Friday, March 27, 2009

Hamilton on Pecuniary Bounties

Pecuniary bounties or direct subsidies to private firms have been a hot topic under the Bush and Obama administrations. In his Report on Manufactures of December 5, 1791Secretary of Treasury Alexander Hamilton advocated subsidies or bounties as a useful tool to promote manufacturing. He proposed bounties in the first Congress. But Jefferson's Democratic Republicans opposed them, as did Madison, Hamilton's erstwhile Federalist ally (see Elkins and McKitrick, The Age of Federalism, for a careful description).

Hamilton believed that bounties can subsidize domestic manufacturers with a smaller price increase than tariffs alone. The reason is that while a $1 tariff raises prices of imports by $1, a 50 cent tariff coupled with a 50 cent bounty provides the same subsidy to the manufacturer (the tariff being transferred to the manufacturer) but raises prices by only 50 cents.

He writes* "Bounties are sometimes not only the best but the only proper expedient for uniting the encouragement of a new object of agriculture with that of a new object of manufacture. It is the Interest of the farmer to have the production of the raw material promoted, by counteracting the interference of the foreign material of the same kind. It is the interest of the manufacturer to have the material abundant and cheap."

However (p. 171), "the continuance of bounties on manufactures long established must almost always be of questionable policy. Because a presumption would arise in every such Case, that there were natural and inherent impediments to success. But in new undertakings they are as justifiable, as they are oftentimes necessary."

Thus, while Hamilton would probably have supported the current banking system in accordance with his views on funded debt to stimulate economic activity and his support for other government policies that subsidize business, he might have opposed the bailout as a subsidy to a lost cause, long established businesses like Citigroup and Bank of America that are not capable of managing themselves.

*Alexander Hamilton, "The Reports of Alexander Hamilton", edited by Jacob E. Cooke. New York, Harper and Row, 1964. p. 169.

Alexander Hamilton on the Presidential Administration of Barack Obama

"The debt...may be swelled to such a size, as that the greatest part of it may cease to be useful as a Capital, serving only to pamper the dissipation of the idle and dissolute individuals: as that the sums required to pay the Interest upon it may become oppressive, and beyond the means which a government can employ, consistently with its tranquillity, to raise them; as that the resources of taxation to face the debt may have been strained too far to admit of extensions adequate to exigencies which regard the public safety.

"Where this critical point is, cannot be pronounced, but it is impossible to believe that there is not such a point."

----Alexander Hamilton, Report on Manufactures, December 5, 1791.

Alexander Hamilton's Socialism for the Rich

Alexander Hamilton was the first American "progressive". He advocated government intervention on behalf of economic development. His Federalist philosophy was overthrown in the presidential election of 1800 when Thomas Jefferson and the Democratic Republican Party (antecedent to both today's Democrats and Republicans) was elected.

Hamilton's socialism was an elitist socialism, much like the Bush-Obama socialism of today. Hamilton proposed the infant industry argument that in order for firms to compete, government protection and subsidy were necessary. In his Report on Manufactures, December 5, 1791, which Hamilton presented to Congress in his role as first Secretary of Treasury, he wrote of start ups of manufacturing firms:

>"Experience teaches, that men are often so much governed by what they are accustomed to see and practise, that the simplest and most obvious improvements, in the most ordinary occupations, are adopted with hesitation, reluctance and by slow gradations. The spontaneous transition to new pursuits, in a community long habituated to different ones, may be expected to be attended with proportionally greater difficulty. When former occupations ceased to yield a profit adequate to the subsistence of their followers, or when there was an absolute deficiency of employment in them, owing to the superabundance of hands, changes would ensue; but those changes would be likely to be more tardy than might consist with the interest either of individuals or of the Society. In many cases they would not happen, while a bare support could be insured by an adherence to ancient courses; though a resort to a more profitable employment might be practicable. To produce the desirable changes as early as may be expedient, may therefore require the incitement and patronage of the government.

"The apprehension of failing in new attempts is perhaps a more serious impediment. There are dispositions apt to be attracted by the mere novelty of the undertaking--but these are not always the best calculated to give it success. To this, it is of importance that the confidence of cautious sagacious capitalists, both citizens and foreigners, should be excited. And to inspire this description of persons with confidence, it is essential, that they should be made to see in any project which is new, and for that reason alone, if for no other, precarious, the prospect of such a degree of countenance and support from government, as may be capable of overcoming the obstacles, inseparable from first experiments.

"The superiority antecedently enjoyed by nations, who have preoccupied and perfected a branch of industry, constitutes a more formidable obstacle, than either of those, which have been mentioned, to the introduction of the same branch into a country in which it did not before exists. To maintain between the recent establishments of one country and the long matured establishments of another country, a competition upon equal terms, both as to quality and price, is in most cases impracticable. The disparity in the one or in the other, or in both, must necessarily be so considerable as to forbid a successful rivalship, without the extraordinary aid and protection of government.

"But the greatest obstacle of all to the successful prosecution of a new branch of industry in a country, in which it was before unknown, consists as far as the instances apply in the bounties and premiums and other aids which are granted, in a variety of cases, by the nations, in which the establishments to be imitated are previously introduced. It is well known (and particular examples in the course of this report will be cited) that certain nations grant bounties on the exportation of particular commodities , to enable their own workmen to undersell and supplant all competitors in the countries to which those commodities are sent.

"Hence the undertakers of a new manufacture have to contend not only with the natural advantages of a new undertaking, but with the gratuities and remunerations which other governments bestow To be enabled to contend with success, it is evident that the interference and aid of their own governments are indispensable.

"Combinations by those engaged in a particular branch of business in one country, to frustrate the first efforts to introduce it into another, by temporary sacrifices, recompensed perhaps by extraordinary indemnifications of the government of such country, are believed to have existed, and are not to be regarded as destitute of probability. The existence or assurance of aid from the government of the country, in which the business is to be introduced, may be essential to fortify adventurers against the dread of such combinations--to defeat their efforts, if formed and to prevent their being formed, by demonstrating that they must in the end be fruitless."

The arguments for protectionism have not changed much since Hamilton. He was aware of the ideas of Adam Smith, but did not believe them.

Hamilton's socialist plan of course extended to banking. He had argued for a central bank, and strongly believed in the value of a "funded debt" to serve as capital for investment in manufacturing. The logic of this is the same as that of Keynesian economics 140 years later. Hamilton derived this mercantilist concept from Hume. Unlike the Keynesian economists, Hamilton was frank in his opinion that the wealthy need to be subsidized.

"The effect of a funded debt, as a species of Capital, has been noticed upon a former Occasion, but a more particular elucidation of the point seems to be required by the stress which is here laid upon it. This shall accordingly be attempted.

"Public funds answer the purpose of Capital, from the estimation in which they are usually held by Monied men, and consequently from the Ease and dispatch with which they can be turned into money. This capacity for prompt convertibility into money causes a transfer of stock to be in a great number of Cases equivalent to a payment in coin. And where it does not happen to suit the party who is to receive to accept a transfer of Stock, the party who is to pay is never at a loss to find elsewhere a purchaser of his Stock, who will furnish him in lieu of it, with the Coin of which he stands in need.

"Hence in a sound and settled state of public funds, a man possessed of a sum in them can embrace any scheme of business which offers as much confidence as if he were possessed of an equal sum in Coin.

"This operation of public funds as capital is too obvious to be denied; but it is objected to the Idea of their operating as an augmentation of the Capital of the community, that they serve to occasion the destruction of some other capital to an equal amount.

"The Capital which alone they can be supposed to destroy must consist of--

"The annual revenue, which is applied to the payment of Interest on the debt, and to the gradual redemption of the principal--The amount of the Coin which is employed in circulating the funds, or, in other words, in effecting the different alienations which they undergo...

" is evident that the Capital destroyed to the capital created, would bear no greater proportion than 8 to 100. There would be withdrawn, from the total mass of other capitals a sum of eight dollars to be paid to the public creditor; while he would be possessed of a sum of One Hundred dollars, ready to be applied to any purpose, to be embarked in any enterprise, which might appear to him eligible. Here, then, the Augmentation of capital, or the excess of that which is produced, beyond that which is destroyed, is equal to Ninety two dollars.

"To this conclusion it may be objected, that the sum of Eight dollars is to be withdrawn annually, until the whole hundred is extinguished, and it may be objected, that the sum of Eight dollars is to be withdrawn annually, until the whole hundred is extinguished, and it may be inferred, that, in process of time a capital will be destroyed equal to that which is at first created.

"But it is nevertheless true, that during the whole of the interval between the creation of the Capital of 100 dollars, and in reduction to a sum not greater than that of the annual revenue appropriated to its redemption--there will be a greater active capital in existence than if no debt had been Contracted. The sum drawn from other Capitals in any one Year will not exceed eight dollars; but there will be at every instant of time during the whole in question, a sum corresponding with so much of the principal as remains unredeemed, in the hands of some person or other, employed or ready to be employed in some profitable undertaking. There will therefore constantly be more capital, in capacity to be employed, than capital taken from employment. The excess for the first year has been stated to be Ninety-two dollars it will diminish yearly, but there always will be an excess until the principal of the debt is brought to a level with the redeeming annuity, that is, in the case which has been assumed by way of example, to eight dollars...

"Hitherto, the reasoning has proceeded on a concession of the position that there is a destruction of some other capital, to the extent of the annuity appropriated to the payment of the Interest and the redemption of the Principal of the debt; but in this, too much has been conceded. There is at most a temporary transfer of some other capital, to the amount of the Annuity, from those who pay to the Creditor, who receives; which he again restores to circulation to resume the offices of a capital. This he does either immediately by employing the money in some branch of Industry, or mediately by lending it to some other person, who does so employ it...

"The force of Monied Capital which has been displayed in Great Britain, and the height to which every species of industry has grown up under it, defy a solution from the quantity of coin which that kingdom has ever possessed. Accordingly it has been Coeval with its funding system, the prevailing opinion of men of business, and of the generality of the most sagacious theorists of that country, that the operation of the public funds as capital has contributed to the effect in question. Among ourselves appearances thus far favor the same Conclusion. Industry in general, seems to have been reanimated. There are symptoms indicating an extension of our Commerce. Our navigation has certainly of late had a Considerable spring and there appears to be in many parts of the Union a command of capital, which till lately since the revolution at least was unknown...

"In the question under discussion it is important to distinguish between an absolute increase of Capital or an accession of real wealth, and an artificial increase of Capital as an engine of business, or an an instrument of industry and Commerce. In the first sense, a funded debt has no pretensions to being deemed an increase of Capital; in the last, it has pretensions which are not easy to be controverted. Of a similar nature is bank credit and in an inferior degree every species of private credit.

"But though a funded debt is not in the first instance an absolute increase of Capital, or an augmentation of real wealth; yet by serving as a new power in the operation of industry, it has within bounds a tendency to increase the real wealth of a Community, in like manner as money borrowed by a thrifty farmer, to be laid out in the improvement of his farm, may, in the end, add to his Stock of real riches."

Thursday, March 26, 2009

Government and Markets

A student writes:

>...from the looks of your blog I take it you don't think that the government's capital injection is a good thing. Doesn't a moratorium on taxes simply benefit those with wealth while restricting governments ability to address things like infrastructure revitalization, entitlements (social security and medicare), dependency on foreign sources of energy, the war on terror (read withdraw from Iraq, beef up in Afghanistan, missile defense in Europe and Japan). I guess what I am saying is isn't it government's job to structure markets rather than let them run free?

I respond:

Good point about government. I don't think it works. The common law provides a stable structure for capital markets. The distinguishing difference between medieval history in which there was limited progress, life expectancy of 25-35 years and people in places like England slept with their sheep and horses in the same cottage (with no stone fireplace, just a hole in the roof to let the smoke out from the fire in the center of the room) was a reduction in government. This occurred around the time of the English Civil War mostly by accident. Also, the Protestant reformation discarded prohibitions on lending at interest and did not condemn but rather supported acquisition of wealth. This lead to an explosion of economic activity. There was still a debate in the 17th and 18thg centuries between the mercantilists who advocated what today is called "progressivism" such as Hume, Steuart and Shaftesbury, and the advocates of limited government, notably Adam Smith. In the 19th century the limited government people won the argument and the pace of progress became much more rapid. However, there was a concomitant escalation of anxiety and popular resentment, as expressed, for example, through violent strikes in factories. This occurred despite rapidly (by historical standards) rising real wages, and became most intense at the very time that real wages were rising most rapidly.

The issue was clouded by the association of Social Darwinism with laissez faire capitalism, which did not occur until the mid to late nineteenth century. Until then laissez faire was a working class or entrepreneurial movement and mercantilism was the movement of the rich. It was assumed that government would subsidize the rich at the expense of the poor. The precursors of the Republicans, the Whigs, were essentially mercantilists. Socialism found its response in Social Darwinism, which unfortunately became associated with the formerly mercantilist Republicans. Thus laissez faire went from being the ideology of the poor to the ideology of the rich, but it became entangled (unnecessarily) with Social Darwinism.

The Progressives then transformed the argument by saying that since laissez faire results in Social Darwinism (a false premise) big government is necessary to modify the ill effects of markets. This led to creation of the Federal Reserve Bank and various social welfare programs. The Progressive reforms escalated with the Great Depression.

Milton Friedman has argued that the Great Depression was the direct result of Progressive reforms, specifically policies of the Federal Reserve Bank. Since the Fed's creation, fluctuations in the business cycle have been considerably more painful than they were in the 19th century and recessions and depressions lengthier. The social welfare programs that the New Deal created have been weak despite large sums expended. Social Security, for instance, was a transfer from voters of the 21st century to voters of the 20th century. Now that the economic value of social security benefits is considerably less than the economic value of contributions for many if not a majority of taxpayers, it does not strike me as such a good idea.

Since 1971, when Progressivism reached its ultimate triumph in the abolition of the international dollar gold standard, the real hourly wage has declined. That is, after a century of Progressivism, roughly from 1908 until now, the triumph of 19th century laissez faire capitalism has been reversed. Instead of real hourly wages (I'm not talking about household income where people work more hours to hold even, but payment per hour) doubling every forty years, since 1971 real hourly wages have declined by close to 20%. Progressivism has undone the triumph of laissez faire capitalism.

This was accomplished through wealth transfers via inflation; through regulation that hampers entrepreneurial innovation; through taxes that discourage effort; and through misallocation of credit from entrepreneurial start ups to less productive projects that banks prefer. Government programs squander resources.

In the 1850s John D. Rockefeller financed his own business by working as a clerk for 3 years and personally saving his initial grubstake himself, about one year's salary, which he turned into a successful store. Upon the sale of the store he purchased his first oil refinery with a partner. Today, this would be impossible. The income tax prohbits the savings rate young Rockefeller was able to achieve, 30% per year. Capital gains taxes inhibit reinvestment--the sale of his store would have been taxed. As a result, entrepreneurs like Rockefeller face cost impediments that slow or eliminate the possibility of their ventures. While some still succeed, there are many who would have expanded wealth by starting businesses but have failed because of progressive taxation and regulation.

The needy have fared even worse under Progressivism than everyone else. Forced into unemployment by minimum wage laws; factory jobs driven from the city by zoning and urban redevelopment (we will discuss this in class vis-a-vis Robert Moses); crippled educationally by "progressive education" approaches that leave inner city youth unable to compete in the global labor market; and forced to live in urban "ghettoes" by urban redevelopment and redistricting in the 1950s, four generations of American blacks have been crippled by the overwhelming "kindness" of progressives or liberals, by the actions of government on "their behalf" and by "government structuring markets to help the poor".

So no, I do not think government has done much of value to structure markets. The current situation with the banks is but one more extension of a downward spiral of wealth transfer from the average American to the financial community. The transfer has killed economic growth and undermined capitalism.

The Man Behind the Curtain Is...Barack Obama

My blog "The Man Behind the Curtain Is...Barack Obama" appears on the Republican Liberty Caucus Blog.

>We all remember the scene in the movie version of Frank Baum’s Wonderful Wizard of Oz when Toto pulls the curtain aside and the Wizard turns out to be none other than the snake oil salesman from Kansas. In William Leach’s wonderful history of consumerism, Land of Desire*, Leach points out that Baum was one of the earliest store window designers for Wannamaker’s Department Store in Philadelphia and that Baum’s American fairy tale was an allegory for the concept of consumerism. The snake oil salesman was the Wizard of consumerism who could grant everyone their dreams.

Within a few decades of Baum’s publication of Wonderful Wizard of Oz American politics took a particular turn. A snake oil of illusory democracy and equality were sold to the American public by a series of Wizards who managed to transfer increasing quantities of wealth to Wall Street and the banking industry while, at the same time, convincing Americans that they were doing so in the interest of the poor and middle class.

Americans have traveled the Yellow Brick Road for more than seventy years while the snake oil has done its work. During that time, both conservatives and “liberals” have played their part. The conservatives, keying off the social Darwinism of the late 19th century, have claimed that “liberals” are soft on the poor and do not recognize the importance of incentives. They pretend to libertarian views on government, but when push comes to shove conservatives advocate a key role for big government in the form of Soviet-style central planning by the barbaric relic known as the Federal Reserve Bank. The “liberals” say that the conservatives are greedy and indifferent to income inequality. Both sides agree that big government is needed and neither questions the Federal Reserve Bank’s existence.

The faux debate has left open an opportunity for the RLC: a benign libertarianism where freedom works in favor of the poor; government serves to oppress them; and freedom (as opposed to border fences or wealth transfers) provides the opportunity for achievement. This is the authentic American dream that both conservatives like Sean Hannity and “liberals” like Paul Krugman have deserted.

The use of illusion is fundamental to Keynesian economics and its argument for Soviet-style planning by Fed economists. On page 8 of his General Theory of Employment, Interest, and Money Keynes writes:

Read the whole thing here.

Teaching Employees How to Fish

My article "Teaching Employees How to Fish" appears in the March 19, 2009 issue of of the American Institute of Certified Public Accountants (AICPA) Career Insider.

"I would argue that the softer benefits — especially job search, networking and outsourcing advice — are more important than severance dollars in helping employees. These can be provided more cheaply in-house and provide more bang for the buck than SUB, severance or other benefits.

"My point that education is more important than direct dollars is based on the saying of an ancient Chinese philosopher, Lao Tzu: 'Give a man a fish and you feed him for a day; teach him to fish and you feed him for a lifetime.' It is beneficial to both employers and employees to encourage the development of skills by which employees who are laid off can cushion the blow and recover easily."

Read the whole thing here.

RLC Has A Great Opportunity: Just Ask Anyone on the NYC Subway

My blog "RLC Has a Great Opportunity: Just Ask Anyone on the NYC Subway" appears in the Republican Liberty Caucus Website here.

"...Increasingly, Brooklynites as well as Americans in general have been asking questions about the Federal Reserve Bank. If one of the parties decides to take this issue by the horns, it will be winnable. This is so in part because the statist media will have trouble responding to it. They can trot up Keynesian economists to argue, but the economists themselves can be made to be part of the issue. They are themselves, after all, on the special interest Fed gravy train."

Read the whole thing here.

Tuesday, March 24, 2009

New Stimulus Plan Proposal for Congressman Hinchey

Dear Congressman Hinchey:

I have a stimulus plan and I urge you to propose it to Congress. My plan is that Congress, the President and the US Supreme Court ought to convene in Guantanamo Bay, remaining there for the next twenty years.

They could occupy the cells left by the departed terrorists. Their decisions would be limited to Guantanamo Bay.

The three branches would then be able to begin to mend the damage that they have caused to this country.


Mitchell Langbert

Cc: President Barack Obama, Senator Chuck Schumer, Senator Kirsten Gillibrand