Freedom has a thousand charms even in the labor market. Repeal the minimum wage and a free labor market would welcome young people, writes Hans Sennholz. This would not only would exhort and restore the spirit of work but also improve labor skill and know-how. The labor productivity of American youth soon would rise and exceed the ominous minimum levels that presently condemn millions to idleness. FULL ARTICLE
Source link: http://blog.mises.org/4484/repeal-the-minimum-wage/
Repeal the Minimum Wage
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This is perfect, thank you.
Hi Austrians,
I appreciate your site, and I generally agree with most articles, but in this case let’s not try to deceive ourselves being “politically correct” about the riots in France: they have indeed something to do with unemployment, low wages etc., but please oh please DO NOT FORGET the political/ religious background that started it all !!!
These are not just “youths” living in adverse conditions – as you may find in almost every corner of the world.
Unemployed youths all around are normally engaged in an intense strive for a job, fighting against the lack of opportunities, but NOT SETTING FIRE ON THOUSANDS OF CARS, destroying their cities and shouting “You-know-who-is-great” or the like.
Let’s adhere strictly to the good old Austrian, rational analysis of facts and not mix things up, OK??
In my opinion, the article is otherwise quite focused and reflects the Misesian thought.
Keep up the good work.
Regards from Brazil,
RH (a newcomer to Austrian Economics)…
RH,
In your post you stated, “Let’s adhere strickly to the good old Austrian, rational analysis of facts and not mix things up, OK??”.
Maybe I’m reading more into this than I should but Austrian Economics is based on a priori theory, not facts. Austrians primarily use facts for illustration, not proof. Facts can neither proof nor disprove a priori theory.
In my view, Hans Hermann-Hoppe does the best job of explaining the theory in his introduction to “Democracy: The God that Failed” and “Economic Science and the Austrian Method”, sections I and II.
Both of these are available online although you may have to go to Hoppe’s web page for the former.
If this thesis is true why is it that the only time US employment of minimum wage workers increases is right after minimum wages increase.
In every year that the minimum wage was unchanged US employment of minimum wage workers actually falls.
In other words, the correlation between the minimum wage and minimum wage employment is positive.
Why do the facts contradict your analysis?
Hallo Ron Brown,
Thanks for your clarification, I didn´t intend to go that deeply in theory, as I had already stated I’m a newcomer to Austrian thinking – by the way, I’m no Economist but Mechanical Engineer working on Offshore Rig & Ship design.
What I was trying to say (from my intuition derived from what I’ve read during some 2 or 3 months on Mises website) is that, as far as I understood, the referred article includes indeed an “en-passant” comment/ analysis of riots in France, associating unemployment as a root cause, and that’s the point I disagree with. It may be one of the causes, but check who have made those violent demonstrations and how they think, then arrive to your own conclusion.
I’m beginning to understand – please correct me if I’m wrong – that the Austrian way of thinking also involves a specific mental exercise of discarding aspects which do not contribute to the result or somehow distort reality or deviate from the main principles of Austrian theory.
Most articles I’ve read until now on Mises website were clear and self-explaining, even for those like me, not involved professionally with Economics, and political comments – whenever made – were as free as possible from bias or this universally spread, stupid thing known as “politically correct” view.
We shouldn’t be afraid of giving things their real names, like “FREEDOM”, “TERRORISM” and others, so difficult to find in the news.
I hope your School remains always independent from this amorphous entity called “media”, so please keep on speaking positively about that which deserves so, and correspondingly criticizing what impairs freedom, prosperity and all other values you defend.
“NE CEDE MALIS …!!”
Best regards from Rio,
RH.
This article is a bit tepid. It attributes minimum-wage legislation to good intentions, which probably IS a description of most of its casual supporters. But the REAL supporters are those who fear low-priced competition for their typically slightly higher-wage jobs. They fear, with some justification, that their own earning power may be driven down by cheaper competition supposedly eliminated by minimum-wage legislation. It’s fear and greed, not good intentions.
Secondly, this article omits to mention that minimum-wage legislation drives massive immigration of low-wage workers, who in many cases can be induced by right of their illegal immigration to accept illegally low wages indefinitely, incidentally blowing the argument referred to in the previous paragraph to smithereens.
Economic regulations not only fail to attain their stated goals, but they also lead to crime and the requirement for more economic regulation.
Good concise article.
Here is a graph that really says it all. It tracks the Real Minimum Wage and Teenage Unemployment.
http://www.mrderrick.com/blog/?p=28
Or…if you don’t want to go to my blog view the graph at:
http://www.house.gov/jec/cost-gov/regs/minimum/against/fig-1.gif
I came across this graph on Roger Garrison’s website.
“If this thesis is true why is it that the only time US employment of minimum wage workers increases is right after minimum wages increase.”
That’s a no brainer. The new wage level becomes the level at which people are already employed. This level comes closer into the average rate (which is where the bulk of people are).
For Example, many people are employed at $6.50/hr. The min wage is raised to $6.50 from 5.15. Guess what happens? The previous $6.50 are still employed, very FEW $5.15 manage to get to the new level, and the majority of the $5.15 people become unemployed.
The problem is that you think the transition has the same min wage workers. I’m curious about your source.
“In other words, the correlation between the minimum wage and minimum wage employment is positive.”
Really? Why not just raise it to $100/hr and make everyone wealthy? Why bother providing foreign aid – when we can just tell those countries to raise their minimum wage?
Tell me, is there some magical wage rate other than the one set by the market that will ensure the most employment?
The minimum wage also had racist roots–JFK propounded it as a way to keep unskilled blacks form taking jobs from unskilled whites through a willingness to work for less.
All such regulations also have subtle, negative cultural effects. When I employed lower waged workers (up to 50 for ten years; so plenty of empirical, real time observations about my own decision making), the minimum wage flattened the wages to all my employees (part time or full time–)–the terrible employee still received $5.15/hour; the exceptional employee had to make less than he/she might otherwise have done–because there are only so many dollars to go around in a small business. This imposes destructive costs in many ways–a less valuable employee that I might have been willing to pay $3.00, received $5.15; the better employee whom I might have liked to pay $9.15, instead had to make $7.15. The result is that the lesser employee does not bear the full cost of his/her incompetence (and possibly be motivated to change and improve his/her productivity and ultimately wage) and the better employee is not properly rewarded for his/her abilities. In addition, the better employee eventually leaves for a better opportunity. The employer is hurt by turnover and lower productivity of the labor force; the lesser employee is hurt by having important incentives for improvement of his effort and life removed, and is eventually fired since he costs more than he is worth; the better employee is harmed by having to look for addtional/different employment; the business is less able to comepte with the larger businesses with more resources (by not being able to more efficitently allocate labor resources) and is more likely to fail.
I also got this from an article by Roger Garrison. The numbers he uses are calculated by multiplying the hourly figure by 8, then 5, then 52 to get the corresponding daily, weekly and, yearly figures.
It’s a simple thought experiment, but a very useful one! I use it in my classes all the time. Below is an excerpt from his article.
Here’s an exercise for students to contemplate: Suppose that someone is currently employed at a job that requires little skill. He is earning $5.00 per hour. The job is a boring one and so the employee has time to do a little on-the-job daydreaming. Listed below is a sequence of his thoughts. The question for you is: How far are you willing to follow him in those thoughts?
Did you follow this daydreamer to statement #12?
Did you follow him to statement #2?
Is there some statement between #1 and #12 that has a special claim on our attention?
RH, if I may try a slightly different tack on the issue.
Getting a specific task accomplished is worth something to me as an employer. If I have to pay more to get the task done than it is worth to me, the task won’t get done.
This directly relates to minimum wage. If I must pay a worker $6/hr to do a job which is not worth $6/hr to me to have done, then the job won’t get done. Elevator operators, shoe-shiners, counter clerks, have all been left behind by self-service and modern materials.
The old saying, that without experience one cannot get a job, and without a job one cannot get experience, is brought into stark reality. It just isn’t worth having to pay “minimum wage” to hire someone who doesn’t already have skills.
Don,
You state, “The minimum wage also had racist roots–JFK propounded it as a way to keep unskilled blacks form taking jobs from unskilled whites through a willingness to work for less.”
Could you please provide me with some references to this?
Thank you,
Ironically, minimum wages will actually raise the statistically measured productivity even though it lowers per capita income.
By in effect forbidding low-productivity workers from getting a job, they will make them $unemployed which will lower national income. But as it is only low productivity workers which will be unemployed by minimum wages employment will fall more than output which in turn means that out per hours worked will increase.
This is why measured productivity in France is somewhat higher than in the U.S. even though per capita income is considerably higher in the U.S.
France have a minimum wage of $9.50, far higher than the federal minimum wage of $5.15 in America. As a result, France have a far higher unemployment rate, particularly among immigrants.
I wasn’t aware that productivity could actually be measured, and I seriously doubt Mises would advocate Keynesian analysis on a website named in his honour.
“The impractibility of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations. If it were only caused by technical insufficiency, at least an approximate estimation would be possible in some cases. But the main fact is that there are no constant relations. Economics is not, as ignorant positivists repeat again and again, backward because it is not ‘quantitative’. It is not quantitative and does not measure because there are no constants. Statistical figures reffering to economic events are historical data. They tell us what happened in a nonrepeatable historical case. Physical events can be interpreted on the ground of our knowledge concerning constant relations established by experiments. Historical events are not open to such an interpretation. (Mises, 1966, p. 56).
So lets honour this great man by practicing economics rather than classical physics.
Alan,
The impossibility of aggregating production of apples and oranges into a single statistic is, I think, well understood by most who comment here.
The statistical “measurements” of productivity and value calculated by econometricians may be flawed, but such “measurements”, or rather the changes in them are often useful to illustrate the economic rules in action. Stefan’s argument is one such instance.
Tarran,
I agree that the “changes in them are often useful to illustrate the economic rules in action”.
But I am not entirely convinced we are measuring productivity here if we mean productivity to be the ratio of the quantity and quality of units produced to the labour per unit of time.
Perhaps my definition of productivity is flawed and this is where my error lies.
Cheers
I thought I expressed myself in a clear enough manner not to be misinterpreted but apparently I didn’t express myself clear enough not to be misinterpreted by some.
The whole point behind the comment was that productivity statistics could be misleading because they count the turning of low productivity workers into unemployment as a productivity increase. This was of course a argument against minimum wages and those who use productivity statistics to advocate statist policies.
Even so, I don’t think measuring (or calculating if you prefer that word) productivity is impossible. Economic calculation is one of those things which the introduction of money have made possible. And productivity is the money value of the work effort by workers. Minimum wages create unemployment whenever it is set higher than the marginal productivity of some (would be) workers.
I am surprised that some advocates of minimum wage have never proposed a government marketing board for labor, in the style of those for some agricultural products.The government would pay above market wages, then supply labor to companies at market rates, absorbing the loss.
Minimum wage laws are abolished, along with welfare and unemployment benefits.(I’m not saying
I favor this, I’m just surprised no interventionist has proposed this.)
RH
When a young man is unable to obtain employment he feels worthless and unvalued. Before long his depression and frustration turns into resentment and anger. He becomes angry because he can’t set out on the journey of life in a meaningful way. He has nothing to do and no money. The game is closed to him. Everyone else is passing him by. Wouldn’t you resent such a situation?
When this happens to an entire group of people it is only a matter of time before they misidentify the reason they are excluded from society as being racially or religiously based. Now anger can focus. Perhaps there is some crime and a little violence at first. This accelerates. Soon enough violence and crime become the favoured path. No other is identified. The emotion builds. Hate. Resentment. Anger.
In my experience groups of unemployed youths get to a point where they give up looking for a job. They perceive there is no point to the search. There is NO JOB available to them. They are unemployable and they know it. So what does that leave? Crime and violence.
Riots like Paris, Watts and so on have similar roots and they are as identified in the essay above; govt. restrictions.
Think of it like this. If there is no welfare and no minimum wage these guys would be working. They’d have jobs, an income and some assets. Would they be out on the streets rioting and burning property (like cars etc.) then? Hell no (could be their vehicle set on fire)! That is why it is important that people get the opportunity to partake and productively interact in a civil society.
It’s a shame the unemployed attack the innocent during these riots. It would be better if they visited violence and destruction on the real source of their pain- the politicians and bureaucrats.
Talofa!
Sione
I think it’s worth posting the following, the body of an email I just sent to the author, now I’ve spotted this blog post on it (the link I mention is to http://member.netlink.com.au/~peterl/publicns.html#AFRLET2):-
I believe that your article is an accurate description of the situation
in the special case where a free labour market would reach a market
clearing situation. However, even in equilibrium after a painful
transition, I believe that a market clearing wage would be less than a
living wage for many people in most modern economies. So the wrong
choice of minimum wage legislation has an equally wrong straightforward
alternative.
There are however other possibilities. Without going into detail here, I
would like to refer you to the work of Professor Kim Swales of the
University of Strathclyde, which I see as a Pigovian approach to undoing
an externality originally arising from vagrancy costs, which is now
usually compounded for by social security costs but which remains an
externality. I have some discussion of this area in various articles and
letters at my publications page, which you can find linked via my
signature below.
Dear Stefan,
I apologize if my remarks appear ignorant to the meaning of your comments. It was never my intention to misrepresent or quote your meaning.
I retired from academic life because sometimes, perhaps often, I felt misinterpreted on ideological grounds rather than from the fundamentals of my analysis.
Now my question.
Can the unemployment differentials in the USA and France be explained by minimum wage rates alone?
In Australia we enjoyed unemployment rates of less than 2% for around 30years. By the 1990′s unemployment had increased above 10%, and today the unemployment rate is around 5.2%.
Now admittedly the composition of employment has seen a dramatic shift towards casualisation, and the percentage of those in Full-Time employment has declined since the 1970′s. In addition, women have entered the labour market in greater numbers in more recent times as well.
So what is the reason for Unemployment in Australia not returning to the 2% golden age between 1946-1972?
One explanation is that the percentage of the working age population employed by the Public Sector and the percentage of the working age population employed by the private sector equal total employment.
What has been found is that the % employed by the private sector has remained relatively constant. The % employed by the public sector has decreased,and most rapidly between 1974 and 1990.
Based on this very crude analysis the differnce between the unemployment rate now and the so called golden age is that the government does not provide enough public sector jobs.
Do you think the composition of private and public sector jobs could account for the differential between US and French unemployment?
Alan, you didn’t ask me, but I have two cents to throw in.
I suspect the size and composition of the public sector would affect a country’s standard of living more than its employment rate, as it lures labour and production away from productive uses and channels it into unproductive uses.
Basic economics tells us that anyone trying to sell labour that has any value at all will find a buyer at some price. Therefore, the only factors I can think of that would result in unemployment above the frictional level would be, in order of importance:
1. Minimum wage laws that deny low-skilled workers their right to sell their labour.
2. Welfare that makes low-paying jobs pointless.
3. Income tax (really an employment tax) that penalizes entrepreneurs for buying labour.
Paul,
I like the three points you make, and if you are implying (not saying you are) that these factors inhibit the private sectors ability to increase the percentage of the working age population, then I think we are onto something good.
Unfortunately, when we factor in how the monetary financial sector operates in a modern capitalist economy (and not that orthodox textbook model flogged by the ignorant masses)the fiscal policies of government and indeed the monetary policies of Central banks have a significant effect on the generation of full employment (Frictional only).
Unless we can get rid of these institutions altogether (and trust me I’d like to) I think we can never realise the potential of such policies.
Do we totally remove money from the economy? We might have to without a government or central bank to control it.
The consequences here are without money as we know it we would need to have [n(n-1)]/2 prices.
And you know what sytem that is …Barter…. Hello dark ages :0)
Alan,
I’d like to address these comments in particular:
“Do we totally remove money from the economy? We might have to without a government or central bank to control it.”
There is no need to abolish money to remove the government’s hands from it. Money is a market phenomenon and it occurs naturally without government intervention. The fed can definitely be abolished without eliminating money. The only debate is what the best way to abolish the fed is.
“The consequences here are without money as we know it we would need to have [n(n-1)]/2 prices.
“And you know what sytem that is …Barter…. Hello dark ages :0)”
It would certainly be chaos to go back to barter and that is something we should definitely seek to avoid. Fortunately, barter is entirely avoidable. Rothbard and Salerno (and many others) lay out an approach or two on how to abolish the fed and bring the dollar back to a gold standard basis. It definitely avoids the dark ages of barter while completely eliminating the fed.
Alan Dunn, my personal suspicion about Australia then and now is related to the Pigovian subsidy approach I mentioned. To me, it looks as though the particular optimum point of the extrenality, for Australia, shifted. If so, that would mean that Australian (state level) Payroll Tax was in fact helpful then, as being something of a Pigovian Tax helping to prevent pressure on wages.
If there was such a shift, the question arises why, and also the related question of why the equilibrium was different in Australia to that in other places. It looks to me as though – just a hypothesis, mind – Australia was developing faster than its resources could be applied and new capital brought in or created locally. But of course, nothing happens in isolation, and I see other complications arising from comparable economies (like Argentina) doing wrong headed things and so giving Australia a boost. Sadly, this would have been true even if their policies were sound in the long run, because they weren’t attainable with the resources they had – especially while the others like Australia were keeping going as commodity exporting specialists (the “quarry”).
And, of course, the relics of protectionism in Australia tended to spread any windfall gains from the quarry around, something that doesn’t happen so much these days.
All in all, so much was different that it is hard to trace out any causes for the differences between Australia then and now, and I can only suggest possibilities.
Dear Paul,
I am well aware of the Rothbard approach, everyone should read “Money and Banking” – its the best book on the subject in my opinion. But there are some things which Rothbard implies, but yet does not make explicit.
One of the many functions of a tax system is to create demand for the governments / Central banks, otherwise worthless fiat money.
If we remove the FED, to what degree would the legitamacy of the government be lessened, and in effect its ability to tax?
Furthermore, if these changes were to occur what would actually be the role of government? And would it be capable of assuming this role given that its power to spend without constraint in terms of its own “worthless fiat” money has been removed?
It is the very issuing of this fiat money which transfers goods and services from the private to the public sphere.
Hence removing this power from the government would immensely change the types of goods and services produced – perhaps even the magnitude of goods produced . And given the private sectors inability under the curent syttem to create full employment (or at anytime in history)I wouldn’t like to be the guy who “presses the button”.
With respect to the function of taxes:
Many people assume that their taxes actually fund government spending. In the modern monetary financial system whereby there is a monopolist supplier of fiat, be it the government or the FED this is definetly not the case.
The orthodox textbook explanation of a governments use of / and the function of Bonds is perhaps an even greater fallacy than how governments fund spending.
The government has absolutely no need whatsoever to use bonds to fund its spending. When a government / FED is the monopolist supplier of fiat the only method of funding its spending is via money creation.
What the role of the bond then becomes for the government / Fed is as an interest rate maintenence tool. The sequence being : create the money (doesn’t have to be printed), transfer the money to the private sector and in exchange the private sector transfers goods and services to the public sphere.
There will now be excess reserves in the banking sector. To maintain its target cash rate, the fed will seek to remove the excess by offering an intest bearing alternative to the banking sector, namely a bond.
Because excess reserves earn a close to zero rate of return the banking sector will be more than willing to accept the bond. The excess reserves are removed from the system and as a consequnce destroyed, and the target cash rate is maintained.
Until Full employment is achieved such behaviour in itself is not inflationary. If the target cash rate is lower, than that of other countries then certainly capital outflows may or will occur, and this in turn could lower the exchange rate.
But this is a conseqence of the target rate being set too low, not of the actual act of the government spending.
Therefore, given this explanation of monetary/ fiscal policy – the consequences of changing the system are far greater than many would belive.
Dear P.M. Lawrence,
The Australian government between 1946 and 1972 stressed the utmost importance to maintaining Full-Employment. They did this by employing the labour resources that the private sector did not employ either explicitly or implicitly via transfering goods and services from the private to public spheres, and / or employing them directly with public sector jobs.
Economic policy in Australia now focuses on fiscal consolidation through maintaining Budget Surpluses. Given that under the current monetary financial framework in Australia it is impossible for the private sector to achieve the level of spending required to achive full employment. Simply because the sole source of net money creation is the exchanges that occur between the government (Central Bank) and the private sector, which I have outlined above.
The budget Surplus effectively functions as a net contraction of money , and hence savings in the private sector.
Thus, I think the differences are overwhelming, though I also believe you are correct with respect to the tax matters you mention.
In Australia we also have a tax referred to as negative gearing whereby property can be negatively taxed. We’d need an accountant to go into the ins and outs of the system, but effectively this tax scheme promotes idleness rather than entreprenurial savvy.
Overall, I think we all agree anything that inhibits the pursuits of entrepreneurs is bad – silly taxes and fiscal consolidation are two such cases.
Cheers Everyone, and a safe and happy NewYear.
Dear P.M Lawrence,
I just realised that you are an accountant and hence could better than I explain the ins and outs of negative gearing. I think an analysis by a skilled professional such as yourself would be most valuable with respect to its effects of labour markets.
Cheers
What crap about the minimun Wage. The wage is set by a combination of market forces and qwhat the employer is willing to pay for the service an employee provides. As noted an economist as the wealth of nations author posited! there is a natual adversarial relationship between employer and employee: Both wishing to maximize their returns.
greed on the part of the employer is the first principle, given that he would employee slaves if he could get away with it. If you think this is not the case then just examine Malthus or the american South prior to the civil war and to some extent even today. What daydreamers you are
there is a natual adversarial relationship between employer and employee: Both wishing to maximize their returns.
greed on the part of the employer is the first principle, given that he would employee slaves if he could get away with it.
Or vice-versa, an employee would force his employer to pay him for doing as little as possible? Greed only exists on the employer’s part, not the employee’s? In any case, the fact is that they cannot ‘get away with it’ as long as an open market and competition exists. They can only succeed if they are able to use coercion, which is exactly what the minimum wage law is.
In spite of this, some enlightened people recognize that both employer and employee will benefit more by not mistreating the other, that they are not in an adversarial relationship-the employer benefits by having good, motivated employees, and employees benefit by having intelligent, rational employers. A daydream? Yes, the same daydream that has made our lives so much better off than our ancestors, in spite of government coercion.
Alan,
“I am well aware of the Rothbard approach, everyone should read “Money and Banking” – its the best book on the subject in my opinion. But there are some things which Rothbard implies, but yet does not make explicit.”
I think it is more likely that there are some things which you inferred from Rothbard which he did not intend to imply.
“One of the many functions of a tax system is to create demand for the governments / Central banks, otherwise worthless fiat money.”
No. The function of taxes is to provide the government with funds to spend. The imposition of taxes is not directly responsible for a demand for fiat money. The process involved in weaning a nation from commodity money to paper is described in Mises’s regression theorem. Taxes do not play a role.
“If we remove the FED, to what degree would the legitamacy of the government be lessened, and in effect its ability to tax?”
The legitimacy of the government and its right to tax is a question completely disconnected from the existence of the fed. The government has been taxing since before the installation of the fed, if the people do not object, it could continue to tax after the fed is dismantled.
“Furthermore, if these changes were to occur what would actually be the role of government? And would it be capable of assuming this role given that its power to spend without constraint in terms of its own “worthless fiat” money has been removed?”
Assuming for an instant that we think the government should have any legitimate role and that we care about such questions, the answer remains, the government can be run with taxes on a gold standard. An inflationary central bank system and a financially unconstrained government are not prerequisite to having a government.
“It is the very issuing of this fiat money which transfers goods and services from the private to the public sphere.”
Inflation is one way to transfer wealth from the productive to the parasitic. Taxes are the other. The two are distinct and independent operations, regardless of the fact that they are both crimes carried out by the same criminal monopolist for the same purpose.
“Hence removing this power from the government would immensely change the types of goods and services produced – perhaps even the magnitude of goods produced . And given the private sectors inability under the curent syttem to create full employment (or at anytime in history)I wouldn’t like to be the guy who “presses the button”.”
Removing control over the money supply from the government would immensely increase the number and types of goods and services produced by the private sector. It would do this by eliminating inflation and misallocation of resources. Productivity and general wealth and well-being would be greatly enhanced. I would be thrilled to be the one who presses the button.
“With respect to the function of taxes:
“Many people assume that their taxes actually fund government spending. In the modern monetary financial system whereby there is a monopolist supplier of fiat, be it the government or the FED this is definetly not the case.”
No. This is definitely still the case. Taxation and deficit spending is what funds government operations and in that order of significance. Taxation is a very substantial source of funding for the government.
“The orthodox textbook explanation of a governments use of / and the function of Bonds is perhaps an even greater fallacy than how governments fund spending.
“The government has absolutely no need whatsoever to use bonds to fund its spending. When a government / FED is the monopolist supplier of fiat the only method of funding its spending is via money creation.”
No. First of all, the government issues bonds to borrow; that is how it borrows. Secondly, the fed, by buying treasury bonds and other treasury securities on the open market, increases demand for these bonds, increasing their price and thereby keeping interest rates on these bonds low. This is how the fed assists the government in its reckless spending. However, taxation is still the substantial source of government funding.
“What the role of the bond then becomes for the government / Fed is as an interest rate maintenence tool. The sequence being : create the money (doesn’t have to be printed), transfer the money to the private sector and in exchange the private sector transfers goods and services to the public sphere.”
Well. The Treasury bond is how the government borrows. The fed regulates interest by buying treasury securities such as these bonds with money it creates out of thin air.
“There will now be excess reserves in the banking sector. To maintain its target cash rate, the fed will seek to remove the excess by offering an intest bearing alternative to the banking sector, namely a bond.”
No. The fed does not issue its own bonds. It merely buys and sells government bonds and on net over time, it always just buys them. It is constantly inflating by buying up government bonds with money that it creates from thin air.
“Because excess reserves earn a close to zero rate of return the banking sector will be more than willing to accept the bond. The excess reserves are removed from the system and as a consequnce destroyed, and the target cash rate is maintained.”
The commercial banks also buy government bonds with money created from thin air.
“Until Full employment is achieved such behaviour in itself is not inflationary. If the target cash rate is lower, than that of other countries then certainly capital outflows may or will occur, and this in turn could lower the exchange rate.”
The fed and its fractional reserve banking system is almost always inflationary because it is almost always inflating by increasing the supply of money. Whether or not full employment is achieved is irrelevant to what constitutes inflationary behavior.
“But this is a conseqence of the target rate being set too low, not of the actual act of the government spending.
“Therefore, given this explanation of monetary/ fiscal policy – the consequences of changing the system are far greater than many would belive.”
Eliminating the fed can only be a good thing, despite whatever the many might believe.
Dear Paul,
I actually considered writing the reply you gave to my comments before I had read your reply. I expected the textbook model, and the textbook model thou received.:0).
I bet you were excited when you saw my comments – well my friend, that was the idea. Your muttering the words Socialist, Marxist,Communist, perhaps even Keynesian,Ican visualise vividly as you read my comments :0)
Well sorry to dissappoint you, I’m a liberal – its just that I don’t think the movement has found a world that will accept Liberalism at the present time.
Liberalism is definetly the best system its just that some out there are as yet unwilling to abdicate their thrones. Them, being so obvious we need not mention names, only that they come from many factions of society.
Have you ever considered that the textbook model is a mere construction written solely to justify an ideological position?
The model I quoted is precisely designed to justify an ideological position – and its not socialism either :0)) or Liberalism. It’s that Full-Employment should be an objective.
I used to feel so guilty being paid as a University Course Coordinator and lecturer to sell that very same out of date, irrelevant model of the monetary financial sector you have quoted.
I felt even more guilty when I was teaching it to someone with writing talent far exceeding my own such as yourself – which was often the case.
Please don’t assume I think your a undergraduate or graduate student – persons of far higher offices than either of us have “gotten it all wrong”.
Here are my concerns:
The model you quote has had no relevance since financial markets were deregulated, fixed exchange rates became floating, the real money supply became endogenous, the cash rate became exogenously determined by a Central bank board, the gold standard was abolished, and the loanable funds theory became no more than a text book curiosity.
You can read “Understanding Modern Money: By Professor Randall Wray. This book will answer all the questions you asked of my analysis/summary in a clear and precise manner. It’s not a better book than that of Rothbard, it’s simply more up to date.
With respect to taxes funding government spending you are placing the cart before the horse. The Central banks behaviour is a direct consequence of the governments fiscal strategy. if the goverment runs a deficit the net savings of the private sector increase. If the government runs a surplus, then prior savings from previous deficit spending can be used to finance private sector spending.
However, if the government continues to maintain a surplus position then private sector savings will be run down to the point whereby private sector spending must be financed via credit. The case for these occurences is sound.
One of your comments is relevant, namely, the following:
“I think it is more likely that there are some things which you inferred from Rothbard which he did not intend to imply”.
Yes, it was misleading to imply that Rothbard, knew how a modern monetary financial system, which appeared after his book was written actually operated.
I should have said that Rothbards Mystery of banking was the best account or the monetary financial sector prior to financial deregulation.
If my remarks in anyway appear condescending it is a consequence of my poor writing style rather than any attack on your integrity or ability as an analyst.
I will not be making any further comment on this issue and will read your comments Paul, and merely acknowledge that I have read them with a smiley face thus :0)
Cheers Paul
Alan,
If by “textbook” you mean that I presented the textbook Rothbardian model of money and banking, then i am pleased to plead guilty because that is the approach to which I subscribe. All of whatever understanding of banking that i possess i attribute to my readings of Mises and Rothbard and the authors found here on mises.org.
I appreciate the very friendly tone of you post considering the strong difference of opinion we have on banking and money. I’m always happy to leave a topic in the state of both parties agreeing to disagree.
Take care, Sir.
And the terms “Socialist, Marxist, Communist, and Keynesian” never entered my mind in respect to you. Cio!
In keeping with my word:
:0)
Take Care, Sir.
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