Life, Liberty, Property #61: The myth is that the Federal Reserve is independent of politics when it is a prisoner of the big spenders that run the federal government.
IN THIS ISSUE:
- The Myth of the Independent Fed
- House of Fiscal Blues
- A Copyright Sequel
- Cartoon
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The notion that the Federal Reserve (Fed) is independent of the federal government is a myth.
Established in 1913 at the height of the Progressive Era—the great movement for the massive centralization of American government that characterized the twentieth century—the “Fed” was established to add liquidity to the economy in times of great, unmet demand for money which banks could not provide because of the borrow-short, lend-long structure of banking.
There are plenty of additional details to be considered in a full history of the Fed, and they are well worth the reader’s attention at leisure, but this liquidity management function is the important point for our present purpose. The desired monetary regularity was to be accomplished through the creation of a system of 12 regional banks, independent of government control, that would manage the nation’s monetary system.
“What could possibly go wrong?” you might wonder.
The answer is: plenty.
Far from being an independent, apolitical, faction-free organization dedicated to fairness for all parties, the Fed is like all government-established bureaucracies established since the year 1900: armed with grossly excessive power and thoroughly captive to special interests.
The biggest interest of all, it should surprise none, is the federal government. Presidents are well-known for complaining about tight money, but the entire government is complicit in political rule over the Fed. Congress, the president, and the permanent federal government bureaucracy regularly operate on the premise that they can continue spending record amounts of taxpayers’ money and take on ever-higher obligations of future tax collections through government debt, and no harm done. They expect the Fed to accommodate their overspending via manipulation of the value of the U.S. dollar.
The Federal Reserve is more prone than the politicians to worry about the predictable effects of monetary manipulation, but the central bank’s governors know that a refusal to induce the system to print enough dollars to finance the government’s debt will bring on a recession by choking off the supply of money for consumer spending and private-sector investment. Consequently, the Fed adds money to the system and waits until price inflation becomes painful before its governors dare to tighten the money supply. They then wait until their money-tightening has done serious economic damage (especially by reducing economic growth and increasing unemployment) before they loosen, because they will get all the blame for the ensuing inflation. Politicians are better at media management than bankers are.
Once unemployment rises, Congress and the president antagonize the Fed into loosening the money supply, by overspending on the federal budget (to “prime the pump”), and then the Fed reverses course when the inevitable inflation happens.
That is not independence. The Fed is a prisoner of the big spenders that run the federal government.
The excuses for excess government spending have been magnified in recent years by Modern Monetary Theory (MMT), which holds that deficit spending does no harm to the economy. This rationale echoes, exaggerates, and weaponizes the Keynesian approach that dominated economic thinking beginning in the interwar era.
MMT proponents argue that “public debt is private savings” because the government bonds that finance deficit spending become assets for the buyers and the latter benefit from the interest paid to them (by other taxpayers), as Jonathan Newman notes at the Mises Institute’s Power & Market blog. To MMT proponents, “public debt is private savings,” and therefore “public debt isn’t a burden at all” because it enriches investors in the U.S. government, Newman writes.
In addition, though Newman does not discuss this, all the countries in the world need currency to pay for trade with one another, and the U.S. dollar is the best tool for that because of the power of the U.S. government (specifically, its consistent ability to tax the nation’s residents) and the size of the economy on which that government power is based (which provides an unparalleled tax base). Dollars are backed by the productive capacity of the U.S. economy. With an ever-increasing demand for U.S. dollars as the world economy expands, the Fed can monetize U.S. government spending without any negative consequences, and the U.S. government can spend as much as it wants, MMT proponents claim.
Newman quotes MMT proponent Stephanie Kelton as arguing for this position in her book The Deficit Myth, and he immediately spots the deception—the refusal to acknowledge what happens after the public is “enriched” by interest payouts for these bonds:
“In truth, paying interest on government bonds is no more difficult than processing any other payment [Kelton writes]. To pay the interest, the Federal Reserve simply credits the appropriate bank account.” Later, she describes that the only potential constraint is price inflation: “Every dollar that is paid in the form of interest becomes income to bondholders. If those interest payments become too large, the risk is that total spending could push the economy above its speed limit.” [Those who perceive Keynesianism in that rationale are 100 percent right.]
And that’s the end of it. Paying bondholders might have negative consequences in the form of excessive price inflation. MMTers don’t connect debt service to their prior claims that public debt is actually private savings because it negates the alleged aggregate benefits of government bonds held by the public. Paying bondholders requires an expropriation from the productive part of society in the form of either taxes or diminished purchasing power, which means public debt is not private savings in the aggregate.
In addition, though Newman does not mention this, foreigners own $8.3 trillion of that U.S. federal debt. That money will go to other countries and will not enrich Americans.
To foster the illusion that government borrowing is unlike any other kind of debt, MMT proponents simply ignore the fact that payment of government obligations requires confiscation from the public:
While they describe their framework as providing the “full picture” of government finance, they do not proceed in their analysis (at least not in sufficient detail) by asking what happens when the government pays the people holding the bonds. The money used to pay back the bondholder ultimately comes from taxing and printing, both of which involve expropriation from the private sector. …
They see, correctly, that holding a bond means that you can receive payments from Uncle Sam in the future, but then gloss over the costs of Uncle Sam servicing this debt. It’s a perfect example of a violation of what Henry Hazlitt described in 1946 as the art of economics: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Government borrowing moves resources from the private sector to the government, the great majority of which is spent on income transfers from workers to nonworkers, from investors in business to investors in government, and from producers to consumers. Although purchasers of government debt will benefit from the interest payments, the latter are extracted from everybody else through taxes, inflation (decreased purchasing power), or both.
That process of expropriation from the public has accelerated since January 2021, with the Biden administration’s and Democrat Congress’s adoption of MMT as their economic bible.
The current federal debt is just under $35 trillion, around $267,000 per taxpayer. It was $22.7 trillion at the end of 2019. Federal spending is $6.7 trillion this year. It was $4.87 trillion in 2019.
In FY 2023, the federal government spent $1.7 trillion more than it took in. In addition, the Biden administration and Congress imposed regulations costing $3.079 trillion in 2022, according to the National Association of Manufacturers. Under this intensely centralizing regime, much more money is being diverted from the production of goods and services to income transfers.
That kind of activity changes things radically. The increasing cost of government and the decreasing amount of resources available to the productive side of the economy make the burden of government progressively heavier. That is true regardless of whether the government spending is paid for through current taxes or through money borrowed with promises of taxing people in the years to come.
Regardless of what the Fed’s governors might want, Congress and the president keep increasing spending. That money comes from today’s taxpayers, through taxes paid or by investment diverted to the government instead of the productive private sector (via government borrowing). Both these means of financing the government also affect tomorrow’s taxpayers, by decreasing economic output today and in the future and by obligating them to fork over higher taxes to pay back the borrowed money.
Borrowing via forced money-creation by the Fed does not mean that nobody will ever have to pay for it. MMT is catastrophically wrong in assuming that government borrowing has no consequences. On the contrary, the debt accumulation accelerates and further damages the economy that is expected to support the government. The debt increases will continue to speed up until the government cuts spending (radically), the Fed devalues the debt through inflation (which it does only reluctantly), people stop lending money to the government at bearable interest rates, or the government defaults on its debt.
If a national government can borrow money, there is no such thing as an independent central bank. It is all political, and government greed will ultimately derail everything. No amount of clever theorizing will change that reality.
Source: Power & Market
Speaking on the House floor a few days ago, Rep. David Schweikert (R-AZ) provided an extensive analysis of the current fiscal situation on the federal level and explained what its economic effects have been and will be.
Regular readers of this newsletter will recognize much of the material Rep. Schweikert covers in this speech. I am in complete agreement with Rep. Schweikert on his two main points—and all or nearly all the particulars.
Schweikert’s most important observations are that the inflation of recent years is the result of massive overspending by the federal government (now higher than even in 2021 during the recovery from the Covid recession) and that there is no way to tax the rich enough, or even the entire population, to raise the revenues necessary to close the deficit.
Schweikert notes that the market’s decreasing willingness to finance U.S. federal government bonds sends a strong signal that the current spending trajectory and accumulation of debt are unwise (all quotations edited for clarity):
[4:50] We’ve already had a couple of bond auctions in the last 12 months that were undersubscribed [compared with] the way we thought they would be. You’re actually now seeing articles saying American bonds are getting harder to sell. …
You’ve got to understand, you’re playing games with fire. Interest this year, if today’s interest rates hold, you’re approaching $1.2 trillion this fiscal year. That means Social Security is $1.450 trillion, interest $1.2 trillion, Medicare underneath that, and defense is number four.
Just so you can see it, we threw together a little chart. … These are just 12 countries and then the United States; we’re number 13 on there; the markets price U.S. debt higher, meaning they consider it more risky. …
The United States right now pays higher interest rates on a 10-year bond than Greece; we pay higher than the United Kingdom, Canada, Republic of Korea, Greece, Spain, France, Germany, Japan, and Switzerland. You take these industrialized countries, we’re functioning number 14 on the price. …
Because of how our inflation runs, because of how our governance has been running, because of our demographics, because of what we’re talking about in taxes and plans to grow the economy and the stunning amount of debt we’re borrowing, we have 13 countries in the industrialized world that have cheaper ten-year bonds than we do.
That risk premium means bond markets believe that the current course of U.S. government taxation and spending is less sustainable than it was before the pandemic and Biden spending spree and that the chance of our government bonds being paid off in full is seen as being below even that of Greece.
This dismal situation is entirely a result of reckless government spending, and “taxing the rich” won’t bring in anything like the amount of money necessary to close the budget deficit, Schweikert says:
[9:45] … but we’re going to do a clown show here and say we don’t tax rich people enough. And then I show up with the reports that [show] basically when you go over the numbers—and I’ve done entire floor speeches just on this report—when you did every bit of taxes on the $400,000 and up [annual incomes]—you maximize their capital gains tax, maximize their income tax, maximize their estate tax, maximize everything—and then you adjust for its effect on the economy, you get about one and a half, 1.6 percent of GDP. In the last 366 days—remember it’s a leap year—we’ve borrowed over 9 percent of GDP.
As Schweikert’s analysis indicates, those who say that the rich can be made to pay for ever-increasing government spending are lying, delusional, or both.
Schweikert also discusses other issues, such as the increase in debt payments as government bonds become due and are refinanced (because we cannot pay them down, of course); how the federal deficit harms the developing world (“We’re actually crushing much of the developing world because we’re consuming all the money that would be helping them build up their economies.”); the impact on ordinary people of price inflation caused by excessive government spending; the need for the government to stop suppressing innovation (“Life expectancy is shorter [now], but this body will knife each other when we’re just trying to add technology to telehealth, because it will force someone out there to change their business model.”), and more.
Government overspending in the United States has become a moral crisis, concludes Schweikert:
[35:50] It basically comes down to a single line: prosperity is moral. If you looked at the inflation data, the new GDP data that came out on Friday, we’re on the cusp of going back to something horrible from almost 40 years ago, called stagflation. That’s immoral. This body can make that not happen, and we can make this a prosperous future. I believe we only have three to five years to embrace the disruption [of major reforms to fiscal policy], but if we don’t do it, we’ve engaged in a really immoral act here.”
The video is well worth watching:
(Hat tip to my Heartland Institute colleague Matthew Dean for calling this video to my attention.)
Source: YouTube
A Copyright Sequel
Liberty-minded thinkers, it appears, are increasingly coming to the realization that the U.S. copyright system is not a force for freedom but instead a corrupt cronyism scheme benefitting enormous multinational corporations that have no evident interest in fostering American greatness and virtue but instead have a powerful desire and massive incentives to exert highly destructive control over the nation’s culture.
Readers will recall that just last week this newsletter covered Regime Critic writer Josiah Lippincott’s analysis of how the excessively long current duration of copyright protection under federal law increases the centralization of power within the culture and in the federal government and empowers gigantic, multinational corporations with unprecedented levels of cultural control. This week attorney and Motley Fool writer Richard Smith takes up the subject in a superb review-essay at Law & Liberty about the book Who Owns This Sentence, by David Bellos.
Changes in the law have transformed copyright ownership into a massive asset, Smith notes:
By 2021, write Bellos and Montagu, the total value of intellectual property (IP) licensing fees paid from country to country and around the globe topped $508 billion—and that may be an understatement. Calculating the total amount that IP payments add to the cost of products, be they IP themselves or simply products incorporating IP into them (anything from the licensing fees paid to use music in a movie, to the design on a box of cereal), the authors conclude that our current system of IP regulation costs consumers approximately $6,000 per person per year.
Times a global population of 8.1 billion souls, that’s $48.6 trillion—a figure roughly 100 times the size of the first estimate! So you can see that there’s some debate about exactly how big the size of the global IP market has become.
Those assets, established through what Bellos and Montagu call “copyright creep” which extends protection far beyond the printed word and continually expands the period to which it applies, affords enormous power to their owners and invites massive political manipulation to protect it. That is a complete reversal of the original intention behind the establishment of copyright:
[I]n the present day—a right originally designed to protect the interests of individual creators came to be captured largely by corporations.
[I]t doesn’t take too much reading between the lines to discern that this is ultimately the point the authors are getting at. As Bellos and Montagu argue, if the market capitalizations of six of the largest corporations in the world—Apple, Microsoft, Alphabet, Amazon, Meta, and Disney—“are almost entirely constituted by their ownership and control of copyright material,” while the employees who created the IP that built these businesses must forfeit rights to their created work, then today’s copyright system has drifted very far indeed from where it began.
The expansion of copyright extent and duration has been radical, especially since the early years of the twentieth century, Smith notes:
[W]hen Britain passed its first copyright law, the 1710 Statute of Anne, authors were granted exclusive rights to their work for just 14 years after the creation of the work. But over time and through many twists and turns, we’ve reached a point where—in the United States at least—a bit of software code, a drawing, or a sentence composed by an author in his 20s could easily retain copyright protection for 100 years or more.
The excessive duration of copyright protection benefits an ultrawealthy few at the expense of multitudes and impoverishes the nation’s culture, Smith notes:
Who Owns This Sentence’s authors cite the example of [rock and roll musician] Mr. Bruce Springsteen and the recent sale of his life’s work to Sony for the princely sum of $550 million. And there’s a real question of how a transaction like this one, which could lock up the Boss’s catalog in Sony’s ownership well into the 2100s, encourages any creativity by anybody. On the contrary, by shackling Born in the U.S.A. to a corporate master, copyright law is much more likely to prevent anyone else from riffing on the album for almost the next 100 years! …
This system perverts the artistic process, to the benefit of investors in multinational corporations (and the politicians whom they support with campaign contributions) and a few lucky (and/or particularly corruptible) creators:
Successful book authors, able to earn a living income from writing, number in the mere hundreds across the globe—“a bare handful.” And the vast majority of self-proclaimed writers earn less than minimum wage from their work, even with the full weight of copyright laws supporting them.
“Yet people keep on writing!” exclaim Bellos and Montagu, and the reasons they keep on writing (and acting, and singing, and otherwise creating) often derive from goals beyond the monetary—a desire for fame, for example, an internal need to express themselves, or even simple “sheer pleasure.”
Thus, the current copyright system is doing no good and plentiful harm, Smith reasons:
The logical conclusion: Authors would continue to write, actors act, singers sing, and even software programmers program, with or without copyright and other IP laws to protect their work and generate nominal incomes (to them) in return. IP rights, in other words, are often superfluous—even as they impose upon society “almost everlasting rent-generating monopolies” benefiting the corporations that collect them, and discouraging future creativity by individuals.
Summing up how we got to where we are today, Bellos and Montagu argue that over the centuries “a long sequence of dubious analogies and plays on the meaning of words” has vastly expanded copyright protections, that were originally awarded to protect the livelihood of individual creators, and transferred these rights instead to giant corporations, which use them to extract a form of rent from global consumers.
Smith suggests a different approach, which would award artists and prevent corporations from co-opting the system:
A more dramatic change to IP laws, however, might have an even more beneficial effect—rewarding creative efforts by individuals, while preventing corporations from hoovering up IP rights and charging for their use in perpetuity. Bellos and Montagu cite the example of France’s decision to deny Louis Daguerre a patent on his design for an early camera prototype, awarding the inventor a pension instead. Another example might be found in Soviet Russia’s practice of rewarding inventors with social status, medals, and prizes.
Such one-off payments by the state would directly reward inventors, authors, and other creators, without establishing long-term restraints on trade that harm consumers for decades and concentrate power in the hands of corporations.
Such a system would require free-market proponents to rethink our approach to copyright. I did so myself long ago, and I conclude that Smith and Lippincott are right. American urgently needs a pro-market, pro-liberty rethinking of our nation’s approach to copyright.
Source: Law & Liberty
Cartoon
via Comically Incorrect
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