Topic: Finance, Banking & Monetary Policy

Margaret Thatcher and the Battle of the 364 Keynesians

With the death of Margaret Thatcher, and the ensuing profusion of commentary on her legacy, it is worth looking back at an overlooked chapter in the Thatcher story. I am referring to her 1981 showdown with the Keynesian establishment—a showdown that the Iron Lady won handily. Before getting caught up with the phony “austerity vs. fiscal stimulus” debate, the chattering classes should take note of how Mrs. Thatcher debunked the Keynesian “fiscal factoid.”

According to the Oxford English Dictionary, a factoid is “an item of unreliable information that is reported and repeated so often that it becomes accepted as fact.” The standard Keynesian fiscal policy prescription for the maintenance of non-inflationary full employment is a fiscal factoid. The chattering classes can repeat this factoid on cue: to stimulate the economy, expand the government’s deficit (or shrink its surplus); and to rein in an overheated economy, shrink the government’s deficit (or expand its surplus).

Even the economic oracles embrace the fiscal factoid. That, of course, is one reason that the Keynesians’ fiscal mantra has become a factoid. No less than Nobelist Paul Krugman repeats it ad nauseam. Now, the new secretary of the treasury, Jack Lew (who claims no economic expertise), is in Europe peddling the fiscal factoid.

Unfortunately, the grim reaper finally caught up with Margaret Thatcher—but not before she laid waste to 364 wrong-headed British Keynesians.

In 1981, Prime Minister Thatcher made a dash for confidence and growth via a fiscal squeeze. To restart the economy, Mrs. Thatcher instituted a fierce attack on the British fiscal deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to The Times, they wrote a knee-jerk Keynesian response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”

Mrs. Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures to that letter than the economy boomed. Confidence in the British economy was restored, and Mrs. Thatcher was able to introduce a long series of deep, free-market reforms.

As for the 364 economists (who included seventy-six present or past professors, a majority of the Chief Economic Advisors to the Government in the post-WWII period, and the president, as well as nine present or past vice-presidents, and the secretary general of the Royal Economic Society), they were not only wrong, but also came to look ridiculous.

In the United States, the peddlers of the fiscal factoid have never suffered the intellectual humiliation of their British counterparts. In consequence, American Keynesians can continue to peddle snake oil with reckless abandon and continue to influence policy in Washington, D.C., and elsewhere.

What Is the Value of Bitcoin?

With Bitcoin enjoying a spike in price against government currencies, there is lots of talk about it on the Interwebs. If you’re not familiar with it yet, here’s a good Bitcoin primer, which also counsels reading a lot more before you acquire Bitcoin, as Bitcoin may fail. If you like Bitcoin and want to buy some, don’t go all goofy. Do your homework. As if you need to be told, be careful with your money.

Much of the commentary declares a Bitcoin bubble for one reason or another. It might be a bubble, but nobody actually knows. A way of guessing is to compare Bitcoin’s qualities as a currency and payment network to the alternatives. Like any service or good, there are many dimensions to value storage and transfer.

I may not capture them all, and they certainly don’t predict the correct price against the dollar or other currencies. That depends on the ultimate viscosity of Bitcoin. But Bitcoin certainly has value of a different kind: it may discipline fiat currencies and the states that control them.

Iran’s Inflation Statistics: Lies, Lies and Mehr Lies

The Mehr News Agency is now reporting that Iran’s annual inflation rate has reached 31.5%. According to the Central Bank’s official line, Iran’s annual inflation rate has bumped up only 1.3 percentage points from February to March.

Never mind that this official inflation statistic is well below all serious estimates of Iran’s inflation. And yes, Iran’s official inflation statistics are also contradicted by the overwhelming body of anecdotal reports in the financial press.

Since September 2012, I have been estimating Iran’s inflation rate – which briefly reached hyperinflation levels in October 2012 – using a standard, widely-accepted methodology. By measuring changes in the rial’s black-market (read: free-market) U.S. dollar exchange rate, it is possible to calculate an implied inflation rate for Iran.

When we do so, a much different picture of Iran’s inflation emerges. Indeed, Iran’s annual inflation rate is actually 82.5% – a rate more than double the official rate of 31.5% (see the accompanying chart).

As I have documented, regimes in countries undergoing severe inflation have a long history of hiding the true extent of their inflationary woes. In many cases, the regimes resort to underreporting or simply fabricating statistics to hide their economic problems. And, in some cases, such as Zimbabwe and North Korea, the government simply stops reporting economic data altogether.

Iran has followed a familiar path, failing to report inflation data in a timely and replicable manner. Those data that are reported by Iran’s Central Bank tend to possess what I’ve described as an “Alice in Wonderland” quality and should be taken with a grain of salt.

Deficits and Inflation, from the Fed to the Cartoon Page

You know you’ve arrived when your name starts showing up in cartoons. Here’s the Wall Street Journal’s legendary “Pepper … and Salt” cartoon from last Thursday:

Of course, most inflation obsessives are deficit scolds, so it’s not clear that host is going to get much debate. 

One person who might be called both an inflation obsessive – that is, a person who objects to the robbery of savers through the erosion of the value of their money – and a deficit scold is David Stockman, former budget director for President Ronald Reagan. He has a new book out, The Great Deformation: The Corruption of Capitalism in Americawhich he summarized in the New York Times on Sunday. He’ll be speaking about his book at the Cato Institute on Wednesday. Don’t miss it.

Targeting Multinationals, the OECD Launches New Scheme to Boost the Tax Burden on Business

I’ve been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that’s just the tip of the iceberg.

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on “Addressing Base Erosion and Profit Shifting” that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new “BEPS” initiative.

…the BEPS report…calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. …The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

…the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. …Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD’s anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.

Hayek v. Krugman – Cyprus’ Capital Controls

Nobelist Paul Krugman has a propensity to spin and conceal. This allows for deception – the type of thing that hoodwinks some readers of his New York Times column. While deception doesn’t qualify as lying, it also fails to qualify as truth-telling.

Prof. Krugman’s New York Times column, “Hot Money Blues” (25 March 2013) is a case in point. Prof. Krugman sprinkles holy water on the capital controls that will be imposed in Cyprus. He further praises to the sky the post-1980 capital controls that were introduced in a number of other countries.

Prof. Krugman then takes a characteristic whack at all those “ideologues” who might dare to question the desirability of capital controls:

But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.

Fine. But, not once did Prof. Krugman mention that there just might be a significant cost associated with the imposition of capital controls – a cost with which Prof. Krugman is surely familiar.

Before more politicians fall under the spell of capital controls, they should take note of what another Nobelist, Friedrich Hayek, had to say in his 1944 classic, The Road to Serfdom:

The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.

When it comes to capital controls, I think the Cypriots – even the non-ideologues – might be inclined to agree with Hayek over Krugman.

Cyprus: Follow the Money

While the Cypriot Parliament may be dragging its feet on a proposed rescue plan for Cyprus’ banks, the country ultimately faces a choice between Brussels’ bitter pill…and bankruptcy. Cyprus’ newly-elected President, Nicos Anastasiades, has quite accurately summed up the situation:

“A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation.”

 Yes, Brussels and the IMF have finally decided to come to the aid of the tiny island, which accounts for just 0.2% of European output – to the tune of roughly $13 Billion. But, this bailout is different. Indeed, the term “bail-in” has emerged, a reference to the fact that EU-IMF aid is conditional upon Cyprus imposing a hefty tax on its depositors. Not surprisingly, the Cypriots, among others, are less than pleased about this so-called “haircut”.

Still, the question lingers: Why now? The sorry state of Cyprus’ banking system is certainly no secret. What’s more, the IMF has supported a “bail-in” solution for some time. So, why has the EU only recently decided to pull the trigger on a Cyprus rescue plan?

One reason can be found by taking a look at the composition of Cyprus’ bank deposits (see the accompanying chart).


There are two main take-aways from this chart:

  1. European depositors’ money began to flow out of Cyprus’ banks back in 2010. Indeed, most European depositors have already found the exit door.
  2. Over that same period, non-Europeans (read: Russians) have increased their Cypriot exposure. If the proposed haircut goes through, Russian depositors could lose up to $3 billion. No wonder Valdimir Putin is up in arms about the bail-in.

Perhaps a different “red telephone” from Moscow will be ringing in Brussels soon.