The Federal Reserve Accountability and Transparency Act (FRAT)


Congress is currently considering a reform measure that looks seriously into the inner workings of the Fed. The Federal Reserve Accountability and Transparency Act (FRAT) is long overdue and doesn’t go far enough, but it’s already getting criticism from Keynesians. The argument is really quite simple.

The Federal Reserve was established in 1913 for a number of reasons, most notably to lend stability to the U.S. banking system and control inflation. However, U.S. banking has experienced considerable instability since the Fed’s creation.  The dollar increased in value by 13% in all of the years prior to 1913, but has decreased by 92% since the establishment of the central bank. Keynesian economists argue that Fed intervention through changes in the money supply and interest rates has kept the inherent capitalist business cycle under control. Austrian economists argue that Fed activity has actually caused much of the inflation and economic instability we’ve experienced. This issue has been addressed in previous posts so I won’t discuss it in detail here. Suffice to say that one’s position on this issue likely determines one’s view on FRAT.

Keynesian Alan Blinder’s op-ed in the Wall Street Journal summarizes the argument against FRAT. For Keynesians, the central issue here is the extent to which the Fed can operate “free of political influence.” If Congress “audits” the Fed, then Congress—not economists—will politicize the Fed. It might sound good to “keep the politicians from screwing up the economy,” but this argument is severely flawed. Of course, the politicians have already screwed up the economy to the tune of a $17 trillion deficit, and the same crowd that doesn’t want politicians involved in Fed activity is calling for Congress to raise the minimum wage, pass an amnesty plan for illegal immigrants, and raise taxes on “the rich.” The hypocrisy of this argument should be obvious.

There’s a deeper argument here that’s more disconcerting. Liberals argue that “independent experts” should control the economy through the Fed in the same way that the so-called experts should be empowered to run other parts of the government. Individuals aren’t smart enough to decide what to eat, how much to exercise, and when to see a doctor, so healthcare experts should tell us. The marketplace cannot be trusted with protecting the environment, so climate change scientists should set policy. Workers aren’t capable of saving for retirement, so we should be required to cough up more than 12% of our paychecks and let the social engineers in Washington tell us what portion we can get back when we retire.

But leftists are providing a false choice. They frame the debate as one between politicians and experts, but they leave out the third option, the individual. It doesn’t really matter whether politicians or Fed economists centrally plan the economy. In either instance, the best option—individuals through the free market—is being thwarted. Both handouts from politicians and artificially low interest rates orchestrated by the Fed must be paid for sooner or later. We’d be much better off if both groups stayed on the sidelines and empower the invisible hand of the market.

The next time someone tells you that the Fed should be able to conduct its affairs without Congressional oversight, ask why it’s okay for politicians to be directly involved in so many other forms of economic central planning—but not the Fed.


Government-Mandated Paid Medical Leave?


On Monday the President hosted a Summit on Working Families, arguing that the business community is squeezing its workers and is not smart enough to adopt progressive policies without government mandates. One of the prominent issues is paid medical leave. “Many women can’t even get a paid day off to give birth—now that’s a pretty low bar…That, we should be able to take care of.”

I vigorously appose the President on this issue, which makes me “anti-family” to some. I’m all for family leave; I just don’t think others should be required to pay for it.

Life is difficult and people need time off for lots of reasons. A newborn is certainly one of them. But if companies are required to pay someone who is not working, then that cost must be paid for somewhere else. They could pay everyone less to begin with, cut other benefits, or just raise prices. Regardless, there is no free lunch. The companies are paying for it, so they should be free to create the set of benefits appropriate for their own industries and workers without government intrusion.

The President claims that paid maternity leave, increased job flexibility, and on-site child care help companies attract and retain the best workers, and ultimately outperform their competitors. This is partially true, but misleading. While there is research suggesting that many companies adopting such programs perform well financially, it depends on the type of company, its workforce, its strategy, and its operating environment. Smart companies consider offering extra benefits to get an competitive edge. One size does not fit all, however, which is precisely why some offer such benefits and others do not.

If businesses can benefit financially by offering paid leave, flex time, and on-site child care, they will do so without a summit or prodding from the President.


Learning from Latin America


The economic meltdown in many parts of Latin America is not receiving much attention in the mainstream media, except as the scapegoat for the influx of kids at the U.S. southern border. While gang and drug activity are big problems in some countries and have contributed to the crisis, it’s only part of the story in Latin America. Countries like Venezuela and Argentina have shifted to the political hard left. Their economies are wilting and should serve as sober warnings for the U.S.

Perhaps you think that economic problems in countries like Venezuela and Argentina can be attributed to a shortage of natural resources. Think again. Argentina has a rich agricultural base, outgrew Australia and Canada in GDP and per capita income in the early 1900s, and was actually ranked #10 in per capita income 100 years ago. Venezuela is blessed with massive oil reserves, currently ranked first in the world by some estimates. These nations should be strong economically today, but they are struggling. Both are currently ruled by hard socialists, Maduro in Venezuela and Kirchner in Argentina.

Life is not easy in Venezuela. Food and power are rationed in Caracas. There are even water shortages because the government lacks needed capital to fund a water-distribution network. Government regulations are so burdensome that many investors have left the country. The central planners have implemented a tiered foreign-exchange system that subsidizes dollars to some sectors of the economy at the expense of others. The exchange rate can range from 6.3 to 50 bolivares per U.S. dollar. In a word, it’s chaos.

Some industries are in total disarray. For example, the Venezuelan government has delayed $4 billion in payments to international airlines that serve the country. The government wants airlines to take their funds in bolivares, a currency inflating at 60-80% annually and virtually useless outside of the country. Some airlines like Air Canada have left altogether, while others like American and Lufthansa have cut back flights. The government is currently “negotiating” with a host of airlines for payment of past debts.

Of course, the U.S. has had for some time what is desperately needed in South America. Capitalism thrives where there is a stable monetary system, courts to enforce contracts, and respect for the rule of law. This foundation is eroding, however. Our monetary system continues to weaken with Fed meddling and a $17 trillion debt. The GM bailout demonstrated that courts are not always objective arbiters of private contracts. The ongoing illegal immigration fiasco undermines the rule of law. All of this breeds crony socialism, which is commonplace in Latin America. The U.S. is moving down the same path.

Perhaps you are one of those who thinks that what is happening in the emerging economies of South America can’t happen here. It’s already underway to some extent.


Obama Tinkers with Student Loans Again


As a member of the higher education community, I am supposed to support any and every effort made by the feds to increase funding to college students. I do not, and I have explained my opposition to much of what Washington does in detail in previous posts. Of interest in this post is Obama’s recent executive order to cap student repayment at 10% of the borrower’s monthly income, and a bill promoted by Senate Democrats to allow 25 million borrowers to refinance their loans at lower interest rates.

College debt is a $1 trillion-plus problem, and I certainly don’t wish ill on any college students, past or present. It’s not easy facing a pile of student debt when you don’t have a job. But the federal government should not be tinkering with interest rates and payment schedules. College loans are serious business and should be enforced like any other contract. With Washington in complete charge of the student loan program, however, tossing out favors will continue to be a substantial part of the political process.

The President and his party have conditioned those with student loans to expect a constant renegotiation of terms. Many of my students tell me that they don’t actually expect to pay back everything they borrowed. If they are right, the obligation will be transferred to other taxpayers, including those who made different educational choices. While this is unfair to taxpayers, it’s not fair to students either. The lure of easy money entices some to overextend without realistic expectations for job prospects.

Senator Lamar Alexander rightly called the executive order a political stunt. Concerning the Senate bill, it’s not surprising that they Democrats propose to pay for the refinancing with a tax hike on top earners. It’s also not surprising that we’re in an election cycle.

What we’re witnessing is a dubious political cycle. The government takes over something (e.g., student loans, healthcare, etc.) because the private sector is deemed to be either incapable or unwilling to appropriately support the common good. Once politicians are in control, goodies are tossed out for political favors and ostensibly paid for by “the rich.” Anyone opposed to these favors are accused of penalizing the less fortunate. One American is pitted against another–class warfare at its finest. Taxpayers always pay for this charade in the end, but the process seems to keep the progressives in power.


There is no such thing as “constitutional formality”


I was watching ESPN the other day when the announcer referred to the process underway to remove Donald Sterling as owner of the LA Clippers franchise as a “constitutional formality.” The more I think about this, the more it bothers me.

At first I was taken aback by the casual use of this term. The process required by the NBA’s constitution is not a formality. It lays out steps that ensure a fair process for everyone involved, at least to some extent.


So why does the NBA–or the United States for that matter–have a constitution? Why not just vote on issues as they arise and let the majority rule? Isn’t this democracy?

Constitutions are established to establish basic standards on how things must be done, standards that cannot be overturned with an emotional 51% vote or overruled by a tyrannical leader. Constitutions can change, but only through an established process that requires more than a fleeting majority. The US has a constitution to protect individual liberties and restrain government. The Constitution is not universally respected, however, so all of us must insist that it be upheld. When the US government violated the Constitution when FDR interned Japanese-Americans shortly after the bombing of Pearl Harbor, it was up to other Americans and a court system to address this injustice.

We don’t live in a literal democracy because we don’t vote on every issue. Instead, we live in a representative democracy. We elect leaders to represent our views and vote on our behalf. These leaders are constrained by the Constitution, and the courts can step in when there are interpretational differences. It’s not a perfect system, but the checks and balances it provides are essential. A pure democracy without a strong Constitution would subject individuals to tyranny of the majority. Rights would be constantly negotiable, making them temporary privileges subject to the current whims of government leaders and public opinion at large.

Let’s return to the Sterling situation. The NBA’s constitution was designed to protect and balance the interests of the association and the individual owners. It does not allow the commissioner to remove an owner for making offensive comments. Instead, it lays out a process by which an owner can be removed. This process must be followed, and it cannot violate the US Constitution.

Constitutions are absolutely essential. Without established due process, justice is reduced to a lynch mob. Many who have commented on the Sterling situation don’t seem to get this point, ignoring issues such as the illegal recording of a private conversation and the rights of Donald Sterling’s wife. They only see the presence of mob rule when they disagree with the outcome. Perhaps this is why progressives cheered President Obama when he announced he would (unconstitutionally) bypass Congress when it did not take action he favored. Many of these individuals—including the President himself—constantly berated President Bush for alleged Constitutional discrepancies pertaining to issues such as the Iraq war, waterboarding, and Guantanamo.

Donald Sterling is ultimately responsible for his actions, but he has a right to established due process. Anything else is a travesty of justice.


More on the Sterling Slippery Slope


The most interesting comments on the Donald Sterling/Clippers situation are coming from Sterling’s wife and her attorney as they fight to retain her ownership stake in the team. In an ABC interview, Shelly Sterling asked a provocative question: “I will fight that decision. To be honest with you, I’m wondering if a wife of one of the owners, and there’s 30 owners, did something like that, said those racial slurs, would they oust the husband? Or would they leave the husband in?”

The NBA claims the authority (from its own Constitution) to oust both of the Sterlings as Clippers owners because of what Donald said in a private conversation. Now the NBA is extending its authority to Donald’s wife, who wasn’t even part of the conversation. Really?

But the best comment came from Pierce O’Donnell, Shelly Sterling’s attorney: “We do not agree with the league’s self-serving interpretation of its constitution, its application to Shelly Sterling or its validity under these unique circumstances,” O’Donnell said. “We live in a nation of laws. California law and the United States Constitution trump any such interpretation.” He has a point, but he is not fighting the NBA’s decision to remove Donald over an illegally recorded conversation. California law and the US Constitution protect both Donald and Shelly.

Unless there’s a quiet settlement, the arguments in this case will get very interesting. There’s too much hypocrisy to sweep under the rug.


Climate Disruption


In the 1970s it was global cooling (

When the evidence suggested that the earth wasn’t cooling, they called it global warming (,16641,20060403,00.html).

When the evidence suggested that the earth wasn’t warming, they started calling it climate change. Now the White House is calling it climate disruption (

But wait…if we only initiate massive government controls we can keep from destroying the earth for our children and grandchildren…

There’s far too much on this topic to discuss here. As a primer, I HIGHLY recommend The Great Global Warming Swindle released in 2007 ( A recent book review in the Telegraph ( is also great reading. I want to focus on the connection between science and politics, and more specifically on the notion of experts.

Respect expertise on a topic, but don’t follow the experts blindly. They are not always correct. “Experts in the scientific community” are telling us that we are causing the earth to heat up and that we must take action soon to avoid destroying the planet. But “leading economists” also told us that Obama’s 2008 $787 billion stimulus package was going to create tons of new jobs and it didn’t. You’ve probably had a mechanic tell you that paying him for some type of preventative maintenance was necessary to avoid a breakdown that never happened.

Experts are just like the rest of us. They have biases, limitations, and political views. They want to feel like they matter. They are also influenced by the money trail—government grants for climate research, political contributions for cronyism, or a quick $75 for an unnecessary car repair. This doesn’t mean that they’re expertise isn’t valuable or that they can never be trusted, but it does mean that their claims should be vetted.

When it comes to climate change, there are lots of questions that need to be answered. For starters, why should we believe dire forecasts about anthropogenic (human-caused) global warming when the ones about global cooling were incorrect? If many of the climate claims have already been debunked, why should we believe the current ones? How can we be certain that human activity is causing climate change when we know that there have been more pronounced temperature swings long before humans started building factories and driving cars? Couldn’t the oceans and solar activity—things we cannot control—be the prime causes of climate shifts?

The proponents of climate change are good at issuing reports but have been unable to provide definitive answers to questions like these. Many prefer to say that the topic is too complicated to explain or it’s “settled science.” Some play the “what if we’re right” game, suggesting that we must take drastic action just to be on the safe side. Others mock you as a flat-earther, a greedy capitalist, or an environment hater if you question them. If the “experts” on anthropogenic climate change cannot provide convincing answers to these and other questions, then we have every reason to be suspicious.

But why does the notion of anthropogenic climate change have such a strong political following? If we accept the fact that human activity is irreparably harming the earth, then it stands to reason that we (government) must take action. In the case of climate change, the action required is a mass scale-down of business activity and heavy-handed government control to make sure that nobody drives the wrong car, burns the wrong fuel, produces the wrong crops, raises the wrong livestock, or make the wrong products. But it gets worse. The only way to combat this globally is with multi-country agreements, which means global enforcement, wealth redistribution from developed nations (the earth destroyers) to less developed ones, and the constant negotiation of our Constitutional liberties to appease other nations. If you’re a hard-core socialist who dreams of a one-world government, then this is your ticket.

I have a simple suggestion that could go a long way to resolve this problem: A NATIONALLY TELEVISED DEBATE with a team of scientists on each side and a moderator whose only job is to make sure they don’t get bogged down in scientific jargon. This would give the climate change advocates an opportunity to sway the critics, but would also expose the holes in their arguments. Of course, this is why it will never happen. The proponents would rather stick to the “settled science” argument and let the media push the political agenda.


Donald Sterling


I would ordinarily pass on topics such as Donald Sterling’s presumably private conversations. If you’re not familiar with the situation, just Google “Sterling comments” and you can’t miss it. Taped conversations between Sterling—owner of the NBA’s LA Clippers franchise—and his former girlfriend, V. Stiviano, were aired on TMZ. Sterling made some racially charged and likely alcohol-induced comments, and everyone from basketball analysts to the President is airing their disdain.

You can listen to the complete hour-long conversation online if you like. I’m not interested in defending his comments; I can’t. However, there are some important angles people are missing.

Although Sterling appears to have a history of race-tinged comments, he has received a lifetime achievement award from the NAACP and was scheduled to receive another one. Why? My guess is that Sterling made a hefty contribution to the NAACP as part of the arrangement.

There are also questions surrounding the recording. What gives Stiviano the right to record their private conversations anyway? Whatever happened to the left’s so-called constitutional right to privacy? Is this situation connected to the ongoing lawsuit between Sterling’s estranged wife and Stiviano?

Consider the response from the LA Clippers. All 14 of the roster players earn in excess of $1 million annually; five of them make more than $10 million. They are well-compensated professionals. Basketball commentators have been telling us ad nauseum how difficult it is for them to endure such comments from the owner. The players actually considered boycotting their play-off game on Sunday in protest. I’ve had bosses who’ve said some disgusting things in the past, but not showing up for work was never an option.

Then there are calls for Sterling’s scalp, most beginning with, “He shouldn’t be allowed to…” I guess the concept of free speech doesn’t count when you address certain topics. Free speech, even when bigoted, is always the best policy because the alternative is worse; it empowers someone else to decide what speech will and will not be permitted.

Some are demanding that the NBA require Sterling to sell the team. I doubt there’s anything in the charter that gives the NBA widespread jurisdiction over owners’ private conversations. When this point was made to one commentator, his response was quick and clean: “The NBA should find a way. Sterling’s comments are disgusting that he shouldn’t be allowed to own a team regardless of any technicalities.” Really? So contracts are not just technicalities if someone doesn’t like what you say? If you’re willing to overlook this principle and pile on Sterling because you find his comments offensive, don’t be surprised when they come for you. If you think you’re safe, just ask Brendan Eich.

I understand the NBA’s interest in protecting the brand. Nonetheless, the market is completely capable of resolving this situation, and it will if it’s allowed to do so. Season-ticket holders can refuse to renew next year. Advertisers can back off as well. Players who find the terms of their contracts unbearable can refuse to re-sign with the team when they become free agents.

Unfortunately, I’m not sure the market will be allowed to resolve this. The lynch mob is coming for Sterling and will probably get him first.


Gender & Equal Pay


The left hates gaps. First it was the income gap. Now it’s the gender pay gap.

The argument goes like this. Women make 77 cents (or fill in any amount less than a dollar) compared to men. The 77 cents figure recently cited by the White House is erroneous according to strict numbers reported by the Bureau of Labor Statistics. Nonetheless, the inference is that of an unfair, male-dominated private sector that arbitrarily and systematically pays women less than men. But even if you want to make the broad generalization that women are victims of discrimination in the workforce, you have to be intellectually honest about the details. Proponents of legislation designed to combat this ostensible discrimination are not, because the facts just don’t work for them.

The first problem is with the calculation of the numbers. Without even considering job categories, it’s obvious that some people work longer hours than others. Historically, men tend to work more hours than women because women typically bear more of the childrearing and home responsibilities. I’m not suggesting that ALL men work longer hours than ALL women—we all know exceptions—but if we are comparing one group to another, we need only consider the averages. When you compare men working 40 hours a week with women also working 40 hours a week, the gap (according to the BLS) is 87 percent.

The second problem is job category. While most jobs are open to both men and women, the two sexes are not equally distributed. Women are disproportionately represented as grade school teachers, secretaries, nurses, and cashiers. Men are more likely to hold positions as firefighters, police officers, soldiers, and auto mechanics. Any serious look at pay differences should be within the same field and should account for obvious individual differences such as experience, education/training, and specific job-related skills. If you do not, you’re just comparing apples to oranges.

The third problem is that of individual choices, such as time off during a career. Studies suggest that pay gaps typically do not exist at the beginning of a career, but can emerge over time. Women are more likely to take time off to bear and raise children, and typically lose ground when they return to the work force. Others choose positions that require fewer hours or “job hassles”—distance from work, overnight travel required with the job, etc.—to accommodate this choice.  These jobs are more “family-friendly” and may pay a little less.

When all is said and done, women and men in the same jobs, working the same hours, with the same experience, and making the same types of career choices earn roughly the same. This should end the argument but it doesn’t. Many on the left claim a form of institutionalized sexism is still at work. For example, they claim that teachers and office workers earn less than many other professionals because most are women. While this theory is impossible to prove, it defies logic. If auto mechanics are paid too much and cashiers too little given the demands of their positions, then more women can train to be mechanics and cash in on the excess wages. Good mechanics are always in demand, and female job applicants with the right skills can have a rewarding career. Most women don’t make this choice, however. The differences in wages across jobs can be attributed to market forces.

But wouldn’t many auto repair shops discriminate against female applicants? I’m sure some in the industry might not give women a fair shot, but this could work the other way around as well. At the end of the day, devoid of government interference, the most successful businesses are the ones that find the best people. Any repair shop owner will tell you that competence drives performance, so anyone who discriminates gets what he or she deserves, less qualified workers.

The gender wage gap argument is easy to counter, but it still has an emotional appeal to many who would rather blame society and/or free markets for various job woes. “Equal pay” legislation is really about government control of employment decisions in the private sector. It’s but a leftist solution searching for a problem to solve. Talking about fixing the “problem” is a powerful political tool without a clear basis in economic reality.


Is a college degree worth the investment?


Most academics and politicians say yes and call for more funding and student aid to educate more students. They point to big income gaps between groups of Americans with various levels of education. But with record student loan debt and insufficient jobs in a lackluster economy, it’s difficult to justify the expense in all situations. More and more Americans are asking this question than ever before and for good reason, but the answer is not simple.

So why go to college in the first place? A college education consists of a combination of general education and career preparation. The general education part should help you understand the world in which you live and enable you to make more out of life regardless of your income. The career preparation part should give you the skills you need to enter a chosen field. General education is very important and is not done equally well at all schools. The general left-leaning bias inherent in many courses in arts and sciences is a real problem, but I’ll deal with that on another day. For now, let’s think about the career preparation part as the financial investment.

You can’t evaluate career preparation without considering majors. To put it bluntly, different majors prepare students for different jobs with different market prospects. Majors in areas such as science, business, and engineering offer relatively strong prospects—on average—while majors in the liberal arts are less likely to lead to more lucrative careers. I’m not suggesting that you major only in certain fields, but that you understand the likely outcomes after graduation. My point here is that you can’t consider the value of a college degree without considering the area of study. You’re not comparing apples to apples.

Is the degree worth the cost in time and money? Many recent studies attempt to calculate the average return on degrees from various colleges and universities. The April 5, 2014 issue of The Economist examines costs and job placement statistics, and reports that a degree from the University of Virginia leads the pack with an estimated annual return on investment of 17.6%. Shaw University is the lowest on the list, with an estimated annual loss of 10.9%. Read the story at

While it is true that some colleges are—on average—a better “investment” than others, there are two major flaws to studies like this. First, the amount a student actually pays to attend a given school can vary greatly, depending on scholarships, grants, and the like. Second, students who are better prepared for college academically and are better connected are more likely to earn more after school regardless of where they go. In other words, many Ivy League students come from connected families and are destined for a good job after graduation regardless of what they learn in school. Because there are more of these students at some schools than others, it can lead one to conclude that those schools represent a better “investment.” Again, you’re not really comparing apples to apples.

So what do we conclude? Some of my academic colleagues might shoot me, but I’ll say it anyway. Given economic reality, college isn’t for everyone. A good education can be a real asset in both your personal and career lives, but a mediocre one can leave you with false expectations and a lot of debt. College is really an individualized decision. What’s best for you is not best for someone else.

I didn’t answer a burning question, however. Why was a college degree a stronger investment in the past than it is today? The answer has a lot to do with government efforts to increase the number of college graduates, including increases in student aid. Subsidies always raise prices, and this has certainly been the case for tuition. In an era of technology that should improve the efficiency of course delivery, costs have skyrocketed, making it more difficult for students to justify the expense. I’ll get into this on another day.

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