Monday, September 09, 2013

Money By Its Nature Is Not So Hot, But Loose Credit And Exchange Controls Make It So

WASHINGTON, DC - NOVEMBER 09:  Federal Reserve...
In an amusing modern twist on mercantilism, India has actually been trying to discourage gold imports. Last month, the Indian government increased its import tariffs on gold, silver, and platinum bullion imports to 10%. It also banned the import of coins and medallions in the hope that it might help stop the slide in the value of the rupee, which continued to fall to a record low last week.

Consistent with the old mercantilists, India already has rules requiring that 20% of imported gold be used in exported products, such as jewelry. Last month, the government expanded the categories of gold to be subjected to this restriction. The stated objective for all this is to reduce India’s current-account deficit, which hit record levels this year. It is hard to believe that they expect this to encourage capital inflows, but apparently they do.

India is not a gold producer, but even in South Africa (which is a major producer) some politicians are perennially dissatisfied with merely exporting gold. They want also to encourage (i.e., subsidize) beneficiation of gold and other basic commodities before export. They believe that policies intended to promote “adding value” would improve on market outcomes and increase export earnings.

Due to American low-interest-rate policies and “quantitative easing,” the central bankers in India and South Africa ...

Monday, August 26, 2013

It Cost Mark Shuttleworth More To Leave South Africa Than It Did To Leave The Earth

by Richard J. Grant
Shuttleworth on board the International Space ... Mark Shuttleworth is a South Africa born tech entrepreneur and venture capitalist who is perhaps best known in the rest of the world for being the second “space tourist” to spend time living and helping with experiments on the International Space Station. After a year of training and reportedly paying about US$20 million, in early 2002 Shuttleworth rode on Soyuz spacecraft to spend about eight days on the space station.

Shuttleworth had the wherewithal to buy his space ride since 1999, when he sold his four-year-old Internet security company to VeriSign for about US$570 million. Since then, he has used his wealth to finance and build new companies as well as to fund charitable ventures.

But living in South Africa, with its restrictions on capital movements, created problems for Shuttleworth’s international operations. This soon prompted him to take advantage ...

Sunday, May 26, 2013

When Public Choice Trumps Public Finance


Sunday, May 12, 2013

Moral Consistency From Here To Benghazi

Published at FORBES with archives. A shortened version was published in The Tennessean, Sunday, May 12, 2013.

by Richard J. Grant

When our political leaders tell us lies, we can forgive them when they do so for clear national security reasons. That is, when they lie to protect us, not merely to protect themselves.

We can also forgive error when it is not due to negligence or incompetence. Uncertainty dogs our decisions at the best of times, but during an emergency requiring immediate action the uncertainty can bite hard.
The official immediate response (or lack of response) to the September 11, 2012 attack on the U.S. consulate in Benghazi might have been explained away retrospectively as an attempt to minimize losses. It might be argued that fewer Americans would have died in the attacks had everyone obeyed orders to stand down. A decision based on this belief would be forgivable, unless those in charge should have made a better assessment of the full context and had a better knowledge of the capabilities of available assets.
It seemed obvious at the time that not only had the rescue been botched by decision-makers at the highest level, but also the situation arose because an American ambassador was inadequately protected on hostile territory. Eight months later, with new information finally coming out, it appears that the obvious was true.
It had also been obvious that the Obama administration, which was two months away from an uncertain reelection, wanted the whole issue to go away. Clearly the events did not fit with the campaign narrative, and release of the full facts would have jeopardized the president's reelection.
By the time our ambassador to the UN, Susan Rice, appeared on several Sunday television programs to assert that the Benghazi consulate attack was a spontaneous reaction to a video offensive to Muslims, the absurdity of this claim should have been obvious to her and to everyone else. Now, eight months later, few question that the narrative was false.
Assessment of the response to the security failure remains important but is necessarily overshadowed by the question of who tried to cover it up. The two are inseparable.
Some might also be surprised by the smoothness with which the Obama administration shifted into cover-up mode. But there was no shift necessary. Given the administration's transformative social and economic agenda, the resulting state of constant policy failure makes necessary a constant state of cover-up.
Four years after the official end of the last recession, economic growth remains below our long-term average and joblessness remains high. As cover, the fact that we are no longer at the bottom is hailed as a policy achievement. The so-called stimulus programs and assistance packages, far from helping, have delayed recovery, weakened civil society, and hindered economic progress. The Obama administration's complicity in the stagnation must be denied, not for our benefit, but for theirs.
It is no accident that the response of the Obama administration (and many predecessors) to any perceived problem, especially healthcare costs and financial market reforms, resulted in bigger and more intrusive government. In the course of enhancing their own power, they create the very problems from which they pretend to protect us.
As Friedrich Hayek warned 70 years ago, the propaganda necessary to support the transfer of power from civil society to central government “is destructive of all morals” because it undermines one of their foundations: “the sense of and respect for truth.”
Members of Congress have been trying for several months to get the facts on the Benghazi fiasco. In a classic evasion of responsibility and reality, former Secretary of State Hillary Clinton asked, “What difference does it make?” Alas, the truth is not her friend.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays in the print and online versions of The Tennessean. He is also a regular FORBES contributor. E-mail messages received at:

Follow on Twitter @richardjgrant1

Copyright © Richard J Grant 2013

Sunday, April 28, 2013

Narrow focus on debt and deficits distracts us from the primary problems

Published in The Tennessean, Sunday, April 28, 2013 and at FORBES with archives.

by Richard J. Grant

In scientific controversies, as in political contests, the people most ignored are those who would prefer to vote for “none of the above.” In political contests, we must often take sides between the two remaining “most electable” candidates in order to minimize the damage that will ensue. But in scientific controversies we are not so constrained.

That is why this column never endorsed the 2010 study by economists Carmen Reinhart and Kenneth Rogoff that purported to find a sudden increase in “debt intolerance” in countries whose national debt levels exceeded 90 percent of GDP. The problem was not with the concept of debt intolerance, but rather with the portrayal of the 90 percent level as some sort of natural threshold beyond which economic growth rates would be severely curtailed.

Even before reading their article, it could be guessed (correctly, as it turned out) that the 90 percent threshold was more an artifact of how the data were selected and grouped rather than anything resembling a natural law. At the best of times, statistical studies of economic phenomena are exercises in economic history, not economic science. At the worst of times, working with whatever data happen to be available, they resemble a drunk looking for his keys under the lamppost. The science resides in the theory that is necessary to interpret the data.

Last week, researchers who were given access to the original data and spreadsheet used by Reinhart and Rogoff announced they had discovered calculation errors. After correction, the 90 percent threshold had disappeared. There was still a negative correlation between the size of the national debt and GDP growth, but there was no implied causal relationship or sudden change at 90 percent.

Unfortunately, all of this had played out in a political environment in which the U.S. and some state governments were running record deficits, partly in response to the recent recession. The debate over deficits grew in shrillness and crowded out discussion of the deeper problems, such as excessive government spending, overregulation, and the abuse of the powers of the Federal Reserve System.

During the past three years, the study’s conclusions were used to overstate the case for deficit reduction. With the revelation of the spreadsheet errors, some supporters of big government were giddily proclaiming victory as if they had not already been discredited before Reinhart and Rogoff entered the scene.

Those who need the assurance of statistical studies would be better served by the Rahn Curve (named after economist Richard Rahn), which shows a long-term negative relationship between the size of government expenditures as a percentage of GDP and economic growth rates. In other words, the bigger the role of government in the economy, the lower will be long-term economic growth rates.

The original theory underlying the Rahn Curve assumed that as the size of government increased from zero, supplying law and order and some basic services, economic growth rates would increase until government reached some optimal size. Government expenditures are not the only variable, so even if we had more examples of small government, we would still not be able to specify an optimal size of government expenditures, where the Rahn Curve peaks.

But what we can be sure of is that the peak of the Rahn Curve is much closer to zero than to where we are now. Instead of obsessing over debt and deficits, we should instead focus on the primary factor of government interference in the economy. If we constrain government spending, reduce the burden of regulation, and assure the value of the dollar, the national debt will cease to be a threat.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays in the print and online versions of The Tennessean. He is also a regular FORBES contributor. E-mail messages received at:

Follow on Twitter @richardjgrant1

Copyright © Richard J Grant 2013

Sunday, April 14, 2013

Japan's inflation cavalry arrives too late

Published in The Tennessean, Sunday, April 14, 2013 and at FORBES with archives.

by Richard J. Grant

Throughout history, inflation’s advocates always found some reason for governments to create new money. We receive most of our incomes as money and we calculate our wealth in terms of money. When any one of us receives more money, that person rightly feels wealthier. But it does not follow that the existence of more money in general would make us all wealthier.

It is true that as we have grown wealthier, historically the quantity of money has tended to grow along with that wealth. The biggest deviations from this tendency have occurred during periods of fiat-money inflation or debasement of the coinage. In each case, the consequent monetary depreciation resulted from government officials trying to get something for nothing. The newly printed money, or the new coins minted from diluted alloy, was directed toward the special purposes of the government officials and their supporters.

The stimulus to those activities favored by the availability of the newly created money is always temporary and never without side effects. Such newly created money never enters the economy evenly. It increases demand for some goods and services relative to others and redirects resources accordingly.

The injection of new money, especially through the credit markets, will temporarily reduce interest rates. But it does not necessarily reduce people’s time preference, which means that it does not by itself make people more willing to save. Neither does the induced reduction in interest rates reflect any such spontaneous willingness.

An increase in the money supply is not the same as an increased willingness to supply capital. An expansion of credit in the present does not assure the continuous availability of such credit in the future.

When governments arbitrarily alter the general value of our currency (whether up or down), they deprive us of a reliable measure of the relative values of the goods and services that we trade. This is especially apparent when comparing the values of present goods and investments with future goods.

This makes inflation a harmful and inappropriate method to compensate for the effects of poor fiscal and regulatory policies. But this is how inflation has been used in the United States and around the world.

It is not even obvious that inflation is a good cure for a preceding deflation, though it can truncate some of the unhappy price adjustments.

Japan experienced de facto deflation from the mid-1980s through the 1990s. Since then, the yen has trended lower against gold. For the past dozen years, even though Japanese consumer prices periodically fell, the yen-gold price did not signal deflation.

During the same period, the yen trended horizontally against the US dollar with wide, but smooth, fluctuations. That trend broke during the US financial crisis. The Fed weakened the dollar and the yen moved relatively higher, surpassing a 15-year high by the end of 2010. This (relatively deflationary) uptrend continued until about September 2012 when the Japanese government very credibly signaled its intention to inflate the yen.

After a period of deflation, it can take many years for the price effects fully to work their way through the economy. A reflation of the currency, such as that indicated by the yen-gold price during the past dozen years, would remove much of the impetus for the deflation-induced price adjustments. Reflation can never put things back the way they were, because changes in relative prices would already have caused real adjustments in economic activity.

With the yen-gold price now at record highs, perhaps the Japanese government should loosely peg its exchange rate to the dollar and focus on improving its fiscal and regulatory policies.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at:

Follow on Twitter @richardjgrant1

Copyright © Richard J Grant 2013

Sunday, March 31, 2013

Factual Confusion and a Disregard For Personal Liberty Explain Support For The Minimum Wage

Published in The Tennessean, Sunday, March 31, 2013 and the full version at FORBES with archives.

Richard J. Grant

A reader writes, “The Center for Economic Policy and Research found that the minimum wage would be $21.72 an hour if it kept pace with increases in worker productivity.” Touting data from the same study, in a U.S. Senate committee hearing last week Sen. Elizabeth Warren (D., Mass.) noted that the current federal minimum wage of $7.25 falls short of the productivity indexed estimate of “about $22 an hour.” She asked, “What happened to the other $14.75? It sure didn’t go to the worker.”

Sen. Warren’s question is absurd for the same reason that it would be wrong to assume that all senators share her economic illiteracy. Just as not all senators are equal, not all workers are equal. Each worker’s productivity level differs from others depending on attitudes, skill levels, and the types of tools available to the worker. Productivity is generally higher in jurisdictions with greater economic freedom, which means less government interference.

Labor productivity estimates are statistical averages; but minimum-wage workers are not average. The $21.72 estimate is itself above average because it applies only to non-farm productivity. The CEPR’s productivity estimate for the broader population is $16.54, which is still an average and is well above the marginal productivity of minimum-wage workers.

People often confuse a statistical average for an actual event or entity. While we all laugh when we hear ...

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at:

Follow on Twitter @richardjgrant1

Sunday, March 17, 2013

Medicaid benefits politicians more than it benefits citizens

Published in The Tennessean, Sunday, March 17, 2013 and the full version at FORBES with archives.

Richard J. Grant

In how many states have the governors or legislators claimed that their state would be a net beneficiary of federal spending for Medicaid expansion? There are supporters of Medicaid expansion in all 50 states who do make such claims. But not everyone can be a net beneficiary of subsidization.

When redistribution is the game, someone must be a net contributor. What becomes important here is that the burdens borne by such contributors are not necessarily relevant to the decision process. The question of whether Medicaid expansion brings net benefits to a state is a less-useful predictor of a state politician’s actions than is the expected effect of that expansion on the politician’s reelection chances. ...

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at:

Follow on Twitter @richardjgrant1

Sunday, March 03, 2013

What does Medicaid mean to governors?

Published in The Tennessean, Sunday, March 3, 2013 and the full version at
FORBES with archives.

In the coming weeks, several state governors will attempt to increase low-income citizens’ access to medical services by expanding a state-federal program that, on average, pays doctors 40 percent less than private insurers pay. How wise is this?

When you pay less, eventually you’ll discover that you are getting less. In the case of Medicaid programs, we found that out pretty quickly. Medicaid has created a class of medical consumers that do not have either the incentive or ability to consider the cost of the services they consume. As with any third-party payment system, which gives the illusion of someone else paying, patients tend to demand far more medical services than they would if they believed they could spend any savings on something else.

In this regard, Medicaid works less well than food stamps. Whatever the flaws of the food stamp program, at least it does not require grocers to accept 40 percent less for food-stamp payments than they would from other customers. But that is exactly what Medicaid does to doctors and, as a result, many doctors are limiting their acceptance of Medicaid patients. Some doctors refuse to see Medicaid patients at all.

The current drive to expand Medicaid is really just an attempt to correct the problems created by the existing Medicaid and all the other government programs and regulations that have similar effects. During the 2010 health care reform debate that resulted in the utopian Affordable Care Act, opponents often claimed that this would result in the nationalization of 16 percent of the economy. But the difference from the status quo was not really that great.

Governments have long accounted for more than half of all medical expenditures, and health care is one of the most heavily regulated industries in America. The supply and qualification of doctors is restricted by governmentally enforced licensing requirements, not by a free market. Rather than seeing health and medical care as a profit center – a center of value creation, characterized by innovation and free competition to provide the best service – our governments have tended to treat medical services as a cost center.

Do our governors really believe that they can reduce the cost of medical care by decreeing lower prices? They have never succeeded in doing so and never will. Whatever advances we have experienced in medical care have been despite the misallocations caused by government interference. Had we regulated the electronics industry as tightly as the medical industry, then much of the diagnostic and informatic equipment that we now take for granted would not have been invented here. Even government-directed medical research money is redirected from some other research or productive use.

When we recognize these alternatives, we perceive a much bigger cost. The government might pay Medicaid doctors a lower price, but Medicaid patients have trouble finding doctors, wait longer for appointments, and have poorer medical outcomes than they would in a system that is more respectful of social realities.

Few people would begrudge giving assistance to the poor through charity or an efficient government program. But Medicaid is neither of these. We can do better.

Just as Medicaid creates counterproductive incentives for doctors and even for hospital administrators, the existence of the program and the possibility of its expansion create perverse incentives for many state governors.

For a state governor, the ultimate third-party payer is the federal government. As long as a significant number of voters believe that the federal government will always benevolently subsidize their state, they will be unhappy with a governor that turns down what they naively believe to be free money.

The decision rests on the governor’s integrity.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at:

Sunday, February 17, 2013

Three Examples (Or Is It One) Of How To Have A Lower Standard Of Living

Published in The Tennessean, Sunday, February 17, 2013 and at
FORBES with archives.

Richard J. Grant

We see three different countries with three apparently different problems. But their problems have the same root.

The Argentine government has announced a two-month price freeze on supermarket products and is reportedly trying to limit union wage increases to no more than 20 percent. Given forecasters’ predictions that Argentine price inflation will approach 30 percent this year, one wonders how politicians can expect to hold wages and other prices down without causing shortages and an expansion of the underground economy.

This is what happens when policymakers treat symptoms rather than causes, but Argentina is way ahead of Japan in this regard. Japan is still trying to push up its inflation rate.

Japanese Prime Minister Shinzo Abe became famous for the lengths to which he was willing to go to weaken his national currency, the yen. So far, the Bank of Japan has pumped up the base money supply (along with expectations) and the yen has fallen 20 percent relative to the dollar since September.

Japanese policymakers blame their economy’s underperformance on a lack of demand, particularly demand for their exports. They see the problem manifesting as price deflation, even though, over most of the past 10 years, the yen has fallen in value compared to gold.

Now Prime Minister Abe has resorted to “moral suasion” to persuade private employers to raise the wages of their employees. He apparently believes this would promote optimism and consumer demand. In any event, he wants wages to keep up with the 2-percent rate of price inflation that is his goal.

In the United States, the president announced ...

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at:

Follow on Twitter @richardjgrant1

Wednesday, February 06, 2013

The Immigration Debate Is About More Than Trade

Published in The Tennessean, Sunday, February 6, 2013 and at

Richard J. Grant

President Barack Obama has already ensured that legitimate immigration reform is practically impossible during his reign. But this should be no surprise: he has made many things impossible.

The president’s track record of disregarding, or failing to enforce, laws that he doesn’t happen to like give us anything but assurance that he or his successors would enforce the border security provisions that would be a necessary part of any immigration deal. He exemplifies the morally consistent progressive who studies the Constitution with the same detachment as the activist who studies the obstacles around which he wishes to maneuver. Skirting a mere statute is, comparatively speaking, a cakewalk.

The president has not only refrained from enforcing the politically inconvenient aspects of immigration laws, but has obstructed their enforcement by other levels of government. On this and other issues, he plays a game of “Catch Me If You Can.”

Even when he is caught, as when a federal court recently ruled unconstitutional his “recess” appointments to the NLRB when the Senate was not in recess, he merely appeals the case while running out the clock. Only that which can be enforced will be taken seriously as law. Those parts of a statute most difficult to enforce, whether because they are expensive or because they lack a concentrated interest group as champion, will be the parts that fall into disuse.

The amnesty portion of any immigration bill would be the easy part to enforce, but the border security aspect, as President Ronald Reagan found out ...

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at:

Sunday, January 27, 2013

Republicans must mark their budget territory

Published in The Tennessean, Sunday, January 27, 2013 and at
FORBES with archives.

Richard J. Grant

There is an obvious reason why Republicans, despite holding a majority in the U.S. House of Representatives, keep appearing to lose their fiscal standoffs against the Democrats who control the White House and the Senate.

In both of the post-election fiscal fights, first over the “fiscal cliff” and then the “debt ceiling” standoff, standing fast would trigger consequences that most Americans would find undesirable. The party to flinch first would be the one that is less certain of its esteem in the eyes of the electorate.

On the fiscal cliff, Republicans accepted a compromise on tax rates in order to avoid an automatic increase in all income tax rates. Few doubted that such across-the-board tax-rate increases would further depress the economy, so Republicans gave the president his more-modest requested tax increases in the forlorn hope that the electorate would exhibit the Wisdom of Solomon in their judgment of the accord.

The debt ceiling is a problem for Republicans only when it is viewed in isolation from the events that make it important. When the U.S. government spends more than its revenues during any significant period, the shortfall would be financed by credit until the borrowings could be covered by a surplus. Over the years, cumulative federal budget deficits have exceeded surpluses by just over $16.4 trillion, which is the current total of the formal national debt.

Up until the U.S. entered World War I, Congress had to approve the issuance of Treasury debt. This kept congressional attention on the consequences of deficit spending, whether those deficits were planned or the result of historical accident. But to facilitate the extraordinary demands of war finance, Congress set a statutory debt limit up to which the Treasury could borrow as needed without further authorization.

The existence of the debt ceiling, and the periodic reluctance of some congressmen to raise it, is often portrayed as an unnecessary impediment to the proper execution of the Treasury’s duties. But the debt limit does not give Congress any more power than it had before. Those who wish to eliminate the debt limit must understand that its elimination would not give the Treasury the freedom to borrow at will. It would still be necessary for the Congress to approve all borrowing.

When, in the minds of the electorate, the congressional spending decision becomes separated from the financing decision, voters lose sight of the fact that the whole debt-limit issue arises due to deficit spending. It also tends to obscure the fact that as government spending grows relative to the size of the economy, eventually the economy tends to grow more slowly. As tax rates are raised, in an attempt to “pay for” the expenditures, it becomes increasingly difficult and more expensive in terms of lost production to raise each new dollar of tax revenue.

When seen for what it represents, our repeated confrontations with the debt ceiling should serve to remind us that the perceived benefits of government spending cannot ultimately be separated from their cost. But a statutory debt limit is a poor substitute for a constitutional balanced budget amendment. Painless lessons are ignored by those statists who would with impunity exploit the weaknesses of the electoral flesh.

If the best that the Republicans can do is to pass a bill that hopes to balance the budget in 10 years, then there is little credibility in attempts to use the debt ceiling as leverage to force Democrats to accept any significant spending limits. If Republicans are serious about restraining the size of government then, even with a divided Congress, they must mark their territory. Mark or be marked.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: 

Sunday, January 06, 2013

When Capital Trickles Away, Not Down

Published in The Tennessean, Sunday, January 6, 2013 and at
FORBES with archives.

Richard J. Grant

Although nature presents us with an adequate array of obstacles, many of society’s most formidable ills are self-inflicted, most potently through the ballot box. The framers of the U.S. Constitution were rightly wary of the dangers of unfettered democracy. They understood that most parts of our lives should be set apart, protected from the reach of voters.

Over two centuries later, voters seem no more reliable. They can find all sorts of reasons to meddle in other people’s lives through the magic of government. They seem more able to imagine the wonderful things that governments might do than they are able to imagine the costs. Imagination is often untethered to education.

Those who would wish the government more tax revenue, would also have us believe that taxes are benign in their impact on business. After all, in the past century we have had some of the highest corporate and personal income-tax rates in the world, but we have also had plenty of profitable companies and prosperous individuals.

If we ask the owners and managers of these profitable companies how taxes affected their operations, we will always find some who will claim that they simply took taxation in stride. Even those managers that criticize taxes for reducing profitability and possibly putting their businesses at risk can be, and often are, dismissed as merely greedy or uncaring. They were, after all, profitable.

The problem with our question is that we were asking only those that were profitable or, to put it differently, those companies that have continued to operate. We tend to lose track of companies that no longer exist and we rarely have any inkling of all those planned businesses that might have come into existence had business conditions, such as tax burdens, been better.

When we base our judgments of a situation mostly on the experiences of those who succeeded, our judgments may suffer from what statisticians call ...

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at:

Follow on Twitter @richardjgrant1