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Lacy Hunt Sticks With His Message: Lower Bond Yields On The Way

Lacy Hunt Sticks With His Message: Lower Bond Yields On The Way

Authored by Mike Shedlock via,

Citing unproductive debt, velocity,…

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Lacy Hunt Sticks With His Message: Lower Bond Yields On The Way

Authored by Mike Shedlock via,

Citing unproductive debt, velocity, and a negative multiplier from government debt, Lacy Hunt sticks with his prognosis of lower treasury yields.

Please do yourself a favor and read Hoisington Management's Third Quarter Review by Lacy Hunt.

Hunt's analysis is six pages long. I present a few paragraphs on the negative impact of debt in the economy. The titles are mine, the paragraphs are from Lacy.

Excessive Unproductive Debt

Excessive indebtedness acts as a tax on future growth and it is also consistent with Hyman Minsky’s concept of “Ponzi finance,” which is that the size and type of debt being added cannot generate a cash flow to repay principal and interest. While the debt has not resulted in the sustained instability in financial markets envisioned by Minsky, the slow reduction in economic growth and the standard of living is more insidious.

Swedish econometricians Andreas Bergh and Magnus Henrekson, writing in the prestigious Journal of Economic Surveys in 2011, substantiate that there is a "significant negative correlation" between the size of government and economic growth. Specifically, "an increase in government size by 10 percentage points is associated with a 0.5% to 1% lower annual growth rate." This suggests that if spending increases, the government expenditure multiplier will become more negative over time.

Second, Ethan Ilsetzki (London School of Economics), Enrique Mendoza (University of Pennsylvania), and Carlos Vegh (University of Maryland) in a study published by peer reviewed the Journal of Monetary Economics in 2013, concluded that the government spending multiplier is sharply negative in highly indebted countries. The definition of highly indebted is central government debt exceeding 60% of GDP, a condition that is met by most of the major economies of the world.

Third, an econometric study by Alberto Alesina, Carlo Favero and Francesco Giavazzi in the Journal of International Economics in 2015, corroborates that the tax and expenditure multipliers are both negative, with the tax multiplier more negative. Quite significantly, these conclusions are supported by domestic as well as international data. Alesina is a Professor at Harvard, while Favero and Giavazzi are professors at IGIER-Bocconi.

Fourth, Cristina Checherita and Philip Rother, in research for the European Central Bank (ECB) published in 2014, investigated the average effect of government debt on per capita GDP growth in twelve Euro Area countries over a period of about four decades beginning in 1970. Dr. Checherita, now head of the fiscal affairs division of the ECB and Dr. Rother, chief economist of the European Economic Community, found that a government debt to GDP ratio above the turning point of 90-100% has a “deleterious” impact on long-term growth. In addition, they find that there is a non-linear impact of debt on growth beyond this turning point. A non-linear relationship means that as the government debt rises to higher and higher levels, the adverse growth consequences accelerate.

Trend in Treasury Yield Remains Downward

In the third quarter, economic growth slowed sharply, registering a fraction of the growth rate in the first half. We expect the third quarter’s weakness to continue over the balance of this year and into 2022.

During the 1970s, unlike currently, the velocity of money was stable (although not constant). As a result, the aggregate demand curve (C + I + G +X = M x V) also shifted steadily outward. This allowed the inflation from the supply side disruptions to become entrenched. Currently, however, the decline in money growth and velocity indicate that the inflation induced supply side shocks will eventually be reversed. In this environment, Treasury bond yields could temporarily be pushed higher in response to inflation. These sporadic moves will not be maintained. The trend in longer yields remains downward.

*  *  *

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Tyler Durden Thu, 10/14/2021 - 11:59


The stagflation myth

Describing evolving inflationary conditions as stagflation misses the point about today’s inflationary conditions. Stagflation was originally used only…

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Describing evolving inflationary conditions as stagflation misses the point about today’s inflationary conditions. Stagflation was originally used only in the context of excessive wage increases not matched by improved trading prospects. Just in that narrow sense, today we are experiencing stagflation.

But in the wider context inflationary conditions being described as stagflation are not stagflation at all. They are the consequences of increased money supply undermining the purchasing power of currencies —an extremely dangerous economic condition that, unless it is fully checked, leads to the destruction of a fiat currency.

In the UK and elsewhere politicians are claiming that higher wages for the low paid are needed to get them back to work. Without an increase in productivity, it amounts to a recommendation in favour of stagflation. But in measuring stagnating production, politicians and economists alike are being misled by estimates of individual productivity by the OECD, which produces the basic statistics.

This article demonstrates the incorrect assumptions behind the OECD’s calculations on productivity and why it is not the function of governments to attempt to manage it. If governments are to do anything positive, it should be to cut employment taxes and stop interfering.

The reader less interested in the abuse of labour and production statistics might like to skip the section on the OECD’s approach to productivity for the brief update on the wider evolution of global hyperinflation later in the article.


As the global economy descends into a hyperinflationary collapse, commentators who have yet to fully understand the dynamics of it are now becoming aware that price inflation looks like being rather sticky and far removed from Jay Powell’s hopeful description of transient.

Still on the back foot, these rear-view mirror policy drivers are beginning to see it as evidence of stagflation. It is a condition which neo-Keynesians find contradictory, taken to describe a combination of inflation and a stagnating economy. But this takes the word out of its original context. I should know, because it was first used by Iain Macleod when he was a Member of Parliament and shadow chancellor in the Conservative opposition on 17 November 1965. Iain happened to be my father’s elder brother, so was he was my uncle.

The following is an extract from Iain’s speech in the Commons that day.[i] I extract as much as I do to give it its proper context:

We now have the biggest gap between productivity and earnings of any time in modern economic history. Certainly, history was being made. The index figure of industrial production at 133 for January—revised on the latest figures to, I think, 134; and for December it is down to 131—is certainly history. I can find no period—and I have checked this all the way back, with the possible exception of 1952—when in 13 years there was a year when the gap was so wide between what we should be doing, and we were in fact doing.

“We now have the worst of both worlds —not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation and history in modern terms is indeed being made. There is another point behind the figures. As I say, production has fallen by 1 per cent. or ½ per cent. while incomes have gone up, perhaps, by 8 per cent. This can result only in two things happening in the months ahead; either a considerable increase in our import bill to meet the increased consumer expenditure or a very real rise in our prices.”

So, there we have it. The reference was specifically about the combination of stagnating production and wage inflation. This is the condition that is, ironically, today being promoted by the Conservative government, led by Boris Johnson lauding higher wages without the immediate production to match. That’s just a vague hope for the future. There really is no difference between the government sanctioning higher wages in the predominantly nationalised industries without improved productivity in 1965 and the wages situation today. The language only is changed. Boris is chasing a mirage of economic transformation with industry somehow managing to accommodate higher wages and remain in business.

It was not, as is commonly supposed, a wider description for an economy which is stalling while consumer prices are rising. But to many observers that is what stagflation has become. It is now a portmanteau word for a portmanteau situation — the latter being an inadequate description for the consequences of earlier monetary stimulation. It is a half-way house on the road to discovering the true hyperinflationary threat faced by us all on a global scale, if as seems likely democratic governments have become so addicted to unfunded expenditure that they cannot stop relying on it.

Stagflation is commonly associated with the 1970s. But as we have seen, it was applied to an earlier condition a whole credit cycle before price inflation threatened to escalate from 1972 onwards.

Another aspect was the different monetary situation, best illustrated with American statistics. Bank credit in the US expanded in the 1970s more rapidly than in 2010—2021, but since the financialisation of the economy this comparison is rendered useless due to the development of shadow banking, which in terms of credit creation cannot be defined statistically. A better indicator is the Fed’s base money, and Figure 1 shows how base money has grown since 2005, compared with its growth between 1965—1981.

From 1965—1981, US base money grew 191%, while from 2005 to date it has grown 716%. On its own, the massive increase in base money does not trigger a hyperinflation of prices: that is down to changing public perceptions of the purchasing power of the currency they use for day-to-day transactions. But members of the public are more likely to appreciate a link between measures of narrow money, such as a central bank’s base, than a link with bank credit, particularly when you bear in mind that even financially educated investors don’t understand how bank credit is created and what the effects are likely to be.

Suffice it to say, that in the history of banking and deposit creation a cycle of bank credit expansion and its subsequent contraction is identifiable and can be explained. And the empirical evidence is that the cycle of bank credit has less of an impact on prices over its boom-and-bust duration than increases in base money.

That being the case, we can assume that a comparison between the prospects for a loss of purchasing power for currencies today with the situation when so-called stagflation ruled in the 1970s is misleading. Today, the conditions exist for what economic historians describe as hyperinflation, but more accurately described is a substantial or total collapse in the purchasing power of contemporary currencies.

The productivity myth

We now turn our attention to the error of the state determining individual productivity, which apart from climate change and supposedly temporary logistical foul-ups was a focus for government policy at this week’s G20 meeting of finance ministers and central bank governors in Washington.

As shown above, the term stagflation was originally only applied to a condition whereby wages rise unsupported by output. Other than the cost of labour, prices were not even mentioned. Today, we see that in a wider inflationary context, similar conditions do exist for the original definition of the word. Labour costs are inflating in all jurisdictions while output appears to be stagnating. As mentioned in the introduction, Boris & Co appear to be excusing it by claiming that the UK must transition from a low-wage, low-productivity economy to a higher wage more productive economy, the latter condition an indefinite prospect in the future. Doubtless, other national leaders are or will be making similar claims in their jurisdictions.

Every now and then, there’s a rash of commentary on national productivity. And for the British, poor productivity is a contemporary hangover of Brexit angst. The OECD, the Treasury, the Bank of England and Remainers are all claiming the average Brit’s productivity level is woefully inadequate and goes to show how much they need the certain comfort of being in the EU.

In 2017, the OECD came out with a paper about the economic consequences of Brexit, even recommending Britain should hold a second referendum to reverse the Brexit decision. To back up its analysis it claimed Britain’s labour productivity was at a standstill, while that of France, Germany the United States and the OECD averages of all nations were improving.[ii]

Regular readers of my articles will know that I disparage statist statistics, averages, and the neo-Keynesian analysis that goes with them. The econometricians’ concept of productivity is a prime example of why statistics derived from questionable information should be disregarded entirely. The OECD, which is the main source of the productivity statistics quoted by politicians, appears to use statistics not in a genuine search for the truth, but as a cheerleader for government management of the economy. Being based in Paris this institution is particularly sympathetic to European statism.

This is the organisation behind official international analysis of labour statistics, while being funded entirely by self-interested governments. However, on the face of it, productivity should be uncontentious, and hard to criticise. GDP divided by the number of hours worked is a simple metric. But it is deceptively misleading.

The OECD’s approach to productivity

The OECD’s brief paper, Defining and measuring productivity, quotes Paul Krugman:

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker.[iii]

Krugman implies in this quote that productivity is a function of national policy and therefore should override the interests of the employer. This is plainly in contravention of the facts: apart from the too-frequent instances of employers who seek state subsidies to bridge gaps in productivity, an employee only adds value if he or she is employed by an employer for profit. It is up to the employer to make that decision, not government. That the OECD headlines Krugman’s view confirms the OECD’s economics are in line with his thinking.

From here, the statistical errors embark, starting with the relevance of GDP. GDP is designed to capture final consumption and underplays the production of goods of a higher order, such as factory machinery and services inputs, by not recording the intermediate steps in production. This important point is now recognised in the US by the introduction of a relatively new statistic, gross output (GO).

GO is reported quarterly by the Bureau of Economic Analysis, and it is almost double the GDP number. Therefore, in the US, GDP per hour worked is half the realistic measure of the relation between production output and labour costs in private sector industries. GO confirms that using GDP in a productivity formula is outrageously misleading. But the OECD does not estimate GO, and it should be noted that different countries have varying degrees of intermediate production, which makes it impossible to compare them on a like-for-like basis anyway.

We can easily expose as baloney the concept of labour productivity in our daily affairs. For example, if you are in retailing, you may judge your sales staff to be productive, because they produce sales. But most of the footfall in your store probably has nothing to do with the salesman’s skills. The window-dresser may or may not have contributed, and are the cleaners and accountants productive, along with the warehouse staff and the van drivers who deliver to the store? Taken individually, they are a cost, difficult or impossible to relate individually to final sales, which makes up GDP. Therefore, running a business is about teams of people with complementary inputs, and to record the production of individuals in GDP terms becomes senseless. In this context GO is a more realistic measure.

By intervening in private sector production, the state renders it less efficient by imposing taxes and regulations, and interfering with the relationship between employer and employee. As a form of capital deployed in production, labour becomes inflexible. The state doesn’t want businesses to lay off workers when business calculations go awry. Instead, the state obstructs the redistribution of labour by subsidising the uncompetitive businessman. Governments also penalise profitable businesses by taxing profits and in many cases employment itself.

Furthermore, different industries deploy their various forms of capital in different ways, so within statistical averages, as part of the whole the contribution from human effort varies considerably. And a mechanic on an automated production line supervising expensive robots cannot be averaged with a floor-sweeping cleaner.

The government’s own GDP contribution must be excluded from any productivity calculation, as it is a resource drain on more efficient production in the private sector. The services provided by the state are not demanded by consumers but imposed upon them.

The problem with statistics such as productivity is that everyone thinks they mean something. And, of course, the political class, including finance ministers, stand for nothing and fall for anything. That notwithstanding, let us ignore the fact that this econometric gem is only paste, and recast the figures into something more meaningful. Something that a businessman might find useful as a basis for comparison in the quest for the best jurisdiction to establish his business. Something that will guide him about whether he should relocate from Britain to mainland Europe as the OECD still believes should be the economic consequence of Brexit.

For this purpose, we shall select four countries in Europe from the OECD’s database, including the UK. In 2019 (the most recent OECD calculations), GDP per hour worked in US dollar equivalents in the order of most productive were France $67.50, Germany, $66.40, UK $58.40, and Italy $53.40. For what it’s worth, the UK lags the euro area average ($59.5) and particularly its near-neighbours, such as Belgium and The Netherlands. And it is not much better than the OECD average of $54.5: hardly the position to be in for a leading advanced nation.

These are the OECD figures upon which successive British finance ministers have based their beliefs about how unproductive their taxpayers are, and if only they could be exhorted to work more productively, tax revenues would improve. For that is the state treasurer’s real interest in the matter.

A more sensible approach is to look at productivity from a businessman’s point of view. It is out of his sales revenue that he must pay both employment taxes and wages for his employees. When reverse-engineering the OECD’s figures, we must also remove government, because our quest is to focus on the private sector. Then we must deduct the unemployed to arrive at the number employed. Table 1 quantifies the private sector workforce in 2019.

It’s worth noting that there are different ways to count government employees, and that France and Italy in particular have significant industries under state control whose personnel are not included as government employees.

Next, we must derive private sector GDP per private sector employee. This matches the adjustments to the work force in Table 1 with the private sector’s GDP. GDP and the state’s share of it is for calendar 2019, before government spending and therefore their share of GDP increased due to the pandemic, distorting their involvement in the economy. This is shown in Table 2.

Our Mr or Ms Average is held responsible for producing a share of GDP which is lowest in France, and highest in the UK. Who would have believed it! The OECD told us that the French employee was most productive, followed by Germany, then the UK. And Italy was, well, Italian. The OECD’s calculations have fallen at the first fence.

However, to employ Mr and Ms Average a salary must be paid along with social security and employment taxes before a business hopefully profits from his or her labour. This is our final adjustment in our quest to seek more relevant figures from the businessman’s point of view. The result is shown in our last table, Table 3.

Obviously, these figures are far from a true statement of productivity. As mentioned above, if the EU produced figures for GO, including intermediate processes as well as final values for goods, return per employee would make more sense. Germany, with its strong manufacturing base is probably most understated, while Italy and France less so. Britain may be somewhere in the middle —similar perhaps to the US at nearly twice GDP. And even France’s businesses could be shown to employ human resources profitably, barely perhaps.

The conclusion of this exercise is that the average businessman employing the average employee measured by average GDP per employee gets the best return on his investment in human capital in Italy, followed by the UK. The application of GO instead of GDP would almost certainly change that order into Germany and the UK being the most productive locations, and France and Italy the least attractive. If he has a predilection for France or Italy, a businessman better secure advantageous terms from the government for the life of his investment. And on other factors, such as language, culture, and the lack of parochial nationalism when it comes to business ownership, Britain even beats Germany, hands down. Perhaps that’s what drives manufacturers of international vehicle brands, including those of Germany, to choose Britain to base many of their production facilities.

Using the OECD’s own figures, recast to reflect commercial reality, the results deny the OECD’s own conclusions. When constructing the tables herein, I found significant variations in the statistics from different sources, and applying different exchange rates to costs has an additional statistical impact.

With its large cash-based agricultural sector, France’s GDP must be understated by not adequately recording the role of sole traders in its rural areas. And in Italy, as is the case elsewhere to less significant degrees, there are huge variations in average salaries, not only in different industry sectors, but regionally as well.

The purpose of the tables recast above is to give only the roughest of approximations of employee productivity. Human capital, being employed to do many different things, cannot be measured by anyone, except by whoever pays the salaries. And additionally, the OECD approach encourages politicians and mathematical economists to ignore the impact of employment taxes. It is here that the UK scores relatively well and France is a disaster, reflected in perpetually high unemployment because it is uneconomic for many workers to be employed.

Instead of criticising the private sector for being unproductive, it is surely more relevant for governments to look at their own burdens on production and act accordingly. And for UK politicians to claim that higher salaries will make the nation wealthier displays ignorance of the commercial facts based on misleading statistics. This was what stagflation was originally about: the payment of wages not matched by production. And that is what it should be confined to today, based on a proper understanding of labour economics.

Additional consequences of monetary inflation

We now turn to the wider consequences of earlier and current monetary inflation, which must not be confused with the original application of the stagflation term. Stagflation suggests a less serious inflationary problem than the dangerous potential for a hyperinflation of prices. Far from recognising the real danger, it suggests a problem that is retrievable, where things don’t get totally out of government control and that further inflation of prices is extremely unlikely. Perhaps, they believe, that the problem will resolve itself in time, proving after all, as the IMF states in its latest World Economic Outlook that “…amid high uncertainty, that headline inflation will likely return to pre-pandemic levels by mid-2022 for the group of advanced economies and emerging and developing economies”.

The underlying reason for rising prices is illustrated in Figure 1, which showed that since 2005 US base money has increased over seven-fold. It has become the principal means by which the government deficit is financed, and with the total absence of any suggestion of cutting or even freezing government spending, we can only assume that the impetus behind rising prices will continue. It is not restricted to the US and its dollar. It is a script being followed by all other G20 member nations, with the possible exceptions of Russia and China.

It is not just a stagflation problem. Production issues are now far greater than labour costs on their own. While most of them should be familiar to readers, it is time to run a checklist.

  • Labour shortages, caused by multiple factors, are leading to acute wage inflation in the industry sectors which are seeing unexpected consumer demand post-lockdown, while labour currently unemployed or tied up in less demanded production is proving to be unavailable. It is hoped that this stickiness will be resolved in time. But after receiving government subsidies to see them through covid lockdowns, for many there is a reluctance to return to work that can only be countered by reducing unemployment benefits. At a time of rising prices, this is proving to be impossible for democratically elected governments to do.
  • The energy crisis is hitting households and is now the dominant issue. By pursuing a shift from fossil fuels to renewables, governments have brought an energy crisis upon their voters. Domestic fuel costs have soared ahead of the Northern Hemisphere winter and can only worsen. Wholesale natural gas prices have risen 270% since the Fed started its $120bn monthly QE programme in March 2020, heating oil by 360%, and gasoline blend-stock by 500%. Secondary effects are affecting food supplies, making intensive fruit and vegetable production in glasshouses uneconomic. Production of CO2, a by-product of waste management relying on energy inputs and vital to food packaging and carbonated drinks, has already required government subsidies to continue.
  • The energy crisis is hitting all aspects of industrial production. Rising prices for electricity is affecting energy-intensive industries, rendering production of basic materials such as steel, aluminium, and cement uneconomic. China’s industrial production has been badly hit by power outages, which has prompted the government to instruct its electricity producers to obtain gas and coal on the international markets regardless of cost. This is going to put further pressure on global coal and natural gas prices. West Texas Intermediate oil is now over $80 per barrel, having risen four-fold since March 2020.
  • Logistics problems continue. Experts now say that the world’s logistical foul-up will continue into next year for many months to come. Shortages of trucks have compounded the original post-pandemic problems, with container ports everywhere unable to clear backlogs. According to the Marine Exchange of Southern California, as of last Sunday 87 container ships were classed as in-port, meaning they are within 40 miles of Long Beach and Los Angeles, with 60 of them anchored. In the UK’s largest container port, Felixstowe, it is taking nine days to turn around a container ship compared with a normal time of two days. Product shortages are impacting industrial production badly, a problem made worse by just-in-time practices which have led to acute inventory shortages.
Figure 2 sums up the commodity supply problem and the effect on prices.

After a four-month consolidation, the price of this commodity ETF has broken above the dotted line and is rising again, indicating there is renewed pressure on producers to either successfully raise their output prices or go out of business. Unemployment will certainly rise, adding to government costs and reducing their tax revenues. Inflationary financing, which incidentally will fuel yet higher prices for all factors of production, is only just starting. And it must not be confused with stagflation.

At the G-20 meeting of finance ministers and central bank governors in Washington this week, delegates continued to insist these conditions will resolve themselves, in accordance with the IMF’s line quoted above, that “headline inflation will likely return to pre-pandemic levels by mid-2022 for the group of advanced economies and emerging and developing economies”. That they fully believe in it is however questionable. More likely, they are determined to discourage panic buying, in the knowledge that it will drive prices of consumer goods higher. But they will still hope that things will eventually normalise with headline inflation returning to pre-pandemic levels.


[ii] See Figure 4A on page 19:

[iii] See


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Danger Ahead: Why We Are Heading Toward Double-Digit Inflation

“Government is the only agency that can take a valuable commodity like paper, slap some ink on it and make it totally worthless.” (“Maxims of Wall…

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“Government is the only agency that can take a valuable commodity like paper, slap some ink on it and make it totally worthless.” (“Maxims of Wall Street”, p. 152)

Yesterday, the Social Security Administration announced that it will increase monthly Social Security checks by 5.9% in 2022, its largest jump in 40 years.

Inflation is back with a vengeance. President Ronald Reagan and his Fed Chairman Paul Volcker fought the good fight against inflation, and we entered a disinflationary period that lasted 40 years. That’s quite a legacy.

But President Joe Biden and Fed Chairman Jay Powell seem determined to bring back inflation and higher interest rates. They are succeeding.

Because of huge deficit spending and easy money, commodity prices are up 50%. The official government statistic, the Consumer Price Index (CPI), has advanced nearly 6% this year. Long-term interest rates are also starting to rise.

Of course, I believe the CPI underestimates the actual rise in the cost of living because it excludes such items as income taxes and housing prices. As you can see from the chart below, housing prices are moving up rapidly, even faster than the CPI.

(Reprinted by permission.)

Financial advisor Scott Grannis stated, “There is an 18-month lag between rising house prices and rising owner’s equivalent rent (OER). We are only now at the beginning of the increase in OER. This could drive higher CPI inflation for the next year or two.”

Economists at (see below) think double-digit-percentage inflation is already here.

(Reprinted by permission.)

As a consumer and an investor, you need to increase your net worth by 10% or more just to stay ahead.

Wage Inflation and Minimum Wage

The Biden administration likes inflation and generous, never-ending unemployment compensation because it will force corporations to raise wages in response to the labor shortage.

The Democrats failed to push the $15 minimum wage bill through Congress, so they have decided to go through the back door to help out the unions by creating an artificial labor shortage. Businesses will have to pay people more to get them to come back to work, and that means wage increases for everyone and higher prices.

A Nobel Prize for Raising the Minimum Wage

On Monday, Oct. 11, the Nobel Prize committee in Sweden announced that the University of California, Berkeley, economist David Card won the Nobel Prize for his suspect 1994 study on the minimum wage. This was the infamous study that concluded that raising the minimum wage has no effect on the employment of workers, thus denying a basic concept in supply-and-demand labor economics.

Many economists have shown that his study, co-authored with the late Alan Krueger, depended on misleading data about fast food restaurants.

The Nobel Prize committee should have repeated what it had done in the past, giving the award to economists with opposite views, such as in 1974 (Friedrich Hayek and Gunner Myrdal on market intervention) and 2013 (Eugene Fama and Robert Shiller on efficient markets).

A good choice to counter David Card would have been another David — David Neumark, a professor at the University of California, Irvine. He’s done major research showing the unintended consequences of above-market minimum wage legislation.

I suspect giving David Card this prize is going to stimulate more efforts to artificially raise wages with all its ill-effects on employment, mechanization and working hours, rather than focusing on increasing labor productivity and corporate profitability (companies with higher profit margins pay their workers more).

Are the Economics Textbooks Out of Date?

Regarding the textbook approach to minimum wages, Card said in a recent interview, “The textbooks are frustratingly stupid in our field. The simple models that economists use — they want to hold onto these models, even though they know full well that there are problems with them.”


A fascinating new study of minimum wage legislation, a working paper published by the prestigious National Bureau of Economic Research (NBER), demonstrates that supply and demand still apply to the labor markets. See it here.

As I read it, economists Michael Strain and Jeffrey Clemens conclude that the closer the minimum wage gets to the equilibrium average wage for unskilled and low-skilled labor, the impact on employment is close to zero. But the further the minimum wage legislation is from the equilibrium average wage for these workers, the greater the impact on employment.

It looks like standard supply and demand curves work for the labor market after all. I sent this paper to David Card, and he never responded.

I see that Florida passed a referendum in 2020 raising the minimum wage to $15 an hour (gradually) and then indexing it to inflation. The scary part is the indexing. It means that more inflation is inevitable.

The Double Whammy of Inflation and Progressive Taxation

Inflation also benefits the government by pushing taxpayers into higher tax brackets.

Last week, under the influence of Treasury Secretary Janet Yellen, 136 nations in the Organization for Economic Cooperation and Development (OECD) signed an agreement to impose a minimum 15% tax rate on big companies. I first thought it was a typo — didn’t they mean a maximum 15% tax rate?

A flat maximum tax of 15% is ideal. Under a minimum tax, there is no limit to government abuse. As the great Scottish economist John Ramsey McCulloch warned, “The moment you abandon the cardinal principle of exacting from all individuals [or corporations] the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may commit.”

Special Sections on Inflation, the Minimum Wage and Taxation in “Economic Logic”

My guidebook, “Economic Logic,” has several sections on taxation, inflation and the minimum wage.

Chapter 10 has a whole section on why the minimum wage is bad for workers and businesses. I offer several ways to raise wages “naturally” without government interference.

When I teach students at Chapman University on the pros and cons of the $15 minimum wage, the vast majority change their minds and vote against the minimum wage.

Chapter 19 of my book discusses the evils of inflation and easy-money policies. Chapter 21 introduces the only legitimate principle of taxation known as the “benefit” principle.

Speaking at Hillsdale College on Veterans Day, Nov. 11

I’m happy to announce that I will be speaking at Hillsdale College in Michigan on Veteran’s Day, Nov. 11, at 7 p.m., in Lane Hall. Refreshments will be served. The topic is “What is the Ideal Tax Policy that Maximizes Liberty and Prosperity?” My subscribers are welcome to attend this free lecture. See you there.

For those who can’t attend, consider buying my guidebook “Economic Logic,” which contains 28 valuable lessons on inflation, taxation, the business cycle, investing and the fundamental keys to economic growth and prosperity.

It is the only “no compromise” textbook in free-market economics, with in-depth criticisms of all the various forms of socialism, Keynesianism and Marxism.

“Economic Logic” is indeed a perfect antidote to the bad economics that students are being taught in today’s classrooms.

Click here to read all about “Economic Logic”.

My book has been endorsed by Steve Forbes, who said, “His textbook, ‘Economic Logic,’ now in its 5th edition, demonstrates his ability to look at the whole economy, that is, the real world and real people. The rigidity between micro and macroeconomics is not for him. He realizes instead that they’re all connected together. He begins this book with a profit-loss income statement to demonstrate the dynamics of the real-world economy. No other textbook does this.

“Skousen’s book brings in many other disciplines to teach lessons of economics, whether it is history, sociology, finance or marketing management. He recognizes that individual departments may be a convenient way for universities to organize their academic activities, but in the real world, it does not advance learning. They need to be integrated. In that sense, he is the spiritual heir of Adam Smith, harking back to a time before mathematicians took over economics.”

“Economic Logic” is a 708-page quality paperback with 28 lessons or chapters, and it is ideal for college, advanced high school and home-schooled students.

For a special rate of ONLY $35 (28% off the $48.95 full price) with FREE SHIPPING in the United States, go to

Good investing, AEIOU,

Mark Skousen

You Nailed It!

William Shatner Rides the ‘Free Enterprise’ into Space

William Shatner, who played Captain Kirk in Star Trek, yesterday became the oldest man to go where no 90-year-old has gone before — into outer space.

William Shatner, who played “Captain Kirk,” poses with his Blue Origin crew.

Shatner and I have remained friends since he appeared as the keynote speaker at FreedomFest in 2017. The highlight of my interview with him was when I challenged him to an arm-wrestling contest (see the photo below), and even though he was 86 years old at the time and 15 years my senior, he beat me. He’s a strong guy!

Shatner, 15 years older than me, wins our arm-wrestling match.

Even today, at age 90, Shatner loves to ride horses.

When Amazon CEO Jeff Bezos invited Shatner to fly on a “Blue Origin” booster into space, I suggested that he call the spaceship “Free Enterprise,” since it is a combination of the name of his aircraft in Star Trek (“The Enterprise”), and the fact that Blue Origin is a private company, not a government endeavor.

It is amazing what Jeff Bezos has done with private space travel, as has Elon Musk with SpaceX.

Ron Baron, who leads the highly successful Baron mutual funds, is a big fan of Elon Musk.

Baron just released its latest quarterly report, with a big section on why Ron Baron believes that CEO Elon Musk is “the most accomplished and consequential engineer on our planet.” 

Baron notes that Musk is the CEO of two leading “disruptive” technology businesses: the first is the electric vehicle, extended range battery, alternative energy and software business Tesla, Inc. (NASDAQ: TSLA). The second is the privately owned rocket ship, launch and satellite broadband provider Space Exploration Technologies Corp. (SpaceX).

According to a recent survey published by Science Times, Tesla and SpaceX were ranked as “the most attractive firms for leading engineering students (to seek employment) in the U.S.” That survey reports “the electric car company topped the list and the private space company ranked second.”

Baron has invested in both and profited accordingly: Baron Partners Fund has received 14 times its initial investment in Tesla since 2014 while doubling its money in SpaceX since 2017.

Baron is still bullish on both. He stated, “We expect Tesla and SpaceX to each become substantially larger, more profitable and much more valuable during the next 10 years.”

Ron Baron’s motto is “we invest in people, not businesses.” (“Maxims of Wall Street,” p. 157; to order go to

What’s so special about SpaceX? In 2021, SpaceX will provide 80% of the launches from planet Earth to space. China will provide 12%! SpaceX’s competitive advantage? Reusability! Elon calls it “RRR.” Rapidly reusable rockets.

Congratulations to William Shatner, Jeff Bezos and Elon Musk, all of whom have gone where no one else has gone before.

The post Danger Ahead: Why We Are Heading Toward Double-Digit Inflation appeared first on Stock Investor.

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Hutchins Roundup: Unemployment hysteresis, small business lending, and more 

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want…

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By Lorena Hernandez Barcena, Manuel Alcalá Kovalski, Nasiha Salwati, Louise Sheiner

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Fluctuations in the unemployment rate have a lasting effect on the labor market  

Using data on 29 advanced economies over the 2002-2019 period, Laurence Ball of Johns Hopkins University and Joern Onken of University College London find that transitory changes in the unemployment rate shift the natural rate of unemployment (the rate that is consistent with full employment and stable inflation). The authors estimate that, on average, there is a 0.16 percentage point increase (or decrease) in the natural rate of unemployment if the unemployment rate runs 1 percentage point higher (or lower) than its natural rate over a year. The authors also find that the natural rate is more sensitive to transitory decreases in the unemployment rate than increases. The results imply that shifts in aggregate demand have long-lived responses in the labor market and that “a ‘high pressure’ economy has permanent benefits,” the authors conclude.    

Fintech lenders are more likely than traditional banks to issue PPP loans to Black-owned businesses   

The Paycheck Protection Program (PPP) was introduced during the pandemic to provide government-backed loans to small businesses. Sabrina Howell of New York University and co-authors find that, controlling for business characteristics, Black-owned businesses were about 12 percentage points more likely to receive a PPP loan from a fintech lender than a traditional bank. The authors find that this disparity is not primarily explained by differences in pre-existing relationships between borrowers and banks or by borrower application behavior. Instead, they find that the gap in lending is larger in areas with larger racial animus, such as the South, suggesting that the disparity may have been driven by racial discrimination. When small banks increase automation, reducing human involvement in the lending decisions, their rate of PPP lending to Black-owned businesses increases, they find. Fintech lenders and larger banks already implement automated underwriting processes, which may account for the discrepancy.  

Increases in federal highway grants lead to small decreases in state-financed highway spending  

Using state-level data from 1994-2015, Sheila Campbell and Chad Shirley from the Congressional Budget Office find that, for every dollar in annual federal highway grants, state and local governments spent 26 cents less of their own funds on highways than they would have otherwise. This finding suggests a smaller degree of crowd-out than in much of the literature. Furthermore, for each dollar of ARRA highway grants—temporary federal grants provided during the Great Recession—state and local governments increased their own highway spending by 13 cents, although the response was smaller for state and local governments with larger deficits. The authors note that the response to ARRA grants might have been different because states had to spend the grants much more quickly and were required to maintain their previously planned level of spending for highways.   

Chart of the week: Labor force participation declined sharply over the COVID-19 recession and remains far below pre-pandemic levels 

Source: The Wall Street Journal 

Quote of the week: 

“Amid the prolonged and painful pandemic, financial stability risks have been contained so far. Financial conditions have eased since the start of the pandemic. This reflects the continuing monetary and fiscal support for the economy which helped spur a rebound from 2020. Yet the sense of optimism which had propelled markets in the first half of the year has faded somewhat. Uneven vaccine access along with the mutations of the virus have led to a resurgence of infections. Investors are increasingly worried about the economic outlook amid greater uncertainty about the strength of the recovery. Anxiety about the inflationary pressures has recently pushed yields higher. A sudden and sustained repricing of risk could interact with underlying vulnerabilities that could lead to tightening of financial conditions which could put growth at risk in the medium term,” says Tobias Adrian, Financial Counsellor of the International Monetary Fund. 

“Policymakers are now confronted with a difficult tradeoff. They must continue to provide near-term support to the global economy, yet they must simultaneously try to avoid the buildup of medium-term financial stability risks. After more than a year, complacency appears as a real risk. Asset valuations remain stretched and risk-taking persists. If left unchecked, such vulnerabilities could become structural legacy issues. Policymakers should formulate action plans that would guard against unintended consequences. Monetary and fiscal policy support should be more targeted and tailored to country-specific circumstances given the varying pace of the recoveries across countries. Central banks should provide clear guidance about the future approach to monetary policy and remain vigilant to avoid an unwarranted and abrupt tightening of financial conditions. If price pressures turn out to be more persistent than anticipated, they should act decisively to avoid an unmooring of inflation expectations. Policymakers should take early action and tighten select macroprudential tools to target pockets of elevated vulnerabilities.”  

The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation. 

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