Government Accounting with Gold Grams

Questions have been raised:

Why the “gram of gold”?

Discussion: When the Unit of Accounting, itself, is a “policy instrument” there is no independent element for the voting public to look at, to rely upon, and specifically the buyers of US Treasury bonds should know they are being promised something in the future that is more than just “a policy instrument” of value.

Quote from Isaac Newton

    “Gentlemen, in applied mathematics you must describe your unit.” He instructed the Royal government.

Newton fixed the gold content of the British coinage, which is unchanged today although in 1931 the “paper pound” (GBP) became the UK government’s accounting unit, and UK domestic legal tender.

[Newton citation from Isabel Patterson, The God of the Machine (1943), who was making a similar claim about unreliable “paper” (policy instrument) money.]

The gram of gold is a unit of mass (weight; density) and the Unit of Accounting could be just referencing something from the physical universe. “Gram” as a Unit happens to be convenient as the name of a measurement, and in financial affairs “traditional” in the sense of gold having been so long used as money (along with silver). Social conservatives may insist on “troy ounce,” an apothecaries’ measure, but those “names” are subject to “re-definition” moreso than the designation of mass in the Systeme International.

Why Not a Tabular Standard, with a diversified group of commodities?

Discussion: Proposals for a tabular standard have been around since Stanley Jevons and Simon Newcomb, and have never been taken seriously by the world of finance, or governments. Perhaps tabular standards are the “most rational” method of establishing a Unit of Accounting. I particularly like the Greenfield Fama Hall (GFH) commodity concept, which Greenfield and Yeager analyzed. The best part would be the government would not issue any of the “currency,” which might be created by banks for that Unit of Accounting, privately as credit (deposits).

When the government “defines” a Unit of Accounting for itself, which it uses in the bond market, then the private sector will create deposit accounts and private loans in the same Unit of Accounting. This is just “monkey see, monkey do” anthropology. The banks would also have assets denominated upon maturity in that Unit of Accounting, so their new credit liabilities would be “backed” sufficiently to promote “confidence.”

    1. When the “dollar” is just a “policy variable,” there is no basis for long-term confidence in it. No financial planner can tell a client, “you will have ‘X-value’ in the future.”
    1. Who knows?
    Its value is a “policy variable,” and policy can change.

If the payments system can already accommodate Visa and Mastercard, with FX transactions seamlessly executed, different Units of Accounting are already not any serious problem for a modern economy (and probably not for more primitive systems, where traders are very wary and alert). Local pricing would probably always be done in traditional, familiar customary (“dollar, euro, yen, yuan”) units and labor wage rates would optimally be local also to match the local pricing practices. Tourists don’t seem to have many problems with the payments system if they carry plastic.

So, “Why the Gram of Gold” and it is because it is a Unit that can serve for Accounting, and be independent from any government policy.

Why Not Fix the Dollar-price of gold?

Discussion: The fixed weight definition of “dollar” from 1900 was 1.5046 grams of gold, until F.D.R. debased it and Nixon abolished it in 1971 (it was a “policy instrument”).

Fixing the amount of gold defining ‘One Dollar’ is not technically different from defining dollars in terms of a composite of other commodity prices, as in a tabular standard, but a single tangible referent is “more concrete” in people’s minds, which begs the question: “Why not just use the weight of the metal to which the government’s Unit of Accounting is supposed to refer?”

The answer is that “defining” the “dollar” as something else leaves it as just a “policy instrument” with a value that can change with new policies. [Politicians and crony capitalists want the “flexibility” of that option.]

    • What kind of “confidence” is that supposed to inspire? Does the motto on the paper money say “In God We Trust” because we cannot trust the money itself, or the government that issues it? [motto was first used in 1862 on paper currency; the Greenbacks; “god” instead of “gold” or silver to be trusted]

[When will another president, like F.D.R. and Nixon, decide to break the promised, fixed XAUUSD exchange rate?]

My favorite acronym: F.R.A.U.D.= Federal Reserve Accounting Unit Dollar.

The Optimal Currency Area for Capital Markets is the World as a Whole

To step outside the question of whether a government should have a monopoly of some currency area, what might be an “optimal” currency area? Some things are traded mostly locally, and others are traded mostly globally. It might be useful to have a world-wide, single Unit of Accounting for capital assets and corporate balance sheets, particularly if the company has multinational operations.

The existing system of “national currencies” drives the current strength of the U.S. Dollar. But that is accidental.

To sensibly discuss and compare different values, a “standard” for measuring changes in relative financial values is essential: We have the SI for standards in all other fields, except accounting and finance. Measuring length or weight is standardized. Measuring “dollars” is variable. Measuring the same assets in euro, pounds, yen, or yuan is even more fuzzy.

In a world of floating exchange rates, and flexible commodity prices, to use the free market price in any currency Unit of Accounting, measured against the continuously changing “exchange rate” of a gram of gold, allows both flexible exchange rates among different Units of Accounting and a firm alternative basis for balance sheet accounting – eliminating “money policy” and exchange rate uncertainties.

    Governments, of course, should be discouraged from “fixing” their paper to the gram of gold because that would prevent any beneficial adjustments in the local labor market from flexible exchange rates. Governments should be encouraged to issue long-term bonds denominated only in kilograms of gold, not in paper Units of Accounting.

A single common Unit of Accounting in the capital markets (“gram”) would facilitate international diversification of equity ownership and remove capital movements measured in that Unit of Accounting largely from impacting floating exchange rate values, since “exchanging money” would be unnecessary when “trading” financial assets denominated in gold grams. As gold grams displaced other Units of Accounting in balance sheets, showing historical cost of assets in “gold gram” units, demand for some paper Units of Accounting might decline.

Theoretically a single world capital market based on gold-gram accounting could eliminate any transactions or exchange costs (with technology, e.g. blockchain) improving market performance. Issuing US Treasury bonds in Kilograms of fine gold would represent a dramatic innovation in the financial world, because the slow roll-over of maturing US Treasury bonds financed by the Kilogram bonds would not affect private wealth by a problematic “fixing” of a gold price for “Federal Reserve Accounting Unit Dollars.”

Since “policy Units” of Accounting can “float,” A Unit that DOES NOT CHANGE is worthy of being used as a basic “relative-measure-referent” for Balance Sheet asset values (thus my recommendation for a SI referent, to the gram of gold and introduction of US Treasury Kilogram Bonds). The depreciation of paper makes balance sheet numbers over time less and less useful.

  1. The chemical element, Au, will not change (object permanence), and
  2. The measure of its mass in SI units will not change – by policy. The SI unit of mass is not a “policy variable.” It is ideal as the name of a Unit of Accounting for quoting and measuring relative prices for other assets. Offering the Kilogram bonds would establish a reserve asset for insurance, annuities, and private debentures. They would become the asset side of private balance sheets with liabilities similarly denominated.
  3. The exchange prices for gold in every other Unit of Accounting are available 24/7 as public information, in real time without delay or “statistical adjustments.”
  4. All the historical data needed for any tax calculations would be readily at hand.
  5. Any change in the future relative value of gold against other real goods and services is arguably more stable and predictable than government policy. As we wrote in my essay on financial planning,
      “We might not be able to predict the exchange rate of an ounce of gold vs. a pound of beef in 25 years, but it would not be a whim of imagination. I would be more comfortable thinking about coin vs. beef than about $100 today vs. $1,000,000 in 25 years, and wondering which would be more valuable?”

Although the Unit of Accounting is used centrally in the payments system – paying our bills by exchanging bankers’ debts – the “measurement function” of allowing balance sheet assets to be “historically-valued” over time, and traded, sold, or mortgaged is also critically important. Assets can be traded, and pledged for credit. Credit is liquid; most assets are not. All such pledges are made in the name of the credit-Unit of Accounting.

The “Flexible Gear” of Bank Credit

The “credit process” in action is the “flexible gear” in the economic system that Hayek discussed in The Pure Theory of Capital (1941). “Credit-money” spends itself just the same as “asset-money.” The trick is to assure it is honored in payments (a vanishingly small cost for someone with assets, connected to the ACH or card networks). Bankers know the risks and technology to assure payments are honored.

The Units of Accounting people may locally use (“euro, yen, dollar, yuan”) are not any difficulty, because they all exchange quickly with each other in the FX markets. The Visa and Mastercard networks, and others, seamlessly make foreign exchange conversions.

For its own payments and tax collections, the US Treasury has an Exchange Stabilization Fund (31 Stat. 5117) to be used for balancing foreign exchange, and that Fund could also be used to convert “dollars” to gold grams for internal accounting. The US holdings of IMF SDRs are in that Exchange Stabilization Fund, as assets held by the US Treasury, as well as other foreign currency and “gold certificates” issued by the Federal Reserve in 1934 when all gold was nationalized by Congress under F.D.R.


How to ‘Manage’ a $15/hr. Minimum Wage

The primary “practical” reason why a statutory Minimum Wage of $15.00/hr. is a bad idea is because some workers are “not worth” that much to some employer, who has to use the workers’ productivity somehow to get paid by a customer.

Employers discriminate against “losers.” They shun workers who do not meet minimum “qualifications,” which mostly the employers choose (barring race, et al.).

How to ‘Manage’ a $15/hr. Minimum Wage

Employers are not going to pay and continue to pay, after perhaps a trial probationary period, for an employee who “is not worth it.” But the “social welfare” aspect of the Minimum Wage seems to be outweighing, politically, the logic of economics.

How might a Political Economist solve this problem? It is clearly a problem for the School of Public Choice economists, of whom I am proud to have known some personally (Coase, Buchanan). A simple institutional structure might work here, to divide the “employment” part from the “welfare” part of the costs.

Under current law, every State has a “work training and unemployment compensation” system of some sort. Workers who apply for unemployment compensation after losing a job can apply for it but they have to attend training programs in most jurisdictions. It is a subsidized process.

Proposal for Handling the Minimum Wage

Perhaps the solution is a structural reform, replacing the current Unemployment Insurance and job training programs.

Those old and sub-functional State agencies should be operated as strictly Temp Agencies for employers looking for workers at the low end of skill.  The difference is this “temp agency” is subsidizing those workers who use it for their employment, and the employer does not pay the full $15.00 plus overhead for other taxes.  The low-skilled workers and the employers all win; the American economy wins.  And the “social justice warriors” cannot keep complaining about underpaid poor workers.

Let the Minimum Wage be paid to the workers directly by the State labor exchange, if they get their jobs that way. Otherwise no Minimum Wage shall be mandated. Employers do not have to pay any such thing any more, and we ought to hope the State governments follow this deregulation, and repeal their implicit excise taxes on hiring sub-par workers.

The Federal and State minimum wage laws will be repealed.  Employers could hire anyone at any wage the worker would agree to.  If the worker wanted to receive more, he can go to the State labor exchange and sign up and return directly to the same employer who already wants the worker at less than $15.00.  But the worker would get the higher payments as “wages” and not as “welfare” such as Medicaid and food subsidies.

Employers Decide how much to Pay

Employers would submit a “bid” for workers, and the labor exchange would choose which ones to send for an interview, based on whatever they do “to train” workers about job-finding skills, and assessing their level of skill.

If the workers and the employer do find each other first (the old-fashioned method), then the workers themselves can come to the State labor exchange to start receiving their subsidy.  This would require less bureaucratic administration by the government supervisers, responsible for sending the workers around for interviews.

    1. Let the employers come to the State labor exchange to interview workers, or workers can be sent to interviews, and the employers would be inviting them. Guaranteed interview, and possibly a guaranteed job.

The employer would reply directly to the State labor exchange whether s/he wanted to take on that employee for a trial 30-days and option to renew the worker for a year at an agreed fee (like a temp agency contract). The wage will be paid to the State labor exchange and the State would pay the worker his or her $15/hr. It would also do all the Social Security withholding, etc. including ACA compliance (Medicaid) and workers compensation, and any other local taxes on employers who hire workers.

The implicit Excise Tax on an employer, who hires workers whose productivity may be sub-par with experienced and better trained workers, would be eliminated – and paid by the taxpayers through the labor exchange “minimum wage” – as all welfare payments ought to be paid, not mandated on others to pay.

And . . . the Moral Argument

Finally, the primary “ethical/moral” reason why a statutory Minimum Wage of $15.00/hr. is a bad idea is because the government does not have any legitimate right to command an employer to pay any particular worker any particular amount that the worker has not earned that day.

But retired intellectuals like me can understand why most people want to survive in a world dominated by State laws. This “compromise” idea would give everyone a way out of the Minimum Wage issue, and separate (i) the “welfare” part from (ii) the wage an employer pays. [The social democrats get their “living wage” paid (social justice?) and employers get a more free labor market with no wage controls.]

The Philosophical Argument (phronesis)

It is precisely that “wedge” from the elementary supply & demand graph (the “burden” of welfare), imposed by the government on the private employer; this causes “unemployment.” Since the employer can choose not to hire, that law causes unemployment. [law of demand – demanders move upward on the curve, for a smaller quantity demanded] It is an implicit Excise Tax on employers who hire sub-par workers, thus fewer of those workers are hired.

Yet if we could divide the welfare payment from the wages paid by an employer, then “unemployment” goes away. Taxpayers would pay the “welfare” part of $15/hr. and the employer would pay to the State labor exchange what the employee is worth. The employer’s payments would be under a contract with the State labor exchange; it would pay $15/hr. to the formerly “unemployed worker.”

“Unemployment” goes away. That’s a good result. Employers might figure out how “to chisel” the system by bidding low to get a good worker, and pay the employee less than the $15 the taxpayer is stuck with, but why care about that? Workers get jobs, employers get workers to train, and social democrats get higher taxes “to redistribute wealth” without requiring employers to pay all those taxes themselves, which a mandated Minimum Wage like today’s does do.

Today’s Minimum Wage laws are just a form of Excise Tax on an employer who might hire workers whose productivity is sub-par compared with experienced and better trained workers. When we tax something, we get less of it. Stop taxing job creation.

Note: Nothing in this proposal would restrict direct employer hiring of a worker, and no minimum wage laws would apply when such “Excise Taxes” have been repealed. Workers who do not want the State $15/hr. wage could work for less directly with an employer.

Creating a New Currency


    Link: A review of Warren Coats’ new book.
    (see a list of his articles and books)


Stronger currencies despite central bank policies to weaken

Gold as a Parallel Currency Shows Promise in Foreign Exchange transactions, using the technology of a Blockchain.

Why Dollar-Alternatives Are Non-Starters, e.g. the SDR.

The Appeal of the Gold Standard

The appeal of the Gold Standard is that classic image of the Gold Coin in the minds of people. It is a concrete mental picture. Our paper money system is something else. People know the Federal Reserve dollars are slowly losing value (“inflating”). The gold coin you see in your mind’s eye is more than just a physical object; it is a belief in permanence, a belief in objective reality (and in some sense, “natural law” i.e. chemistry, mechanics).

31.1g AU coin
31.1g AU coin

Economists would want to promise a “Stable Price Level” as a monetary standard. It is not believable. The Federal Reserve cannot even “manage expectations” about their plans for interest rates in 2016. Seeking this elusive ideal, government “planning” crowds out financial planning by individual families and businesses, because “the language of future prices/values” becomes fuzzy. The ideal of their success – a “stable price level” – is not believable (another example, perhaps, of believing in unicorns).

    [ from the page on this site, “Gold as a Parallel Currency,” — continuing to “A Modest Proposal” — Gold kilogram 50-yr.Treasury bonds. ]

US Economic Growth vs. Rest-of-World

The graph below shows with a RED LINE the relative growth rate of the U.S. Economy and the BLUE LINE shows the relative growth rate of the Rest of the World’s economies. The connection is that foreign demand pulls exports from the United States for use in foreign countries. Imports are what Americans demand to add to domestic production to create U.S. economic growth. Imports increase when the economy grows, and they increase faster when the USA grows faster. (“Production” is an inclusive term meaning whatever increases individual standards of living and personal flourishing, even if it is a cheap toy from China “to produce” your baby’s smile.)

The RED LINE also shows what has happened to the CAPITAL ACCOUNT in the Balance of Payments. The Capital Account has been in consistent SURPLUS both because the Rest of the World demands U.S. Dollars in the form of U.S. Treasury bonds, but also because foreign nationals need to buy real estate and build factories in a country where the government does not confiscate wealth and infringe liberty as much as in, e.g., China.

The graph on the left side begins with the Smoot-Hawley Tariff of 1929-30. The stock market crash happened when the House of Representatives passed the bill in October 1929 and the Great Depression began (after a stock market recovery) the following spring of 1930 when the Senate passed and President Hoover signed the Tariff Act, dramatically increasing the tax Americans had to pay for anything imported.

Since the Rest of the World, particularly Europe, in 1930, could not so easily sell goods to Americans (who had to pay the tariff-tax on imports), they stopped buying large volumes of agricultural exports from the Midwest.

SAY’S LAW: Foreign buyers need to raise money to buy US goods, and if their own sales have been taxed to minimal, they no longer can pay US farmers.

That caused small banks in those small farm towns to collapse, which rapidly spread to collapse in the money-center banks. The rest of the story is well known. The Great Depression lasted over a decade. Thank you, government policy Hoover-F.D.R. “admininstrative state.”

How long will the Great Trump Depression last?

A Floating Exchange Rate World

I think we are living in a “floating exchange rate world,” in which we have lost visual control over what we might believe our assets and liabilities are “worth.” Value is hard to measure, and we Americans normally think about how many “dollars” each value might be. It is a yardstick.

I am studying how to trade in the foreign exchange spot market. It is interesting to me as an economist, to play with the numbers. I like to make lines and colored boxes on charts of daily movements in currency pairs. I watch the dollar-value of the gold and silver ounce, and also some curiosity items like bitcoin, oil, junk bonds, and the DXY. Then I look seriously at the currency pairs, and some of them are paired so we say one euro is $1.0624 (11/25) but others are priced inverse, just for convention and trading such as the Chinese 6.421 (11/25) for $1.00 USD. [update: 8/22 EURUSD $1.1320 and USDCHN 6.659]

What is your house worth? How would you find out? Is that a “hard number” or just a guess? What would a Chinese person think about the price of your house, if they wanted to buy real estate in the United States? We can see if you went to Europe everything would seem about 6 percent more expensive, generally.

We live in a floating exchange rate world, but “one dollar” is not like the “inch” on a yardstick, nor a “meter” in the SI. It is like rubber, and we know the dollar is shrinking continuously in value. The Fed says it is trying to diminish the value of dollars at 2% annually. So far their theory seems not to work very well. I believe the strong overseas demand for the USDollar is having a dominant effect; the USD as a unit of accounting, is strong as a safe haven, and because US Treasury bonds are payable in USD.

The great unified “Accounting System of the universe” has chosen the US Treasury bond as its new gold. But never take your eyes off of gold, because you have few other true references. Perhaps also oil, due to its importance and it is priced in USD. Watch OPEC for any discussions of using a different international Unit of Accounting for oil barrels, but so long as the trading in New York is leading the commodity-price methodology, the USD will remain “reserve currency” and the US Treasury bond will be the ultimate “reserve asset.”

What do they say at the end of some 1950s scary “invaders from Mars films? “Watch the skies.”  The danger of another 2007-08 can come again, in this puzzling financial universe of Federal Reserve interest rates near Zero for more than 7 years and quantitative easing, seemingly not to very much effect.

I claim the foreign exchange phenomenon explains much of the picture, but it could change very quickly. Watch the horizon for scary events. What if Donald Trump were sworn in as the 45th President of the United States in 2017?

Social Order and Political “Leaders”

Social Order and Political “Leaders”

Thomas Hodgskin was a great classical liberal leader. His book has this quote about Social Order and the motivations of other polical “leaders” he knew in Parliament.

His insights anticipated the Public Choice School of economists, who teach us to look to the behavioral motives of elected officials and their bureaucratic employees. His book: The Natural and Artificial Right of Property Contrasted (1832) was very important in the 1830s’ British debates about the proper role of government. He strongly opposed Jeremy Bentham’s and James Mill’s Utiliarianism, and he directly influenced Herbert Spencer.

See George H. Smith’s series on this great classical liberal.
Hodgkin’s independent spirit, his intense dislike of unjust authority, and his determination “to make a powerful resistance to oppression every time [he] was its victim” was forged during a brief career in the Royal Navy. One is reminded of Herman Melville’s story of “Billy Budd.”

Let’s take this complex quotation and break it into four segments of argument.

  1. What is “social order”? How does it arise peacefully?
  2. Social order occurs prior to the State and legislators.
  3. Legislation attempts to freeze out natural changes.
  4. The political meddling by politicians introduces social dis-order.

1. What is “social order”?

“Social order is the mutual dependence of all those who contribute to the subsistence and welfare of society. It includes the manner in which they assist and protect each other, and provide for the mutual wants by the interchange of their respective products. . . .”

Hodskin defines “social order” as a process F.A. Hayek would later describe as “spontaneous order.” It arises from the evolution of usage and successful experimentation just as all social customs evolve, as well as our common language.

2. It is prior to government

“If by social order be meant the great scheme of social production, mutual dependence, and mutual service, which grows out of the division of labour, that scheme I will boldly assert the legislator frequently contravenes, but never promotes – that grows from the laws of man’s being, and precedes all the plans of the legislator, to regulate or preserve it. . . .”

The bureaucrats and Parliamentarians who make regulations and laws are restrictive and seek “to regulate or preserve” the status quo for the benefit of vested, crony interests.

3. Political meddling is costly

“In fact his attempts to keep in one state what is continually in progress are mischievous. . . .”

The bureaucrat and the legislator cause more direct and indirect harm to the peaceful operation of social order than they intend. We can measure this in the rent-seeking costs of lobbyists and protectionists, and the expense of compliance with regulations.

4. The motivations of the lawgivers

“We must then set aside as mere pretexts the assertions of the legislator, that he intends to preserve social order, and promote the public welfare; and we must deal with legislation as solely intended to preserve the power and privileges of the legislator.”

The meddling of the political “leader” is for the purpose of keeping himself and his peers in power. Whether this is a conscious “conspiracy” of political parties, or an indirect effect of making incentives for rent-seekers to work for protectionism, the results are the same for average people: lower standards of living.

The model of “the legislator” in Thomas Hodgskin’s writing is Jeremy Bentham and his protege James Mill, who saw in mechanistic Utilitarianism the key to setting up a “designed,” positive-law utopian scheme for government. This Utilitarianism almost destroyed the classical liberal arguments for human rights and civil liberties in the early decades of the 19th century.

Thomas Hodgskin and Herbert Spencer preserved the original, central argument for private property rights developed by John Locke on the premise of a peaceful “social order,” contrasted with the ideas of Thomas Hobbes (human lives are “nasty, brutish and short” due to warfare of “all against all” in nature). This discussion should now turn to John Locke’s innovation in his 1st and 2nd Treatise on Government.

Who Sets the Minimum Wage?

Debate in the political media about whether the Minimum Wage ought to be $15.00 per hour is silly. I italicized “minimum wage” above because we don’t know what that means, and we all believe we do. It has become “a Thing” instead of a price.

The wages of labor are paid by employers who have work to do and need someone to do it. Sometimes the employers need workers who are smarter than their managers and other times they need workers who are not smarter. They reward the workers accordingly.

Nobody can find anything wrong with that model of correct and moral behavior in the employer-employee relationship. Pay for work performed. Pay promptly. Pay in good “legal tender,” whatever that means.

The idea that a government should create a law telling employers, or potential employers, they are forbidden to pay anyone less than a certain floor price for labor will find itself creating an artificial surplus of labor at the lower supply-curve range. Elementary price theory, long known to be valid.

But what is “magical” about a Federal law? What is more logical about a local law? And what is most logical would be to let each employer decide for his own establishment what the starting or minimum (disliked) wage should be, as workers would want to increase it by demonstrating more quality and effort.

American Eagle Gold Bullion Coin

December 17, 2015, will be the 30th anniversary of the signing into law of the American Eagle Gold Bullion Coin legislation, by Ronald Reagan. This is today Public Law 99-185 [31 USC 5112(a)(7…11),(i),(q) – and “legal tender” 5112(h)]. The law created a US Mint coinage based on troy ounces of fine gold. The denominations were $50.00 per ounce, $25/half, etc.

Credit is due to Rep. Ron Paul (R-TX) who introduced the original legislation in the 98th Congress as H.R. 4226 (10/26/1983). It did not become law during his term in Congress. In the 99th Congress Rep. Jerry Lewis (R-CA) reintroduced the bill with co-sponsorship from Rep. Julian Dixon (D-CA), and Sen. James McClure introduced the Senate bills. President Ronald Reagan signed the law on December 17, 1985.

The design artist, Miley Busieck, whose “family of eagles” was specified in the law, was instrumental as a visitor to each Congressional and Senator’s office with her sweet persuasion in favor of the gold coinage. This is the first legal tender relationship between the US Treasury and a weight of gold since the classic days before 1933.

What I wrote some years ago:

February 8, 2008
Story of the Gold Coinage

Richard Cobden, free trade

Richard Cobden, was a Richard Cobden
Member of Parliament. He is still a strong voice for free trade, as “best” British (and universal) commercial policy. He was able to win his government to free trade in 1846, with a half-century of strong economic growth to follow.

This great idea, of the connection between free trade and peace, was urged at a time of a great delusion about “balance of power” and Russia. It sounds familiar to a 20-21st century observer. Cobden’s classical Liberal Party dominated the government during the following decades and Britain “ruled” the world in a period of great peace and prosperity.

His 2nd greatest achievement was the Free Trade Treaty with France (1860), which became a model for many other such treaties that opened up other countries; Britain was not “closed” again until conservatives took the government and wanted to enhance “imperial preference” in trade. Then the Boer War and the first World War were indirect consequences of that new direction for commercial policies, as other governments followed Bismarck instead of Cobden.

Wars historically come in years/decades following the closing off of an era of “free trade” as Britain enjoyed through the mid-19th century.

The TPP: Don’t Let Perfection Become an Enemy of “Good Enough”

    “When politicians can determine what can be bought and sold, the first thing to be bought and sold will be politicians.” – Mark Twain

The Trans-Pacific Partnership is just a continuation of what Reagan-Bush started with NAFTA and the Uruguary Round of the General Agreement on Tariffs and Trade (GATT), now renamed “World Trade Organization” (WTO).

One criticism of TPP is “super courts” (arbitration panels). All those arbitration panels are the enforcement process, and the other criticism is all the “protections” for pharmaceutical patents and recorded music and films. But that is just US imperialism. It is just an extension of US domestic law. It is actually quite a crony capitalist demand by the US government, in favor of enriching some powerful vested interests in the United States, by requiring those other governments to arbitrate when ASCAP sues. Hollywood money?

Those who favor TPP point out that it is “process” more than a Thing. The vote in Congress to approve it becomes a very technical and comprehensive package of amendments to existing US laws. For example, some 1930s law regulating pork might have to be changed due to some way it held up selling Vietnamese pork products in the US market; the Vietnam government demanded it, to help Vietnamese pork exporters. The Congressional vote to accept TPP cannot be “amended” just to give a reversal-vote for the US pork producers, who themselves have been enjoying protectionism since the 1930s – even if the pork producers have bought every Congressman.

Always Remember: Trade treaties are always “trade off” negotiations. Each side gives up something. In trade treaties, each side agrees to stop punishing its own people. That is considered “giving up something” in mercantilist economics.

We all agree the “best of all possible worlds” would be Universal free trade, no barriers and every merchant and retail distribution system should honor “national treatment” of foreign goods’ imports and foreign service providers (e.g. doctors, lawyers, architects, financial services).

So, in a less than “best” of all (im)perfect worlds, the Trans-Pacific Partnership goes with:

  1. an increase in “the rules of Administrative Law” (a bureaucratic “cost”) in exchange for
  2. a more level and uniform “playing field” for international trade in services and intellectual property. Those, after all, are what the United States increasingly now exports to the rest of the world.

The True Opponents of the TPP (as they have also been against NAFTA, the WTO and Colombia FTA, et al.) are Labor Union Leaders. The “Rank and File” of labor unions probably don’t care about the issue, except to the extent their “leaders” sell them on a propaganda campaign about “cheap foreign labor.”

Labor union leaders depend on a revenue source to pay their own salaries and maintain big offices and private planes and publicity. They collect union dues. Whenever a union’s member-workers lose their union jobs, due to imports, the workers might go on to do some different work. But the union leadership would lose their dues paying members. More free trade tends to dry up union revenues, just as competition in schooling tends to dry up government-employee teachers’ unions’ revenue. (And we know what that means to the finances of the Democratic Party.)

The Economic Truth of any agreement like the TPP is that Some Americans will LOSE, just as Some Asian or other government-protected interests will be traded away (sacrificed) by their own governments. On both sides, there are losers, as well as many more diffusely widespread and a greater number of [smaller amount] winners over the years of future growth and division of labor.

Normal people think it is good to have future growth and division of labor, and could call it “Progressive,” but Union officials in particular and economically illiterate “socialist” partisans will oppose all open international trade if buyers might be given a free choice without paying a penalty tax.

The system of of the TPP (and the WTO and NAFTA) is to enact “norms” of equal treatment for all persons who trade inside a member country. It is called “national treatment.” It is what we have enjoyed inside the USA since before 1776.

Putting local, domestic USA special interests on the “chopping block” is good for every other American, because only protected vested interests can be “sacrificed” by governments that surrender the uneconomic and undeserved protections, and sign a trade agreement – as a “concession.” (This is a “concession” like agreeing not to cut off your nose to spite your face if the other side agrees also not to cut off its collective nose.)

More free trade is about Larger, more extensive markets and greater division of labor. Restricted trade is about Smaller markets and more special protections for political groups, crony capitalists, and payoff for politicians (without whom, the smaller market could never be enforced).
This item has been published in The Washington Times, Monday, November 9, 2015 [link]