Thursday, August 27, 2015

Forgetting the History of Central banks

Forgetting that the great depression occurred after the creation of the federal reserve.
Forgetting that Canada avoided the great depression because it had no central bank.
From Wikipedia: In 1934, with only ten chartered banks still issuing notes, the Bank of Canada was founded and began issuing notes in denominations of $1, $2, $5, $10, $20, $25, $50, $100, $500 and $1000. In 1944, the chartered banks were prohibited from issuing their own currency, with the Royal Bank of Canada and the Bank of Montreal among the last to issue notes. From that point forward, the Bank of Canada has been the sole issuer of bank notes denominated in Canadian dollars. A liability of more than $12 million remains on the Bank of Canada's books up to the present day, representing the face value of Dominion of Canada, provincial, and chartered bank notes still outstanding.[3]

Forgetting that wealth would have been greater had the western world not experienced a great depression..

The EU looked at the world and saw the dominance of the US dollar. They saw research that I have seen shows that the USA is 3% richer than it would be if the dollar was not the dominate currency in the word. They wanted a piece of that. They also thought that a common currency guided by an enlightened central bank.would be better for the Southern countries which had been prone to periods of inflation. Further that a single currency would facilitate trade within the EU. And so the Euro was created.

But big currencies mean big problems and we have Greece, Portugal, Spain and Italy with very high unemployment for 5 years! They are all struggling and falling deeper in debt. 

And lest you get the wrong idea even Germany's real growth has been poor. And no one sees an easy way out.

Time to start thinking of smooth way out of the Euro mess.

Great Depression and the Origins of the Welfare state in the USA

Mike Konczal on the origins of the modern welfare state in America:

Informal networks of local support, from churches to ethnic affiliations, were all overrun in the Great Depression. Ethnic benefit societies, building and loan associations, fraternal insurance policies, bank accounts, and credit arrangements all had major failure rates. All of the fraternal insurance societies that had served as anchors of their communities in the 1920s either collapsed or had to pull back on their services due to high demand and dwindling resources. Beyond the fact that insurance wasn’t available, this had major implications for spending, as moneylending as well as benefits for sickness and injuries were reduced.
The Hoover Administration’s initial response to the Great Depression was to supplement private aid without creating the type of permanent public social insurance programs that would arise in the New Deal. Hoover’s goal was to maintain, in the words of the historian Ellis Hawley, a “nonstatist alternative to atomistic individualism, the romantic images of voluntarism as more truly democratic than any government action, and the optimistic assessments of the private sector’s capacity for beneficial governmental action.” As President Hoover said in 1931, much like conservatives do today, any response to the economic crisis must “maintain the spirit of charity and mutual self-help through voluntary giving” in order for him to support it.
Noble as that goal may be, it failed. The more Hoover leaned on private agencies, the more resistance he found. Private firms and industry did not want to play the role that the government assigned them, and even those that did found it difficult, if not impossible, to carry out those responsibilities. The Red Cross, for instance, did not want to move beyond providing disaster relief. Other groups, like the Association of Community Chests and Councils, had no interest in trying to coordinate funds at a national, rather than local, level. Hoover understood that private charity wasn’t getting to rural areas, yet private charities couldn’t be convinced to meet these needs.
What’s most worth noting is that, in the end, both beneficiaries of fraternal societies and private charities themselves welcomed this transition. During the Great Depression, citizens, especially the range of white ethnic communities in the largest cities, watched as mass unemployment tore down institution after institution. From fraternal societies to banks to charities, the web of private institutions was no match for the Great Depression.
As documented in Lizabeth Cohen’s Making a New Deal, these white ethnic communities turned to the New Deal to provide the baseline of security that their voluntary societies were unable to offer during a deep recession. As a result of the implosion of the voluntary societies they depended upon, working-class families looked to the government and unions for protections against unstable banks and the risks of the Four Horsemen.

So if he is correct, it looks to me like the Great Depression was the result of a failure of the Federal Reserve so great that it proved to be too great a burden non-Government charity and so Government stepped in. Of course the the Federal Reserve was created to because of earlier failures of the federal government money system.  That system was created to fund the civil war. So government money was both the cause of the failure and reason that government could afford to step in an help.

Never the less, I think that the big flaw in Government charity is not that it helps the poor creating disincentive to work, but that most of the spending goes to rich and middle class (through SS, medicare, farm and other subsidies and Government schooling) and so Federal Government spending on charity is much higher than it should/could be. My reason to believe that is because I do not think it is possible at this time for Government to subsidize the median life time earner. So you are taxing the same people you spend the money on. 

So absent if the Great Depression was avoided how much of Government do you think would be devoted to charity? I think it would be much smaller and just about everyone would be better off. 

Take Social Security for one example. 
  • a person who earns $15,000/year will pay $82,000 in payroll taxes (employer and employee combined) over 44 years of work. When he retires, his annual benefit will be $10,476 or 13% of his lifetime payroll taxes.
  • a person who earns $50,000/year will pay $273,000 in payroll taxes over 44 years of work. When she retires, her annual benefit will be $21,672 or 8% of her lifetime payroll taxes.
  • a person who earns $115,000/year will pay $627,000 in payroll taxes over 44 years of work. When he retires, his annual benefit will be $32,952/year or 5% of his lifetime payroll taxes.[56]
From Social Security Just the facts 

$1,294 is the average benefit/worker/month. If everyone got what those who earns $15,000/year that would enable cut the program by about 1/3. We could then lower the tax by about 25% allowing workers to spend that money when they want. Most people are poorer when they are young than old and so would get a higher marginal benefit from keeping that 25% than getting 25% more in retirement. The lower earners would not be hurt because many of them would get more than they get now.  Almost all USA citizens would be better off.

BTW In Australia the government part of the retiree pension pays out the same amount to all recipients. 

Bottom line we should not work to end Government charity but we should work to educate people about why Gov. charity should be for bottom percentiles of life time earners.