Archive for July, 2009

Audit the Fed? Why?

Wednesday, July 29th, 2009

I have been watching with amusement the progress Ron Paul has been making with cosponsors on his bill (HR 1207). The cosponsors tactic was one that I used in the mid-1980s to get the gold coin bill adopted (PL 99-185), in the face of Treasury opposition. Those assholes were so anti-gold they didn’t even want a bullion coin to compete in the market with Krugerrands and Maple Leafs! Our key success in 1985 was to enlist the Black Caucus, chaired by Rep. Julian Dixon (D-CA) and his good friend Rep. Jerry Lewis (R-CA).

Questioning the Federal Reserve “Church”

I think it is true that the “audit the Fed” issue is just a publicity stunt, as Forbes points out. But it is a useful publicity stunt because it has focused a lot of attention on the Fed and its position in American society.

Until very recently, the Fed was treated as some kind of church. Its pontiffs were treated as spokesmen for the Mystery, and every member of Congress was very shy of criticizing the Fed, except for a few old populists like Henry Gonzalez who would have abolished the Fed and replaced it with the Treasury issuing fiat paper money in order to push interest rates down to zero, etc. William Jennings Bryan exercised pernicious influence back in 1913 to convert what would have been a fairly benign private clearing house that issued banknotes (just as every other National Bank also in those days did) – into a government agency that issued “obligations of the United States.” Thus the Fed was born. Rosemary’s baby.

I say Ron Paul’s bill (HR 1207) is a “useful” publicity stunt, but it could backfire if

    (1) the concerns Bernanke highlighted came true, namely that the Fed felt pressured by Congress to inflate; and
    (2) some kind of “audit” is conducted and the Fed is whitewashed and the whole issue becomes covered up with a new cloak of pseudo-democratic appearances.

Certainly, if a government is going to enforce a monopoly currency, the monopoly agency should *NOT* be under popular or democratic control. It should focus strictly on maximizing profit. For a monopoly currency that means only sustaining and stabilizing the purchasing power of the monetary unit. If a central bank can do that, it will rule forever in its narrow sphere.

The business side of the Fed is already audited. The current “Tax on Federal Reserve Notes” (so called; not really accurately named), which is a line item in the Fed’s annual income statement, is a 100% tax on the Fed’s nominal monetary profits. The money goes directly to the U.S. Treasury, just as the coinage seigniorage from the Mint also goes. (Of course, the Fed gets “to skim” because it pays its operating expenses before remitting to the Treasury – but that is revealed in the audits already conducted and published.)

The three areas where the Fed is not today audited are all justified, in my view, under the system we have.

  • First, transactions with foreign central banks and IMF, Bank for International Settlements, etc. are secret because the foreigners want it done that way. The Fed acts as a fiscal agent for a lot of foreign governments, particularly the smaller ones.
  • Second the Federal Open Market Committee and the games it plays under the rubric, “monetary policy,” do have the power to move the stock and bond markets in powerful swings. If anyone had insider knowledge of what the FOMC were doing on any particular day, your profits from day-trading would be gigantic. A hedge fund manager’s dream come true.
  • Third, the FOMC operations, buying and selling to impact the Fed Funds rate, would also be an area that should not be allowed to become something of daily, transparent knowledge. The claim that these things should be kept non-political and out of sight of speculators and day traders makes sense to me.

The Monopoly Problem

But, the real issue is WHY should the Fed be a monopoly, and WHY should the United States government even want to use an undefined F.R.A.U.D. monetary system? [Note acronym: "Federal Reserve Accounting Unit Dollar"]

The answer is because the British Neo-Classical School of economics, which developed under the Victorian era regime following Peel’s Act of 1844, had neglected and lost track of the debates among – yes, amateur for the most part – economists from 1800-1844. Lawrence H. White’s book on this history, “Free Banking in Britain,” is very informative. Even Milton Friedman changed his mind after reading about free banking.

The British Economists

The Briish economists after 1844 came to the conclusion that “scientific management” of a monetary monopoly would be superior to whatever crippled market process occurred under a “pseudo-gold-standard” (Milton Friedman’s label).

Yet, of course, the whole appeal of “scientific management” of an economic system ought to have passed away with the fall of the Soviet Union.

The observation that fewer business cycle downturns occurred after 1913 than before the Fed ignores a lot of economic history. First, it ignores the stupid regulations imposed by the National Bank Act of 1863 that forced banks to operated as undercapitalized agencies, because they were forced to buy government bonds in order to issue currency (but not demand deposits). This crippled the banking system and led to many more runs on banks and contractions than would have occurred without such rules.

Comparing the Canadian experience with the U.S. experience shows how much more stable the Canadian system was, with a more pure system of free banking. Canada didn’t create the Bank of Canada until the late 1930s, and by that time it was the mania of every government on earth to have its own central bank – and there was no longer any international gold payments system.

Second, although there was no Federal Reserve prior to 1913, there was the Bank of England, which acted like a global central bank for all the “gold standard” countries. And the Bank of England was very incompetent in running monetary policy, which is one reason the British Neo-Classical School economists were so critical of the classical pseudo-gold-standard. As the Bank of England induced expansion and contractions in the London financial markets, those markets affected all the rest of the world, New York in particular because of America’s close links with the British Empire. See Walter Bagehot, “Lombard Street” (1873) on “the unnatural system of centralization” and the mismanagement of the Bank of England. Bagehot was the editor of The Economist magazine.

Moreover after 1935, monetary policy was deliberately conducted with a bias never to allow a contraction and to promote a mild and gradual inflation. If you look at a graph of monetary expansion since WW2, many of what would have been contractions before 1913 are just flat spots on a rising chart. This is why Milton Friedman emphasized that it is the 2nd derivative (change in the rate of change) in monetary expansion that affects the growth of nominal GDP after a 6-18 month lag.

So, the bottom line is that I much prefer Ron Paul’s bill (HR 2779) to relax legal tender laws. If I could go all the way to utopia, I would urge a law having Congress make appropriations, budgets, and to assess taxes using the gram of gold as the government’s official unit of account, with a floating rate of exchange between the [thereafter] non-legal-tender F.R.A.U.D. units, which would continue to circulate and probably continue to dominate the financial markets. The U.S. national debt could still be payable in “dollars” but at a floating exchange rate with gold grams.

This might be the way to conform with the 14th Amendment, Section 4, and to pay off the national debt (in “dollars,” but not in gold grams).

Optimal Currency Areas

Indeed, in the literature of “optimal currency areas” it is not clear the whole United States should be a single currency area, much less all of Europe under the Euro. Labor markets in particular could operate more efficiently if wages were paid in local currencies. Michigan right now could experience a currency devaluation and that would help with unemployment.

Financial markets would probably operate more efficiently if prices were quoted in a global currency independent of national governments (e.g., gold grams).

And with floating exchange rates among them all.

Posted in Economics, Editorial Page | 6 Comments »

GovernmentCare’s Assault on Seniors

Thursday, July 23rd, 2009

By Betsy McCaughey

Since Medicare was established in 1965, access to care has enabled older Americans to avoid becoming disabled and to travel and live independently instead of languishing in nursing homes. But legislation now being rushed through Congress—H.R. 3200 and the Senate Health Committee Bill—will reduce access to care, pressure the elderly to end their lives prematurely, and doom baby boomers to painful later years.

The Congressional majority wants to pay for its $1 trillion to $1.6 trillion health bills with new taxes and a $500 billion cut to Medicare. This cut will come just as baby boomers turn 65 and increase Medicare enrollment by 30%. Less money and more patients will necessitate rationing. The Congressional Budget Office estimates that only 1% of Medicare cuts will come from eliminating fraud, waste and abuse.

The assault against seniors began with the stimulus package in February. Slipped into the bill was substantial funding for comparative effectiveness research, which is generally code for limiting care based on the patient’s age. Economists are familiar with the formula, where the cost of a treatment is divided by the number of years (called QALYs, or quality-adjusted life years) that the patient is likely to benefit. In Britain, the formula leads to denying treatments for older patients who have fewer years to benefit from care than younger patients.

When comparative effectiveness research appeared in the stimulus bill, Rep. Charles Boustany Jr. R-LA), heart surgeon, warned that it would lead to “denying seniors and the disabled lifesaving care.” He and Sen. Jon Kyl (R-AZ) proposed amendments to no avail that would have barred the federal government from using the research to eliminate treatments for the elderly or deny care based on age.

In a letter this week to House Speaker Nancy Pelosi, White House budget chief Peter Orszag urged Congress to delegate its authority over Medicare to a newly created body within the executive branch. This measure is designed to circumvent the democratic process and avoid accountability to the public for cuts in benefits.

Driving these cuts is the misconception that preventative care can eliminate sickness. As President Obama said in a speech to the American Medical Association: “We have to avoid illness and disease in the first place.” That would make sense if most diseases were preventable. But the two most prevalent diseases of aging—cancer and heart disease—are largely caused by genetics and their occurrence increases with age. Your risk of being diagnosed with cancer doubles from age 50 to 60, according to the National Cancer Institute.

The House bill shifts resources from specialty medicine to primary care based on the misconception that Americans overuse specialist care and drive up costs in the process (pp. 660-686). In fact, heart-disease patients treated by generalists instead of specialists are often misdiagnosed and treated incorrectly. They are readmitted to the hospital more frequently, and die sooner.

“Study after study shows that cardiologists adhere to guidelines better than primary care doctors,” according to Jeffrey Moses, a heart specialist at New York Presbyterian Hospital. Adds Jeffrey Borer, chairman of medicine at SUNY Downstate Medical Center: “Seldom do generalists have the knowledge to identify the symptoms of aortic valve disease, even though more than 10% of people over 75 have it. After valve surgery, patients who were too short of breath to walk can resume a normal life into their 80s or 90s.”

While the House bill being pushed by the president reduces access to such cures and specialists, it ensures that seniors are counseled on end-of-life options, including refusing nutrition where state law allows it (pp. 425-446). In Oregon, some cancer patients are being denied care by the state that could extend their lives and instead are afforded the benefit of physician-assisted suicide instead.

The harshest misconception underlying the legislation is that living longer burdens society. Medicare data prove this is untrue. A patient who dies at 67 spends three times as much on health care at the end of life as a patient who lives to 90, according to Dr. Herbert Pardes, CEO of New York Presbyterian Medical Center.

What is costly is when seniors become disabled. In a 2007 Health Affairs article, researchers reported that surgeries to unclog arteries and replace worn out hips and knees have had a major impact on steadily reducing disability rates. And nondisabled seniors use only one-seventh as much health care as disabled seniors. As a result, the annual increase in per capita health spending on the elderly is less than for the rest of the population.

Nevertheless, Medicare is running out of money. The problem is the number of seniors compared with the smaller number of workers supporting the system with payroll taxes. To remedy the problem, the Congressional Budget Office has suggested inching up the eligibility age one month per year until it reaches age 70 in 2043, or asking wealthy seniors to pay more.

These are reasonable solutions—reducing access to treatments and counseling seniors about cutting life short are not. Medicare has made living to a ripe old age a good value. ObamaCare will undo that.

Ms. McCaughey is chairman of the Committee to Reduce Infection Deaths and a former lieutenant governor of New York state. This article is reprinted from The Wall Street Journal, July 23, 2009

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India and Climate Change

Sunday, July 19th, 2009

By William Antholis

This essay by the head of the Brookings Institution further shows why there in no JUSTICE in the urgency for suppressing CO2 gas.

As the world community gears up for another round of climate-change talks – and Secretary of State Hillary Clinton arrives in Delhi on Sunday for meetings with Indian Prime Minister Manmohan Singh – a central issue will be how to bring developing countries into a climate-change pact.

Developing countries such as India do not want to pledge to reduce their emissions until industrial countries have first demonstrated not just pledges but actual emissions cuts. Industrial countries, for their part, generally recognize that they should act first. But they want some assurance that their reductions won’t be meaningless in the face of rapidly rising emissions in China and India.

India’s Mr. Singh has become the spokesperson for “equity” in emissions reductions. Mr. Singh has acknowledged that climate change is a problem and has said that India will do its part. Like all developing country leaders, however, he points to the fact that industrial countries have contributed a century’s worth of emissions to the global atmosphere while developing countries have only started to use, in his phrase, their “share of the global atmosphere.” He has pledged that India will never exceed the per capita emissions of industrialized nations. He also said that India will only consider signing on to a climate pact when a common global per capita emissions target has been established.

When it comes to saving the planet, there are strong reasons to consider per capita emissions as part of a burden sharing formula. However, we should be cautious about making this the magic bullet that resolves the dispute between industrial and developing countries. Indeed, the Indians themselves should be cautious. It undermines a core part of their argument.

At some level, Mr. Singh is right. India has not contributed historically to the problem. U.S. per capita emissions are probably 12 times those of India’s. If the U.S. meets the ambitious goal of cutting emissions 83% by 2050 – as stipulated in the recent energy bill passed by the House of Representatives – U.S per capita emissions would drop from 20 tons to three or four tons per person annually.

That per capita standard would still be double India’s current level of two tons per person. Because emissions linger in the atmosphere for 50 years, scientists tell us that all countries must cut their emissions over the next four decades to protect the planet. So if the U.S., the EU, and Japan slash emissions, but China, India and other developing countries continue to emit greenhouse gases unabated, by 2050 the overall global emissions might decrease, but not by enough.

But that’s not the only reason to be concerned about the per capita standard.

First, a per capita emissions standard does not consider population growth. It only looks at the quantity of greenhouse gases each person emits. That standard accepts, in essence, that unmitigated population growth is fine. This undermines a careful consensus developed over a decade ago, with India’s support, at the 1994 United Nations International Conference on Population and Development. After a century of inaction, the world community agreed that population growth needed to be managed. Even under that mandate, China and India together may add almost a billion more people to the world’s population by 2050.

Second, countries like India are using a double standard when they talk about history. In essence, developing nations are arguing that the U.S., the EU and Japan need to act first on climate change. They need to make up for their history of using fossil fuels, even though these nations did not know at the time that they were threatening the climate.

Yet there is also a population-growth history that can’t be ignored. During at least the last half of the 20th century, population growth exploded in developing nations. From 1950 to 2000, world population grew 2.5 billion to six billion – an increase of about 140%. Over that period, India went from 350 million people to over a billion – up 182%, outpacing even China’s increase. By comparison, the U.S. grew from 157 million to 287 million – a rate of increase that is well below the world average.

If developed nations are held responsible for emissions that they historically contributed, oblivious to their impact on climate change, why shouldn’t developing nations take responsibility for producing generations of people who will generate emissions into the future? Put another way, it is unclear whether we should use the population figures of 1950, 2000 or 2050 in judging per capita contributions to climate change.

Fighting climate change is a complex and dynamic undertaking. As with most metrics, the per capita standard is too simple. It doesn’t fully acknowledge the emissions of previous and future generations. When Mrs. Clinton meets with Mr. Singh, she should make it clear that a static per capita metric alone cannot solve the problem of climate change.

Mr. Antholis, who served on the National Security Council during the Kyoto negotiations, is managing director of the Brookings Institution.

Reprinted from The Wall Street Journal, July 18, 2009.

Posted in Climate Change, Editorial Page, Ethics | No Comments »