Topic: Finance, Banking & Monetary Policy

Lucia and PHH: Two Cases, Two Arguments for Constitutional Principles

It’s not often an appellate court agrees to re-hear a case en banc—that is, reexamine a decided case with all active judges participating—and when it does, usually it’s because the case is of particular importance.  Today the federal appeals court in D.C. heard two such cases, and both address fundamental issues of due process and constitutional integrity.  Heavy and exciting stuff.  Cato filed amicus briefs in both cases, given their potential impact on core principles of liberty and the rule of law.

The first case, Lucia v. SEC, considers the role of the Administrative Law Judge (ALJ).  While the case was nominally about whether ALJs are inferior officers, and therefore subject to certain constitutional appointment and removal proceedings, at its heart is the question: what makes a judge a judge?

Most Americans expect that if the government is going to haul them in for alleged wrongdoing, they’ll at least have their case heard by an impartial judge, with all the usual legal protections.  And this is what Americans should expect.  Unfortunately, some federal agencies operate differently, using their own internal administrative proceedings, with their own ALJs, to determine if someone has broken the rules, and to impose a fine or other punishment.

The vast majority of ALJs work for the Social Security Administration, determining whether individuals are eligible for benefits.  As Lucia’s lawyer pointed out in argument today, there is a big difference between ALJs determining whether someone will receive something from the government, as the Social Security Administration’s ALJs do, and determining whether the government will take something from someone.

Paul Krugman on Pump-Priming and Trump

New York Times columnist Paul Krugman recently chided President Trump for imagining he invented the metaphor of “priming the pump” during an Economist interview. Yet Krugman, like Trump, buys into the premise that budget deficits really do “stimulate” total spending or “aggregate demand” which is commonly measured by growth of Nominal GDP (NGDP).

Economic booms and busts clearly have huge effects on budget deficits, but where is the evidence that deficits and surpluses have their own separate (“exogenous”) effect on NGDP? 

To isolate cause and effect, we have to take out the “endogenous” effects that ups and downs in the economy have on taxes and spending. That is why the Congressional Budget Office (CBO)estimates budget deficits or surpluses (divided by GDP) without automatic stabilizers, which has traditionally been called the “cyclically-adjusted” budget. I will label it the “C-A Deficit” for short.  

CA Deficit and NGDP

The red line in the graph shows the CBO’s Cyclically-Adjusted (C-A) deficit or surplus as a share of GDP. The blue line shows the percentage growth in Nominal GDP (NGDP). 

From 1965 to 2016, the C-A Deficit averaged -2.7% of GDP, and growth of nominal GDP averaged 6.6%.

Contrary to 1960s Keynesian orthodoxy, the graph and table reveal no connection between the size of cyclically-adjusted deficits or surpluses and the rate of growth of aggregate demand (NGDP).  From 1991 to 2001, for example, the C-A Budget swings from an average deficit to a sizable surplus with essentially no change in the pace of NGDP growth. 

There is no measurable or even visible connection between larger CA-Deficits and faster NGDP growth in 2009-2012, nor between budget surpluses and slower NGDP growth in 1998-2000.  For more than 50 years, our experience has frequently been the opposite of what demand-side fiscalism predicts. This is not just a short-term phenomenon.

On Saving the Dollar

Every time I say something nice about monetary rules, as I did in my last post here, some Alt-M readers wonder why I’m doing that instead of championing free banking and choice in currencies. Have I given up my former views concerning the merits of these alternatives? Am I suffering from a bout of, or even from chronic, “fedophilia”? Might the Fed itself have purchased my apostasy?

Nothing of the sort. Although my views on the Fed, and on free banking, have changed somewhat since I first started writing on these subjects back in grad school (what sort of scholar would I be if they hadn’t?), they haven’t changed in any fundamental way. I still consider the acquiescence of economists in governments’ creation of currency monopolies to have been one of that professions’ greatest blunders; and I still favor freedom in banking, provided such freedom is understood to imply the absence, not just of extraordinary government regulations, but also of extensive government guarantees, whether explicit or implicit. Finally, I continue to oppose laws that interfere with people’s freedom to employ currencies other than the one officially sanctioned by their own government, whether those other currencies be public or private, paper or metallic or digital.

If I still believe all these things, why do I keep saying nice things about monetary rules? So what if a rule might be better than discretion, given the existence of a fiat-money issuing currency monopoly? If currency competition is better still, surely that’s what I ought to be plugging!

Why Is Insider Trading Illegal?

Kenesaw Mountain Landis, the legendary baseball commissioner, once said that every boy builds a shrine to some baseball hero, and before that shrine a candle always burns. Growing up a Baltimore Orioles fan during the franchise’s glory days, my shrine had many heroes, including central figures Cal Ripken (HOF 2007), Eddie Murray (HOF 2003), and John Lowenstein. Not central but still part of the shrine was Doug DeCinces, a good glove/solid bat third baseman who manned the O’s hot corner for nine of his 15 major league seasons.

And so I was saddened to read that last Friday DeCinces was convicted of 14 charges of insider trading.

Back in 2008, his neighbor, James Mazzo, then CEO of an ophthalmic surgical supply company, told DeCinces that the firm was about to be acquired by medical giant Abbott Labs. DeCinces owned stock in the firm and purchased more after he learned of the deal. He also shared the tip (though apparently not its provenance) with some friends, including Murray. DeCinces ultimately profited about $1.3 million on the deal according to press reports.

His maneuver seems inoffensive if shrewd; after all, who wouldn’t buy something that he can then sell at a profit? That is fundamental to the marketplace, and it typically makes all participants better-off.

But in DeCinces’ case it’s a crime, and a very serious one. He can receive as much as 20 years in federal prison for each of the 14 charges he was convicted on.

The question is why. Remember that all an inside trader does is act on private information that more accurately reflects the future value of some financial asset than the current price does. He buys or sells that asset at a price that someone else voluntarily accepts. He does nothing that damages (or falsely props up) the ultimate value of the asset. Nor does he hurt the broader financial marketplace; if anything, his trading slightly pushes the asset price toward a more appropriate value.

Thank You Allan Meltzer

Allan Meltzer passed away this week. He was one of the great economists I was lucky to have known and to have occasionally worked with. My colleague Jim Dorn wrote a very nice summary of his scholarship and influence here. Jim also recounts his close work with Cato over the years. Jerry O’Driscoll offers a remembrance here.

My own thinking on economic development benefitted substantially from Allan’s work on international debt, foreign aid, and financial crises. I benefitted even more from Allan’s guidance and interest in my work on those issues. He always took whatever time needed to discuss economic and policy topics with me, and recommend readings and research ideas. When Mexico experienced its 1994-95 peso crisis, Allan was an invaluable and generous resource. At the time, few market advocates in Washington criticized the proposed bailout of Mexico. The country, after all, had been considered a star reformer, and the government there was deemed worthy of U.S. support. We at Cato dissented and published a strong critique against “rescuing” Mexico because we thought it promoted moral hazard, it was a use of public resources that was unfair to ordinary Mexicans and Americans alike, and it supplanted and undermined superior market solutions to the crisis. From his perch at Carnegie Mellon University and the American Enterprise Institute, Allan was one of the few making the same arguments. It was useful to have him on our side and to employ some of the arguments he developed.

Knowing about Segregationist Housing Policy Is the First Step to Justice

In education, there is a widespread belief: the federal government ended segregation. This is, of course, based on the Supreme Court’s landmark ruling in Brown v. Board of Education, and subsequent federal efforts to end segregated schooling. But as a sobering new book by the Economic Policy Institute’s Richard Rothstein makes clear, while all levels of government forced, coerced, or cajoled racial segregation through housing policy, the feds may have been the worst, and the crippling legacy of those actions may be much further reaching than even schooling policy.

The Color of Law: A Forgotten History of How Our Government Segregated America is essentially a catalogue of discriminatory housing policies perpetrated throughout the 20th Century, but peaking from the 1930s through the 1960s. It chronicles local injustices including police ignoring or even stoking mobs that tormented African Americans who dared buy a home in a white neighborhood, and states with segregationist intent mandating local referenda to approve low-income family public housing. But it is the federal government that seems to have had the most powerful hand in it all, if for no other reason than only it could sweep every American into the corners where it decided they did—or did not—belong.

Allan H. Meltzer: A Life Well Lived (1928-2017)

The world lost a great champion of liberty with the passing of Allan Meltzer, a longtime Professor of Political Economy at Carnegie Mellon University.  Allan was a prodigious worker who wrote hundreds of articles and more than ten books, including his monumental A History of the Federal Reserve and more recently Why Capitalism?  The latter provides a strong defense of limited government, the rule of law, private property and free markets, which he saw as the surest means to increase the wealth of nations.

A Passion for Ideas and Policy

Allan had a passion for ideas and a desire to influence policy; he sought to make the world a better place by safeguarding economic and personal freedom. He became a major player in the marketplace for ideas — writing, teaching, advising policymakers, serving on editorial boards, co-founding the Shadow Open Market Committee with his close colleague and lifelong friend Karl Brunner, acting as president of the Mont Pelerin Society founded by F. A. Hayek, chairing the International Financial Institution Advisory Commission (also known as the “Meltzer Commission”), and participating in numerous conferences. He continued working right up until his death on May 8, at the age of 89.

A Giant in Monetary Economics

I first met Allan in the early 1980s, when he began to participate in Cato’s Annual Monetary Conference. His paper “Monetary Reform in an Uncertain Environment” was delivered at the first conference, in January 1983, and published in the Cato Journal later that year; it was reprinted in The Search for Stable Money (University of Chicago Press, 1987), a book I co-edited with Anna J. Schwartz.

In that article, Allan examined alternative monetary regimes and their implications for reducing risk and uncertainty. He sought a rule-based regime that would minimize uncertainty and best allow markets to flourish. He preferred, at the time, a quantity rule that would have the monetary base grow in line with the growth of real output adjusted for changes in the velocity of base money. Such a rule, he argued, would anchor expectations regarding the path of nominal income and achieve long-run price stability. However, the rule had to be credible and be supplemented with a fiscal rule that limited the taxing and spending powers of government. He did not want the Fed to finance government deficits or to allocate credit.

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