

Results: Society broke out of the Malthusian trap, life expectancy rose 10 years (in the US), food costs lowered, population and per capita income simultaneously increased for the first time in history.

Second Industrial Revolution

Results: The period of largest economic growth in world history. Living standards skyrocketed, prices of goods fell dramatically. Large swaths of people were left unemployed, as machines and factories took over jobs.

A primary indicator of the health of a society is how well it uses inputs to create outputs.

At the end of this whirlwind of innovation, most of the world would be unrecognizable to even our most recent ancestors. The productivity gains simply came down to better technologies. These productivity gains were furthermore, more than cool gadgets. The Industrial Revolution was correlated with the improvement of life expectancy, quality of life, and human well-being all around.

A primary indicator of the health of a society is how well it uses inputs to create outputs. These outputs should a) serves the broader community and b) trickle down prosperity to governments, businesses and most importantly — the people. 

Zooming in on the IT Revolution

Over the past few decades, the largest portion of productivity gains has come from the information technology sector. Blockchain technology has the potential to continue to drive forth productivity of companies, governments, and society — building on innovations of the past decades.

IT Revolution began about 50 years ago — standing directly on the shoulders of electrification and telecommunication innovations. From this point onward, productivity gains in first-world societies have largely been driven by improvements in IT.

The initial huge wins for the community were the database and the personal computer, two innovations that simultaneously have shaped the way most humans operate in the world today.

However, the real shaping was not possible until about 1990, when the World Wide Web brought the ability to connect the world’s computers into a system of interoperable machines. From a productivity perspective, the gains associated with each of these technologies have driven most of our productivity growth since the 1980s. 

The Productivity Drivers of Blockchain

Today, our world is more information based than ever before. Only 3–8% (depending on sources) of the world’s money supply is in bills and coins. The rest is digital. The blockchain aims to improve the way 90+% of the world’s wealth and information is circulated — and some clear ways that can happen have begun to emerge. Let us identify by name the specific facets of blockchain most likely to be key productivity drivers. 

A Public, Secure Database

The blockchain is literally a chain of blocks which house information in a publicly available, unchangeable fashion. How? Read more here. Use cases today include:

Asset management: Keeping track of your physical assets is vastly important for companies and governments alike. For companies, improved asset management can lead to operational efficiencies. For governments, helping the public track their assets (property title, land registration).

A global, digital identity: One of the immediate applications of this is a ‘global identity’, which has utility in pulling together a full digital identity for an individual. This would in turn, lay the groundwork for individuals and companies to clearly interact with each other. This could be accomplished within an organization, or publicly shared to the world.

The ‘ownership’ of data: Shifts from the companies that collect it, to the people who contribute it to the world. This freedom changes how such data can interact within society, and the broader world.

Today, the way forward is no longer sitting back; it is about experimenting with the blockchain.

A Mechanism for Swift Transfer of Money

Near Zero Transaction Costs: A fundamental gain of utilizing blockchain as a trust mechanism is lower transaction costs to move money from one place to another. Whether across banks, across borders, the blockchain foretells a future of moving money at the click of a button.

Globalization Of Money: Sending money from country to country (currency to currency) will be easier than ever before. Transaction costs lowering results in an increased economic incentive to interact with global counter-parties.

Smart Contracts

Smart contracts are essentially code intended to facilitate, verify, or enforce the performance of a contract. These contracts can now be run via blockchain technologies — most notably, Ethereum.

Today, smart contracts may be the mechanism to enable better communication and coordination between separate businesses. Like SMTP once allowed separate e-mail servers to send e-mails to each other, perhaps a Facebook user could pay any LinkedIn user, even if they are on separate platforms. Across industries, a variety of use cases are coming together.

Conclusions and Recommendations

The technology underlying the blockchain is growing swiftly on one hand, and slowly on the other. We still sit in the early days of a technology set up to have great impacts. In order to capitalize, governments, businesses, and fledgling entrepreneurs all have a part to play.

  1. Governments need to carefully consider blockchain regulation in order to safely support innovative, technologies
  2. Existing companies should consider the ways blockchains can immediately make an impact on their business, and consider how it is likely to shape their future
  3. New entities, unencumbered by bounds of past governance, should consider which aspects of blockchain technologies to immediately incorporate as they launch into the world 

Today, the way forward is no longer sitting back. It is about experimenting with the blockchain in ways which can set your business apart, open up new ways of creating value, and allow for a more productive allocation of capital. The collaborative nature of the blockchain has the potential to improve our productivity worldwide. How much — and how soon — is up to us.

Reprinted from Medium.

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Fed Policy and Velocity’s Dance

The U.S. economy has been growing slowly but steadily since the trough of the Great Recession in June 2009. Deep recessions are typically followed sharp recoveries. Not so this time.

Low Inflation

More recently, there is the mystery of low inflation. The Fed’s preferred inflation measure, the core PCE index, has consistently fallen short of its target rate of 2 percent. In July 2017, it came in at a 1.41-percent annual rate. For the Fed, improved growth in employment and the falling unemployment rate should foreshadow a higher inflation rate. The rationale for this is the old Phillips Curve. The reality is that the model is flawed.[1]

That would eventually result in a higher inflation rate. That has not happened. There is still the expansion of the Fed’s balance sheet and its creation of a huge stockpile of excess reserves. For years, monetary economists expected those reserves to translate into money creation through bank lending and deposit creation. That would eventually result in a higher inflation rate. That has not happened, a conundrum that has generated a considerable literature.

George Selgin has written several pieces on the topic, most recently his Congressional testimony.[2]  In his testimony, Selgin recounts how the Fed began paying interest on bank reserves (both required and excess). Other things equal, that would incentivize banks to hold additional reserves over and above what they would otherwise do. In Selgin’s words, paying IOR was intended to get banks “to hoard reserves.” The move was “an anti-stimulus measure.” Presumably, the Fed did this to keep its expansion of the balance sheet from generating inflation.

Dual Policies

The two policies (balance-sheet expansion and IOR) jointly diverted savings from commercial banks to central banks, and thus from more productive to less productive uses. The two policies were a form of financial repression. In Selgin’s words:

The Fed’s current operating system, with its above-market interest rate on reserves and bloated balance-sheet, is very financially repressive. That is one reason for the continuing post-crisis ‘productivity slowdown.’ Yet the same system, far from at least improving basic monetary control, has prevented the Fed for 5 years running from meeting the 2% inflation target it set in 2012.

To summarize Selgin’s argument, first, the expansion of the Fed’s balance sheet and the payment of interest on reserves redirected credit toward favored groups (the Treasury and the housing industry) and away from other sectors. It substituted government allocation of credit for market allocation. Second, it contributed to the post-crisis productivity slowdown. And, third, it is the cause of low inflation.

I will examine the arguments in seriatim.

Selgin is surely correct about the first issue. Along with others, I have made the same argument myself.[3]

Selgin would be hard-pressed to defend his second contention. First and foremost, the slowdown in productivity growth predates the economic crisis and recovery. One study dates the slowdown beginning at the end of 2004. Second, the slowdown has occurred in dozens of advanced economies and is a general phenomenon.[4]

Additionally, macroeconomic factors affecting productivity are such things as the size of government and inflation. A recent study finds that both macro factors are negatively related to productivity growth. So, to the extent the Fed kept the lid on inflation, it contributed positively to productivity growth.[5]  Thus, there is no apparent linkage between post-2008 monetary policy and an earlier slowdown in productivity growth.

On the issue of low inflation, I don’t know how to read Selgin’s testimony. The Fed has continually missed its inflation target on the low side. Is that a good or bad thing? One can only answer that in terms of an economic model. Lee Hoskins, former president of the Cleveland Fed, has long argued that zero inflation should mean just that: zero inflation with deviations above and below that rate occurring equally often. Selgin has defended productivity-driven deflation in the past.[6] So, maybe zero is too high. Again, the question can be answered only with an economic model.

Interests Rates

I now look at the stance of monetary policy in more detail. Has monetary policy been too loose, too tight or about right? Measured by interest rates, monetary policy looks pretty loose. Nominal interest rates have been very low, near zero for a long time, while inflation rates have been low but positive. So, real interest rates have been very low or even negative.

Judged by the growth rate of money, the answer is more complicated. Money growth, as measured by the growth rate of the M2 money supply, has been normal in this economic recovery. There is no obvious break from the trend rate of growth of money in the past. (Similar stories can be told for narrower and broader measures of money.) Whether because of, or despite unorthodox monetary policy, the supply of money has been expanding much as it has in the past. So, measured by the growth rate of M2, monetary policy has not been obviously tight.[7] It is not the source of low inflation.

I would suggest the rise in money demand, and concomitant fall in velocity, reflect a flight to liquidity by the public. What has not behaved normally, however, is velocity. M2 has fallen to a record low level. And it has fallen very sharply from its peak in the 1990s.

If there is a monetary story in the current recovery, it is on the demand side. Movements in velocity, rather than in the supply of money, seemed to have financed the hi-tech boom. Velocity began its decline before the dotcom bust. After a recovery in the 2000s, it began a decline before the economic crisis. I associate the movements in velocity with the rise and fall of shadow banking. But establishing that would require a separate study.[8] For now, call it velocity’s dance.[9]

I would suggest the rise in money demand, and concomitant fall in velocity, reflect a flight to liquidity by the public. The accumulation of reserves by banks reflects a similar scramble for liquidity. IOR influenced how banks satisfied their demand for liquidity but did not create the demand.[10] Banks and the nonbank public both scrambled for liquidity in the wake of the financial crisis. And the demand has not abated in the recovery and expansion.

Credit for business has not been crimped. Measures of credit growth seem normal when compared to past recoveries, For instance, after a slow start (and initial decline), commercial and industrial loans have grown as in past recoveries.

If the Fed can be faulted, it is for not factoring in the large swings in velocity over the last three decades. For a class of models, comprising monetarist, Austrian, and Keynesian approaches, stabilizing MV (level or growth rate) is a central bank’s responsibility. It would have been no easy task to offset the rise of shadow banking in the 1990s. It would likely have required not just an activist monetary policy, but also regulatory intervention. The tenor of the times went in the opposite direction, however. The Greenspan Fed was for light regulation, and legislation (Gramm-Bliley-Leach) was designed to regularize shadow banking. These actions may have been justified from a regulatory perspective, but they had unintended monetary consequences.

As to the current recovery and expansion, different approaches provide different answers to whether monetary policy was expansionary, contractionary or just right. That reflects an unsettled state of monetary theory.

Monetary economists should also take note of arguments advanced by Jerry Jordan and others that, under the new operating procedures, the Fed cannot influence aggregate economic activity. That is a more fundamental and long-run issue.[11]

Finally, what can we say of the weak economic expansion in the post-crisis era? I suspect that monetary theory cannot explain it, certainly not entirely. That suggests a role for a different explanation, possibly a microeconomic one.

Reprinted from ThinkMarkets

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Bitcoin Is Taking Over in Venezuela

In recent months, news about Bitcoin being widely purchased and mined in Venezuela has led to a number of rumors regarding the growth and demand of the cryptocurrency there. An interview with Daniel Osorio of Andean Capital Advisors on CNBC indicates that the country may soon ‘Bitcoinize’ completely.

Osorio, who spends about a week per month in the South American country, was interviewed regarding the hyperinflation problems that Venezuelans are facing. During the interview, he explained that a simple lunch costs upward of 200,000 Bolivars, or about $8-$10.

Bitcoin only

In order to pay for lunch, locals are beginning to accept only Bitcoin or money wires of foreign currencies. The problem, according to Osorio, is that unlike Zimbabwe and other nations where hyperinflation has taken its toll, Venezuela does not have access to enough dollars to manage the economy.

Locals have, therefore, turned completely to Bitcoin in order to function economically. Since Bitcoin is independent of the black market for Bolivars, it represents a fixed exchange platform for business. Near the end of the segment, Osorio says:

“We may well be witnessing the first ‘Bitcoinization’ of a sovereign state.”

Cryptocurrency lovers would argue that this is just the first of many, as liquidity and access increase exponentially.

Reprinted from Coin Telegraph

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Why Reading about Big Ideas Is Necessary for Success

“Thinking is the very essence of, and the most difficult thing to do in, business and in life. Empire builders spend hour-after-hour on mental work . . . while others party. If you’re not consciously aware of putting forth the effort to exert self-guided integrated thinking . . . then you’re giving in to laziness and no longer control your life.” —David Kekich

I can’t think of a single problem for which becoming smarter fails to assist in finding the solution.

Besides the willingness to work for what we want, the interior depth we bring to our creative challenges is our greatest asset.

Whenever we’re intimidated, defeated, stumped, or rendered hopeless by a problem of any sort, it can always be traced back to the lack of access we have to certain ways of thinking.

All problems are knowledge problems and all solutions are knowledge solutions.

We fail to negotiate because other possibilities are invisible to us. We fail to ask questions because we can’t conceive of answers that exist outside of our own knowledge-base. We fail to persist because we have no understanding of the options that lie beyond inconvenience. We get stuck because we don’t know about any systems or tools that would work for our unique situation. We don’t know what our options are. We don’t know where the resources are. We don’t how to get started. We don’t know who to ask, how to ask, or when to ask. It’s always something we don’t know.

All problems are knowledge problems and all solutions are knowledge solutions.

This is why a steady diet of philosophical thinking and philosophical reading is so important. If you’re not regularly consuming content that exposes you to challenging concepts, you risk becoming a virtual solipsist: someone who believes in the existence of other minds, but who lives as if his or her own mind is the sole source of creative solutions.

If you want to be a successful professional, refuse to settle at your current level of intellectual development. Study your butt off and never stop challenging yourself to become a better thinker.

If you’re content with the books you’ve already read, your career is already dead.

Reprinted from T.K. Coleman.

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One Thing We Shouldn’t Import from China: Its Education System

I remember a story my college economics professor told my class many years ago about the differences she saw between her American economics students and the Chinese ones she taught during frequent sabbaticals to Beijing. She said that the Chinese economics students generally had superior math skills and the ability to quickly solve complex calculus problems, but her American students generally had a better grasp on the underlying concepts and context, were able to better recognize when certain calculations were incorrect (like a negative number for the Price of a good), and were more creative with solutions.

While it is certainly important for U.S. students to have strong academic skills, trying to replicate the Chinese education system may not be the best approach. Yet, that is just what author Lenora Chu advocates in her new book, Little Soldiers: An American Boy, a Chinese School, and the Global Race to Achieve.

The Price of Perfection

As an American journalist living in Shanghai, Chu recounts the experience of her young son attending a Chinese school for five years. Chu acknowledges the often “draconian” ideas and tactics of Chinese schools, but her book touts the benefits of these approaches and suggests American schools should adopt some of them to become more competitive.

In a recent Wall Street Journal article about her book, Chu writes about the ways her son was force-fed eggs by his teacher, prohibited from bringing his asthma inhaler to school, and “isolated” in a separate classroom with threat of demotion after he “failed to follow in ‘one-two’ step during a physical exercise.”

Yet, she says that these practices are beneficial because they give teachers and schools total authority to push for strong academic outcomes. Parental sovereignty and individual liberty become secondary to teacher control and school performance. Chu writes:

“This deference gives the teacher near-absolute command of her classroom. My son became so afraid of being late for class, missing school or otherwise disappointing his teacher, that he once raised a stink when I broached the possibility of missing a few school days for a family trip. He was 5.”

Fortunately, other scholars are speaking out against importing more standardization and control into America’s already coercive, test-driven mass schooling model. In his 2014 book, Who’s Afraid of the Big Bad Dragon: Why China Has The Best (And Worst) Education System in the World, author Yong Zhao explains that the emphasis on subservience to authority and an all-out focus on academic outcomes and test scores may propel China to the top of international education comparisons (see below), but it’s at the price of freedom and autonomy. Skills and scores replace ingenuity and agency.

In The Washington Post this week, Zhao, an education professor at the University of Kansas, wrote a response to Chu’s book and her Wall Street Journal aArticle. He states:

“I did not see any convincing evidence in the book that supports the proposal that American students need Chinese schools. Quite to the contrary, I understood the book as further evidence for not importing Chinese schools into America. Little Soldiers is far from a love affair with Chinese schools as the title of the Wall Street Journal article suggests. It is, rather, a vivid portrayal of an outdated education model that does serious and significant damage.”

Chu doesn’t seem to mind the trade-off between authoritarianism and freedom. She concludes her Wall Street Journal article with the statement: “Sometimes, it is best when parents—and children—are simply obliged to do as they’re told.”

We should be careful that America does not become a society of obedient “little soldiers,” abdicating our individual liberty to the powers of the state under the guise that it’s good for us. High test scores may be commendable, but not if they come at such a high price.

Reprinted from Intellectual Takeout

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The Existentialism of BoJack Horseman

I’ve had this gnawing certainty that Bojack Horseman is a quintessential artistic representation of our era since I saw it for the first time two years ago. However, I’ve struggled to articulate my reasons for that conviction. I realized today as I finished season four that I’ve been waiting throughout that time to see how the story unfolds, suspending my attempts at understanding until I could factor in the end—the writers’ ultimate telos.

The End.

But that presumes there is a telos, and it’s the same dilemma the characters are facing: the metaphysical crisis of modernity. We can’t stop thinking about the ending because we want to know how it all works out, how all of the storylines and subplots come together to a final ending that is not only a resolution to all the tensions and conflicts the characters face, but one that reveals the ultimate meaning of their lives and our own—the purpose that justifies suffering. This craving to create order from chaos is ancient. We create stories because stories create us, helping us to navigate our own lives and inchoate feelings.

What if the happy ending, or any ending, isn’t coming and never was? But BoJack Horseman isn’t a single story – or a book, or a film. Its episodic format is necessary to articulate its existentialist themes, an effect reinforced by its status as a web, rather than television, series. Since viewers tend to binge-watch web series in a manner television audiences could not, long stretches of time within Hollywood are compressed into much smaller periods of time in the viewer’s reality.

While the action peaks at times, the storylines often deny viewers satisfying resolutions, and upon reaching the end of a season they’re left with an uneasiness and shadow of ennui: what if even more time passes, and more things happen to the characters, but nothing ever changes or is resolved? What if the happy ending, or any ending, isn’t coming and never was? That everything from the most minor, irritating banalities to the moments of agonizing suffering will most certainly continue but are unlikely or even impossible to be justified? That there is no plan or purpose and that the real truth is that your life will boil down to circumstances beyond your control and how you react to them?

And what’s more terrifying than the idea of utter failure is the idea that it could be your fault. So long as you’re living by someone else’s plan, you can place the blame for all your unhappiness on them; but freedom extinguishes any attempt at plausible deniability. That’s why people fear it more than anything else – because maybe, just maybe, all those whispering voices inside your head are right: maybe you are insignificant, or not good enough, or forgettable. Maybe you won’t make it through the next hoop, despite all the ones you’ve made before. Maybe it was a fluke, maybe you are a phony, maybe the day will finally come that everyone will recognize you for the weak, stupid, cowardly imposter that you are. And you’ll keep running in place under the command of the Red Queen until you die.

Bleak and Beautiful

That the main character is an actor and the show is set in a fictionalized version of Hollywood are also significant elements to consider. The show’s writers and producers are engaging in staggering heights of meta-mythology. Camille Paglia asserts in Sexual Personae that modern Westerners use pop culture to manifest our suppressed pagan idols, creating within it a pantheon through which we can construct a shared mythology. Bojack’s personal grief is largely driven by the tension he feels between his persona (his status as a celebrity, as well as the role he played on Horsin’ Around) and the bleak and often tragic realities of his real life.

Paglia was inspired to write Sexual Personae by Ingmar Bergman’s Persona, a cinematic examination of the tension faced by individuals reflecting on their dual-, and what can at times feel conflicting, natures: who they are alone and who they are with others; as well as the stark inescapability of Being. Not unlike Bojack, Persona’s protagonist Elisabet is a famous actress who has chosen to “check out” on her life. Where Bojack turned to bourbon, however, Elisabet is hospitalized with a self-induced catatonia. When it’s discovered that the source of Elisabet’s stillness and silence is her own willpower, a matriarchal nurse addresses her with a gentle frankness:

I understand, all right. The hopeless dream of being – not seeming, but being. At every waking moment, alert. The gulf between what you are with others and what you are alone. The vertigo and the constant hunger to be exposed, to be seen through, perhaps even wiped out. Every inflection and every gesture a lie, every smile a grimace. Suicide? No, too vulgar. But you can refuse to move, refuse to talk, so that you don’t have to lie. You can shut yourself in. Then you needn’t play any parts or make wrong gestures. Or so you thought. But reality is diabolical. Your hiding place isn’t watertight. Life trickles in from the outside, and you’re forced to react. No one asks if it is true or false, if you’re genuine or just a sham. Such things matter only in the theatre, and hardly there either. I understand why you don’t speak, why you don’t move, why you’ve created a part for yourself out of apathy. I understand. I admire. You should go on with this part until it is played out, until it loses interest for you. Then you can leave it, just as you’ve left your other parts one by one.

When we lose our myths, we’re left to our own devices, and there is a sincere beauty in being able to create our own stories. But that’s not any guarantee that we’ll be good at it. And most of the time, we’re not. Bojack Horseman is the dream-turned-nightmare of postmodern apotheosis; the anguish of looking for gods and heroes and finding only ourselves.

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Is Development Aid the New Colonialism?

The big solution to global poverty is smaller than you think, but it requires a new philanthropic strategy to change the way we see ourselves and those we hope to help.

The easier it is to exercise economic rights, the less likely you are to find poverty.

In a forthcoming 2018 annual report from the World Bank, for the first time the relationship between small institutional reforms, like strengthening private property rights, and poverty will be quantified. The findings show that for every five-unit increase in a country’s score on the “Doing Business” report, poverty drops one percentage point. In other words, the easier a government makes it for the poor to exercise their economic rights, the less likely you are to find poverty in that country.

Honest Efforts, Unforeseen Consequences

The implication of this finding is that the poor know better than we do how to lift themselves out of poverty. So why don’t we let them? The answer is because today’s economic development aid juggernaut perpetuates a paternalism that relies too heavily on the technical expertise of outsiders and ignores, at its peril, the tacit knowledge possessed only by local beneficiaries.

Here’s an example: outside experts, representing the Millennium Villages Project, recommended and financially supported new crops and farming methods in a Ugandan village. It worked. Crop yields increased significantly, but the villagers ended up unhappy, even resentful, because there was no market for the crops and they soon rotted. As it turned out, the cost to get trucks to the village to haul the extra load to market exceeded their value. Had the local villagers faced the true cost of this venture and had more control, they likely would have brought their tacit knowledge to bear by further scrutinizing the downstream strategy.

There are countless stories like the Ugandan village venture, despite honest efforts to learn from those mistakes. As a result, the developing world is now littered with the unforeseen consequences of outside experts’ grand plans. What’s perhaps most unsettling is the near unbroken pattern of paternalism that links the knavish colonialism of the past to the seemingly earnest aid industry today.

We can take some comfort in now recognizing there is a better way.

In 2016, development aid worldwide reached a new peak of $143 billion. This would be encouraging news if development aid helped achieve lasting economic change. It doesn’t. A growing number of high-profile economic development experts, 2015 Nobel Prize winner Angus Deaton among them, now warn that the current aid model for alleviating systemic poverty around the world does more harm than good and must stop.

Of course, turning our backs on the world’s poor feels just as unsettling as realizing that our best philanthropic efforts over the past 60 years may have prevented economic success among those who need it most. We can take some comfort in now recognizing there is a better way.

They Must Lead, We Must Follow

Last year, in India, an independent think tank called Centre for Civil Society pushed for and achieved the elimination of minimum capital requirements for new businesses, a practice that imposes a disproportionate burden on the poor. This change increased India’s score on the World Bank’s “Doing Business” report. 

Looking beyond aggregates, this translates to the equivalent of 321,000 people lifting themselves out of poverty. Now, rather than preventing the poor from getting ahead, India has restored an economic right to the people with the necessary knowledge to make lasting progress with the opportunity.

Private philanthropy in support of those local organizations is the best way to make a big difference.

Research shows when poor people relocate to countries with economic rights they thrive. As Harvard development expert Lant Pritchett explains it, “There are no poor people. There are people living in poor places.” This means reforms are needed at home, but not reforms designed by outsiders tied to aid.

With its annual budget of roughly $1 million, Center for Civil Society is achieving what billions have not. And there are similar organizations throughout the world doing the same.

For outsiders, private philanthropy in support of those local organizations is the best way to make a big difference as they work to restore economic rights around the world. They must lead. We must follow as we start doing development differently.

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Hurricane Maria Has Devastated Puerto Rico. US Protectionism Is Making It Worse.

Editorial Note: President Trump today waived the Jones Act for Puerto Rico. This is a welcome development, but the Act should be repealed outright.

If anyone wants more evidence of how protectionism hurts the poor and most vulnerable among us, Puerto Rico now offers a prime example.

The island was devastated by Hurricane Maria. Tens of thousands have been left homeless. Basic goods and services, such as food, water, and fuel, are in short supply. Electricity is out for virtually the entire island, and may not be restored in some places for months. Nearly 85 percent of the island has no cell-phone coverage. Much of the country’s already-shaky economic base, including tourism and agriculture, has been all but wiped out.

Stifling the Relief Efforts

Even before the hurricane, the Jones Act was an economic albatross around the island’s neck. Yet vital aid to the island is being slowed by the Jones Act, a 100-year-old example of protectionism and corporate welfare. The Jones Act requires that all cargo shipped to Puerto Rico is carried on ships built entirely in the United States, owned by a U.S. citizen, flying a U.S. flag, and staffed by a majority-American crew. Relatively few ships meet those requirements. And at a time when even a brief delay in getting assistance to suffering islanders could cost lives, the Jones Act is an unneeded impediment to that aid.

Yet despite the unfolding humanitarian crisis, the Trump administration has so far refused to waive the law’s restrictions.

Of course, even before the hurricane, the Jones Act was an economic albatross around the island’s neck. Economists estimate that the law has driven up consumer prices for islanders by 15–20 percent, and reduces economic growth there by more than $500 million annually. One study showed that the Jones Act cost the island as much as $17 billion in economic growth between 1990 and 2010. (Hawaii and Alaska also take big hits from this law. Some estimates suggest that the Jones Act costs Alaska, Hawaii, and Puerto Rico a combined total of nearly $10 billion annually in lost growth.)

Over the years, the Jones Act has been larded with all sorts of national-security justifications, but its real purpose is to protect jobs in the U.S. shipbuilding and merchant-marine industries. No doubt those are good jobs, though the number of people employed in shipbuilding has fallen by 40 percent since 1980. But like most protectionist measures, this law ends up doing far more harm than good. And those most likely to be hurt are those who can least afford it. This law ends up doing far more harm than good.

Pure Protectionism

Let’s repeal this antiquated example of special-interest protectionism. This is not just true of the Jones Act, but of protectionism generally. For example, economists estimate that trade and the availability of low-cost imported goods improves the purchasing power of middle- and upper-income Americans by roughly 29 percent. But trade increases the purchasing power of the poor by more than 62 percent. At the same time, the Peterson Institute for International Economics estimates that past gains from U.S. trade and liberalization of investment range from $9,270 to $16,842 per household. Another study found that that “a 1 percent increase in trade raises real income by 0.5 percent.” That might not seem like a huge boost for the wealthy — the global elite, to use the pejorative preferred by protectionists — but it makes a big difference in the lives of the poor. For now, the bigger debate over protectionism can wait. Suspending the Jones Act for the duration of Puerto Rico’s recovery should be a no-brainer. Better yet, let’s repeal this antiquated example of special-interest protectionism. And let’s begin to understand that there is a very real price to be paid for all special-interest protections.

For now, the bigger debate over protectionism can wait. Suspending the Jones Act for the duration of Puerto Rico’s recovery should be a no-brainer. Better yet, let’s repeal this antiquated example of special-interest protectionism. And let’s begin to understand that there is a very real price to be paid for all special-interest protections.

Reprinted from National Review

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