Category: Politics

Market Rallies Don’t Always Make Sense

Market Rally FollyStimulate Economy - Red Button

Can government infrastructure spending, or “fiscal stimulus,” create more wealth? The stock market certainly seems to think so. As financial publications have recently opined, the stock market has been hitting record highs (Dow 20,000!), at least partly because investors believe the new Administration will usher in an era of government spending on things like roads, bridges, telecommunications and defense. While this may give some companies a boost, it will be a drag on long-term economic growth.

The Seen Versus the Unseen

The art of economic thinking is always to consider the seen versus the unseen. In the case of infrastructure spending, what is seen is the widening of highways, the new suspension bridges and the faster internet cables being buried underground. It is easy to see how this spending could be a good thing because the wider highways and faster internet probably enhance productivity.

Furthermore, any government spending – even on bridges to nowhere – is seen as beneficial, due to the Keynesian idea of the “multiplier effect.” This theory posits that governmental spending gives the construction workers more income, who then go and spend the income on other goods and services such as restaurants or new cars.

This in turn gives those restaurant staff and car manufacturers more income, which they then promptly spend. Each dollar the government spends is therefore “multiplied” throughout the economy.  

The Unseen Hand

What is missing from this analysis is the unseen. For government to spend any money, it must first get that money from somewhere; taxes are the most direct method and borrowing is another option, but this only means higher taxes in the future to pay for the borrowing.

While the government technically can’t print money directly to finance spending, it can do so through other means, which cause inflation and which are – you guessed it – just another form of tax.

Therefore, since taxes can only be taken from those who are creating wealth (for example taxes on profits or income), or from the existing base of wealth (such as real estate taxes), then by definition, government spending can only be accomplished through the transfer of wealth.

But Isn’t Infrastructure Useful?

Proponents of government spending may agree there is a transfer of wealth occurring, but that wealth is being employed into productive uses, such as infrastructure. After all, the construction and maintenance of roads allows businesses to ship their goods all over the country more easily.

It is true that things like roads, bridges and electrical grids are useful. But the pertinent question is how useful? If money is taxed away from a business to build a road, that business may no longer be able to build another manufacturing plant and provide an increasing number of products at a lower price, employing more workers in the process.

In other words, infrastructure spending faces a calculation problem. While politicians can hazard a guess that a wider highway or a public transportation project has some value, it is impossible to know (or prove) that the project is more valuable than what the private sector would have spent those tax dollars on.

If this calculation problem were enough to give cause for concern, there is also a problem of incentives. Infrastructure projects that are likely to be funded are those that will create the most jobs or please the most constituents, not the ones that make the most economic sense.

This logic means that the Keynesian “multiplier effect” does not exist, because every dollar spent to begin with does not come out of thin air but must instead be redirected from something productive. In fact, some of the latest rigorous academic research has confirmed the government spending multiplier to be negative, not positive (see a nice summary of this research from Dr. Lacy Hunt of Hoisington Management).

Employee IncentiveWhat this Means for the Stock Market

The stock market is always forward-looking, and it is likely making new highs for a host of reasons on which financial journalists can only speculate. It is also true that increased fiscal spending could give select companies a lot of extra business in the short term.

However, valuation levels for broad market indices such as the S&P 500 are currently at some of the highest levels in history, exceeded only during the dot-com bubble and the brief run-up before the Great Depression. At current levels, the stock market would have to decline by anywhere from 40% to 60% just to return to historical norms!

To be clear, valuation tools are not timing indicators, and anything is possible in the short term, including a continued bull market in the months ahead. However, what valuation models of the stock market can reveal is that, over the longer-term (10-12 years), investors should expect very low returns (low single digits annually) if they invest at these elevated levels.

Diversify across All Asset Classes

The best strategy is to stick with a plan of being diversified across asset classes, including hard assets such as precious metals, other commodities and real estate.

And don’t let any infrastructure spending plans fool you into thinking it will be a huge boost for the economy and the stock market!


A More Fair Approach to Fair Use

2000px-US-CopyrightOffice-Seal.svgIntellectual property law in the U.S. has not aged so gracefully with the development of internet content publishing. Obviously, this development could not have been foreseen until the very recent past, so it comes as no surprise. As usual though, the law is slow to adapt to the fast-paced changes that society at large is facing today.

Fair use is an aspect of IP law that has particularly caused issues in our modern ‘cut-and-paste culture. The confusion is detrimental to most of the important parts of U.S. copyright law, which is not always clearly defined anyway, and is often misunderstood. Fair use compliance is by nature something that can’t be quantitatively measured, which has turned out to be both an asset and a liability for those seeking protection under its wing. I believe the lawmakers behind IP laws recognized that a simplistic rubric for defining fair use could not ably address the nuances and complexities inherent in the issue, and that it must be dealt with on a case-by-case basis. This gives those appealing for fair use designation the opportunity to defend themselves and their work. The downside is that it gives full discretion to the court.

In this internet age, there is so much content being produced and distributed that it’s not at all feasible to deal with intellectual property disputes on a case-by-case basis anymore. Copyright infringement is handled by computers running algorithms which alleviate people from having to do the grunt work, but are incapable of handling the nuanced and flexible nature of fair use laws. Copyright has always been ‘opt out’ by default, but until now the drawbacks of such a system have not been completely evident.

So in response to the problem, Youtube is announcing that they will provide legal services for select videos which fall victim to indiscriminate removal over copyright charges. Youtube has become a platform that is especially plagued by these issues. Hundreds of videos are uploaded to Youtube every minute by everyday internet users, many of whom will make use of copyrighted materials such as music, pictures or movie scenes. I’m sure most of us have clicked on a Youtube link only to receive a ‘content unavailable’ message, at least several times in our lives.

The number of small insignificant cases vastly outnumbers the large critical cases since now anyone (including many who have limited knowledge of copyright law and fair use) can upload content through platforms like Youtube. It’s safe to assume that most of the videos removed are not important enough to warrant legal action by the parties whose IP is potentially being infringed upon. Those same videos, therefore, are probably also the products of people who don’t have the means to take countermeasures. Making a case for fair use can be complicated and costly. The ‘opt out’ nature of copyright as it stands means that the cases not worth looking into will always be ruled in favor of the copyright holder unless an appeal to fair use is made, which discourages the legitimate use of copyrighted material for creative or educational purposes. This is antithetical to the original intent of copyright law, which was to encourage the production of new intellectual property.

This policy of ‘guilty until proven innocent’ is also damaging to sites like Youtube, for whom it is in the best interest to encourage content creation and to make users feel free to upload videos.

In the best case scenario, Youtube would be able to provide legal service for all users, but this is clearly not possible, considering the scale of such an undertaking. An undisclosed Youtube publisher, quoted in the ZDNet article linked above, noted that it’s a step in the right direction, but implementing an ‘innocent until proven guilty’ mandate would go much further towards finding a solution, since it is not possible for Youtube to offer protection for all users.

Youtube’s move to defend fair use content illustrates that they are aware of the value it contributes to the platform they operate. Thankfully, they are willing to do what they can to even the score. The real solution will not be to simply bandage the hole. Musicians and artists have begun to call for a more fundamental change in the archaic copyright law being applied to internet age IP disputes. For the time being, we may have to settle with band-aids.

Encryption and Terrorism in the Post-Snowden Era

9609572241_d02bd5cbf2_oIn the wake of the horrific terrorist attacks that occurred in Paris last weekend, the question hanging in the air is whether or not there is anything that can be done to prevent such tragedies. Foreign policy and attitudes towards refugees have taken center stage, eclipsing what could become a very serious issue: encryption.

Ever since the Snowden revelations, it seems that regulators are desperately grasping for justifications for snooping into data, even as companies have sought to demonstrate their commitment to providing security for consumers. I wrote an article last month which tackled Apple’s policy on encrypting data. The recent attacks look like fertile ground in which to sow the seeds of such a justification. But even the truly awful nature of the terrorism occurring overseas does not convince me to relax my stance on what I see as one of the most important policy issues of our day.

Policy makers have sought to blame the effectiveness of the terrorist attacks on the use of encrypted communication, causing Russia to push for a ban on encrypted services like Telegram. In the U.S., Silicon Valley is beset by politicians from all sides. Pavel Durov of Telegram skillfully set forth his opposition with an incisive and sarcastic quip for the Moscow Times ‘I propose banning words. There’s evidence [to suggest] that they’re being used by terrorists to communicate.’

I would hope that government officials’ arguments in support of creating backdoors are due to ignorance. The worst thing that could come of tragedies like the Paris attacks would be that they be used manipulatively. In the words of Chris Riley of Mozilla to International Business Times, ‘creating policy from a reactive posture is inherently problematic.’ I couldn’t agree more. The same IBT article mentions a letter signed by several leaders in the tech industry, including Mozilla, asking Obama to reject any proposals requiring backdoors to encrypted data. Such a proposal could set dangerous precedents, not only in the U.S., but worldwide. This includes countries with governments that have a history of gross violations of the trust and rights of their citizens. Once a backdoor exists, there is no way of controlling how or when it is used or by whom.

The idea that Durov so insightfully set forth in the above quote is an essential part of the debate that is obscured by the reactionary sensationalism prone to set in after such events as these attacks. If encryption is banned or companies are forced to provide backdoor keys to the government, terrorists and criminals will find other means of executing their goals.

Encryption is a technique, and it is not something that can be fully legislated against. It’s impossible for any government to prevent everyone from using encryption. It can be banned and made illegal, but that does not stop people from using it or putting it in place. After all, bombing cities and killing innocent people is also illegal, but terrorists continue to perform such acts. Only those already willing to cooperate with regulation would comply with providing backdoors to encrypted data. The government would be no closer to hamstringing terrorists.

Even if the government was somehow able to successfully breach all encryption, terrorists would only find other means of communicating, just like they did before encryption was accessible. By making encryption essentially useless – and just as easy for hackers, criminals, and oppressive regimes to break as it is for whoever it is that’s supposed to be protecting us from terrorism – policies that require backdoors wouldn’t hurt anybody as much as they would hurt average citizens.

We can only hope that the tech companies defending data encryption, and those aware of the dangers inherent in allowing for backdoors, can convince politicians to reconsider the matter. We should not let more corruption and injustice come of the evil that we currently mourn.

Irwin Schiff – A Man of Conviction

Irwin SchiffIrwin A. Schiff just passed away on October 16th, at the age of 87, still under lock and key as a political prisoner. Most people know Irwin Schiff as the father of investor and fellow gold advocate, Peter Schiff. Irwin Schiff was also known as the most prominent tax protester of our time, a man who stood up to the IRS and was imprisoned as a result. But the legacy he leaves is much deeper than his fight with the IRS, and there are some valuable lessons we can learn from his life and teachings.

For those unfamiliar with Irwin Schiff, he was the son of Jewish immigrants. He served in the Korean War and later opened his own insurance brokerage. He read Henry Hazlitt and F.A. Hayek in college, gaining exposure to Austrian economics. He was a staunch supporter of liberty and limited government, undertaking grassroots campaigns and later staging an (unsuccessful) write-in campaign for Governor of Connecticut. He was also a candidate for the Libertarian Party Presidential Nomination in 1996.

Irwin Schiff was also a supporter of sound money, testifying in 1968 before the Senate Committee on Banking and Currency against the removal of gold-backing for our currency. My personal exposure to Irwin Schiff was through his book ‘How an Economy Grows and Why It Doesn’t’. Originally written as a children’s book in an illustrated comic-book style, it is accessible to everyone, yet contains high-level economic and political concepts that most adults do not understand.

The book starts off with an island economy, and it logically illustrates how that economy grows only through savings and capital goods investment. It then shows the disastrous results that occur when the government inflates and devalues the island’s currency. The book has been updated by his sons, Andrew and Peter, and I would highly recommend it to everyone. It is truly a joy to read. Irwin also wrote a similar book called ‘The Kingdom of Moltz’, which is also very clever.

Of course, most people who know anything about Irwin Schiff focus on his tax theories and, unfortunately, many write him off as a tax cheat who was eventually imprisoned for his actions. But his story is much more nuanced.

Could ‘Dig Once’ Bury Free Internet?

Internet regulation has become one of the hottest political topics of late, taking it’s place alongside such old chestnuts as foreign policy and social agendas. So far, net neutrality has been the most widely discussed and publicized internet regulation, inciting bloggers and pundits across the web to opine. Early this year,
the FCC ruled in favor of net neutrality. Many people supported the decision and were pleased with this outcome. On the surface, it seems to have certain benefits, but it also sets a precedent for related issues in the future.


According to a recent Washington Post article, Obama has begun to make broadband issues a key part of his remaining agenda. Part of his proposed plan is to implement

Don’t Shed a Tear for Chicago Public Schools

bus-878697_1920Chicago Public Schools (CPS) have started the new school year without having the money to last the full academic year. Even though the school system has taken care of more than half of the budget shortfall, through cuts and more borrowing, they still face a $480 million gaping hole for the current school year. Yes, that’s right, the hole was previously $1.1 billion. Instead of getting their finances in order, CPS is running to the State of Illinois and expecting to be bailed out.

There is just one problem with this plan – the State is also broke and facing their own budget gap of $5 billion. While the Illinois Senate has passed legislation in an effort to patch the hole, by using state dollars and lowering the required payments to pensions, the House hasn’t yet passed the Bill, and it is unclear how it will be funded, according to the WSJ.

If the money doesn’t come through, the school system will be forced to make additional cuts, mid-year. Adding to the turmoil is the fact that the Chicago Teachers Union is operating under an expired contract. While a strike is not on the table yet, a mediator has been enlisted for help which means that negotiations cannot be going well.

Not surprisingly, one of the biggest drivers of the CPS budget shortfall is their pension obligations. While the teacher’s pension fund is the highest-funded in Chicago at 49%, (the other city pension funds are around 40% funded or less!), it is also the largest pension fund and therefore carries the largest pension unfunded liability at $9.6 billion.

Chicago politicians and pundits would have you believe the shortfall is because city finance managers had to choose between funding the pensions or paying for teachers and school expenses, but a recent study by Illinois Policy has found that was not the case. Rather, it is because pensions have been treated as a political slush fund.