Gasoline Prices are a Policy Choice

The U.S. average price of gasoline has zoomed up 18 percent during the first two months of 2012. A rise that rapid is not caused by an increase in the demand for use. The increase is caused by speculators buying gasoline contracts. They expect higher prices because of possible oil disruptions in the Middle East, especially if there is a conflict with Iran.

Companies that use much gasoline have been able to hedge the prices of future purchases by buying futures contracts. Another way to hedge is with the U.S. Commodity Gasoline Fund, an exchange traded fund (ETF) with the trading name UGA. One buys shares of the fund just as one would buy shares of stock. If one expects the price of gasoline to fall, one can obtain a futures contract to sell gasoline, or else sell-short UGA.

The price of gasoline is a function of the price of oil, so one can go to the source of the price rise and buy shares of USO, the United States Oil Fund, also an ETF. Conversely or inversely, there are short ETFs such as DNO that have sell positions in energy contracts for those expecting a fall, or energy sellers that seek to hedge the current high price of oil to lock in the current prices.

Speculators can go long or short, long meaning owning contracts to buy, or equivalent ETFs, and short meaning contracts to sell, and short ETFs. Even if the rapid rise in oil prices is due to expectations rather than actual production costs and demand for current use, speculative prices can persist for many months. Hence even if one is confident that the prices will fall as fears ease, timing the market is an uncertain art.

The price of gasoline has become a big campaign issue. There are silly accusations that the recent restrictions on drilling in the Gulf of Mexico and delaying the construction of an oil pipeline from Canada have contributed to the oil price increase. The restriction of production and delivery are long-run issues unrelated to the current price rise. In fact, recent oil discoveries have resulting in substantial increases in US oil production.

What governments could do today to reduce the price of oil and gasoline would be to sell futures contracts in gasoline and oil. Most speculators who hold sell contracts do not have the actual commodity, and they sell the contracts before they expire for delivery. But the US government owns a huge pool of oil in its strategic reserve that would make US sales a hedging operation rather than a pure speculation.

Suppose the price of oil keeps rising despite U.S. government’s selling. If the price rises to $150 per barrel, the US government would be able to sell its reserve oil for $150 and liquidate its contracts, so it would be even. But if the price of oil falls, the US government would have a large profit from having shorted the market.

I’m not proposing or recommending that the US government sell oil futures contracts, just pointing out that if they wanted to, Congress and the President could bring down the price of oil and gasoline. Some critics have said that the federal government chiefs welcome a high price of gasoline in order to make “green” alternatives more profitable compared to fossil fuels. Whatever the motive, the high price of gasoline is a policy choice. There is no free market in oil, as the quantity of oil is manipulated by OPEC and influenced by government policies.

In the long run, demand for oil in the USA will fall as cheap natural gas replaces much of the oil consumption, and electric cars and fuel cells become more common. But for the present day, the high prices of oil and gasoline act as a tax to stifle the recovery. When folks spend more on gasoline, that leaves less money for other goods, and the reduction in demand results in less supply, less production, less employment.

If I were the president, I would sell futures contracts in gasoline. The price would swiftly fall, and the president would be a big hero. But this popularity could vanish as other issues become more prominent, so the most effective timing would be, say, two months before the November election. So don’t expect the government to act to reduce the price of gasoline any time soon.

Snared by the "Fair Tax"

There is a deceptive tax reform plan that is becoming increasingly popular among American conservatives and quasi-libertarians. It goes under the propaganda term “The Fair Tax.” The term “fair tax” is a snare to trap the economically unsophisticated public into believing that sales taxes are better than all other taxes, including a tax on land value.

The proposal is to replace all current federal taxes with a national sales tax. Each family would receive a “prebate” money amount that would offset a portion of the tax, to make it less regressive, less burdensome on the poor.

The stated purpose of the shift to a national sales tax is to promote more savings and investment. Indeed, an income tax penalizes savings by taxing income from interest and dividends. By reducing the yield of savings, an income tax reduces the compound growth of the savings, making people poorer when they retire. However, the current U.S. income tax shelters savings yields in IRAs (individual retirement accounts), employee savings plans such as 401k and 403b, and self-employment savings sheltered accounts. Thus much of savings can already grow free of taxes, and a Roth IRA or similar plan also does not tax the funds when they are withdrawn. Moreover, there are generous tax savings such as accelerated depreciation available to enterprises that invest in capital goods.

While a tax on income penalizes savings, a tax on purchases penalizes borrowing. If one buys a car for $20,000 and needs to borrow the funds for the purchase, a $10,000 sales tax forces the buyer to borrow $10,000 more, and then pay interest on that extra $10,000. Since for the whole economy, borrowing equals savings, and the economy depends heavily on credit, there is no good economic reason to favor savings over borrowing. Indeed, what benefits investment and consumption is borrowing; savings that just sits there does nobody any good. other than a temporary parking place for money.

Contrary to the claim that taxing consumption stimulates enterprise, a national sales tax would shut down many small firms and perhaps also some big ones. This due to what professor Mason Gaffney calls the “quantum leap effect.” Businesses that sell to the global economy cannot raise their prices to pass on the tax to customers, so the tax eats into their profit, and if they were making only a normal profit or less, they will no longer be profitable, and shut down. A national sales tax, on top of state sales taxes, will create a quantum leap downward of land uses, shifting land use to enterprises that can pass on the tax, but which generate less output and employment.

Without a federal income tax, the U.S. states that have income taxes would most likely also switch to a sales tax, since state tax systems piggy-back on the federal tax. The stated “Fair Tax” rate would be 23 percent, and if the state sales tax rate is, say, 17 percent, the combined tax rate would be 40 percent. But that does not take into account the massive tax evasion that would occur. There is already substantial tax evasion for state sales taxes, especially on mail order goods. The higher the sales tax rate, the greater the tax evasion. Rather than a 40 percent combined rate, it might be around 50 percent to make up for the evaded tax and the even greater evasion caused by the increase in taxes to make up for evasion.

Another problem with the snare tax is that business-to-business sales would be exempt from taxation. That opens up a wide avenue for tax avoidance. Start a business and make your purchases for business purposes, and you have no tax burden. If you buy a car, for example, it would be for your business as a writer. With no income tax, you can make up income by paying your friend to write blogs while he pays you. Have lunch with your friend, and the meal is a business expense. If the government considered this tax evasion, it would respond with even more severe tax enforcement, requiring receipts for all purchases, and audits on inventory and personal property.

Taxes on both production and consumption have what economists call a “deadweight loss” or “excess burden.” A sales tax has as much excess burden as a sales tax. Moreover, a national sales tax would subsidize land values as much as an income tax. The desired public goods provided by government make locations more attractive and productive, raising the land rent and land value. When the taxes are paid by others, landowners receive a rent and site value subsidy.

The advocates of a national sales tax claim that it is the best tax, both more efficient and more equitable than all others. But they have no argument as to why a sales tax is better than a land value tax. A sales tax interferes with free trade, while a land-value tax does not impose any cost on trade. The snare tax advocates have a good point in saying that replacing the current multiple taxes with just one national tax would reduces tax costs, but a single tax on land value would do so even more. In rejecting a land-value tax, the snare tax advocates are not just violating free trade, but promoting subsidies to land value, whether deliberately or inadvertently.

The economic analysis of the snare taxers is faulty. The snarists claim that since income taxes raise prices by the amount of the tax, their replacement by sales taxes would leave prices unchanged. But much of the burden of taxing wages is on labor as well as on consumers. To the extent that wage taxes reduce wages, the taxes do not get passed on to buyers. Some of the burden of income taxes is also on landowners. To the extent that taxes are at the expense of rent by reducing land rent, it does not get shifted to consumers. Income taxes raise the prices of goods by less than the tax amount, so a sales tax that is directly on buyers could well substantially increase prices.

The funny thing about sales taxes is that probably most of the tax revenue is paid from land rent or at the expense of land rent. On the consumer side, landowners buy stuff out of the income they get from rent. On the production side, much of the “producer surplus” is land rent, so what is paid as a sales tax consists of funds that otherwise would have been paid as rent. But by taking the rent indirectly, via a sales tax, the government imposes a high excess burden, whereas if the same rent were collected directly, by a tax on land value, there would be no deadweight loss. The unnecessary deadweight loss has to be included as a cost of the snare tax, but the economically ignorant are snared into thinking that a sales tax is the best tax, because they have not learned how to analyze economic reality.

Another problem with the snare tax is that it is not easy to distinguish investment goods and “consumer” goods. Suppose you want to put in a new roof on your house. Economically, this is an investment. But if you are not set up as a business, the roof will be subject to a huge sale tax as a “consumer” good. The tax will end up stifling investment. If you do set up a business because you sell alfalfa sprouts you grow in your house, you will be audited and put in prison for tax evasion.

Economically, all goods are capital goods and are investments until they are consumed, and by taxing some goods and not others, the snare tax will be complex, evaded, and require police-state enforcement. Moreover, since services will be included in the sales tax, there will be a large temptation to pay the barber only $5 and give a $15 tip, as the tip will not be a taxable payment but a gift, unless the tax auditor says otherwise and levies to both a big fine.

Finally, there is a big transition problem with the snare tax, as those who are retired have paid high income taxes all their working lives, and now that they are consuming their savings, they will be subjected to high consumption taxes. As a practical matter, the snare tax is politically difficult if not impossible to implement because of the opposition by retired seniors.

Mason Gaffney has shown that historically, candidates and officials who have promoted sales taxes have committed political suicide. But sometimes instead of regicide, the country adopting high consumption taxes committed economic suicide, as did for example old Russia prior to World War I or France before its revolution.

We now have quasi-libertarians being snared by the national sales tax. Their sales-tax candidates may well attract the snare-tax crowd, but in the end, the snare tax will end up crushing the libertarian movement, as most folks have the right economic instinct to suspect that very high sales taxes cannot do them any good.

No Association. No Talking. No Confederation. No Peace.

The committee for an Israeli-Palestinian Confederation attempted to hold meetings in Israel and Palestine in December 2011. The purpose of these meetings was to prepare for elections for an Israeli-Palestinian Confederation to be voted on by the people, even if not recognized by the Israeli and Palestinian governments. The Confederation would be an independent third government representing the peoples of both Israel and Palestine.

The committee had been promoting the concept of a confederation for several years, as a path to the solution of the conflict. But in Palestine, mobs forced their way into the meetings and shut them down. The Jerusalem Post on 13 December 2011 reported this under the headline, “Anti-‘normalization’ Palestinians protest peace meeting.”

Daoud Kuttab, columnist, former professor of journalism at Princeton University, and director general of Pen Media, in an article first published in the Jordan Times on Dec. 22, 2011, reports that previous meetings that included Israeli Jews and Palestinian Arab Muslims had also been disrupted. In 2000, a Palestinian-Israeli human rights film festival was held in several cities in Israel and Palestine. The winning film was to be announced at the final meeting in Ramallah, but protesters who opposed Israeli-Palestinian peace came in and forced the cancellation of the ceremony.

The Palestinian Israeli Journal was going to hold a conference in East Jerusalem to promote its issue on“The impact of the Arab Spring on the Palestinian-Israeli conflict.” Palestinians opposed to “normalisation” called for a boycott of the hotel, and the event was cancelled.

The government of Israel has also been guilty of violating the freedom of association. The government has prevented the Jerusalemites of the eastern part of the city from creating their own organizations. For example, The Orient House and the East Jerusalem chamber of commerce remain closed. Daoud Kuttab reports that cultural and sports activities have been stifled when they are regarded as being tied to the Palestinian Authority.

In a message to the candidates for the Confederation on 25 December 2011, Josef Avesar, founder of the committee, stated that while demonstrators stopped the confederation conventions at east Jerusalem and Palestine, they were not able to shut down the convention in Haifa, Israel. Opponents had also contacted candidates to intimidate them from running. But “not a single candidate took his name of the IPC official website. Collectively, we remain stronger by adding 150 candidates in the last month. We now have a total of 625 candidates.”

Those gangs that shut down the meetings are opposed to peace between Israelis and Palestinians. The plain two-state solution has been much discussed, but not acted on due to inherent problems. A confederation is necessary in order for both states to co-exist. That is why those oppose to peace oppose the confederation idea. The vote for the Confederate legislature is scheduled to take place on December 12, 2012.

A Jerusalem Post headline on 17 December 2001, exclaimed, “Fatah declares 'war' on normalization with Israel.” In reaction to the meetings of the Israeli Palestinian Confederation, Palestinian Authority President Mahmoud Abbas’s Fatah faction has banned informal meetings between Israelis and Palestinians.

Although the Palestinian Arabs may believe that these meetings would not change the Israeli government’s policies, the Confederation offers a method of resolving the problem peacefully, and so banning the meetings blocks off one avenue towards a solution to the problem of the Israelis settlements in the West Bank and the recognition of the 1967 boundary. This war on meetings also blocks off discussions on possible solutions, such as the payment of rent to the Palestinians by the Israeli settlers.

The ban by the Palestinian Authority violates the freedom of association and speech, and shows that this government does not respect liberty and natural rights. It is very deeply an opposition to peace and the resolution of the problem. They claim that they are blocking meetings because of Israeli policy even while shutting off an avenue to change the policy.

Enough said. The actions of the PA speak for themselves. There shall be no associations that include Palestinians and Israelis. There will be no mutual discussions. They will attempt to prevent the Confederate elections of December 2012 in Palestine. And with no dialog and no mutual governance, there will be no peace in Palestine and Israel. The main victims will be the Palestinian Arabs, and the whole world will continue to suffer from the global shock waves generated by turmoil in the Middle East. That is the tragic message by the supremacists on Christmas Day in 2011.

Fetishism in Economics

The thought of Karl Marx continues to resonate throughout the world and is never more prominent than in the use of the propaganda term “capitalism” by both advocates and opponents of economic freedom. The opposition to “capitalism” by the Occupy movements show that Marxist thought has penetrated deeply into global economic culture. Therefore it behooves us to understand Marxism in order to understand the global culture of economics, especially to know how Marxist culture blocks reforms to enhance prosperity and economic justice.

If you talk to Marxists, they will tell you that the concept of “fetish” is fundamental to the economic ideas of Marx and his followers. Fetishism is described in Das Kapital or Capital, Volume 1, Part I “Commodities and Money,” Chapter 1 on Commodities, Section 4 on “The Fetishism of Commodities and the Secret Thereof.”

Marx states that a commodity abounds in “metaphysical subtleties and theological niceties.” An object such as a kitchen table does not merely serve some want to use, but can get transformed by the human mind into “something transcendent.” It can acquire a mystical character.

This commodity meaning of “fetish” is a different application of the concept from the meaning as a sexual attraction to things, such as feet and leather, that are not usually regarded as being sexual.

We can clearly see fetishism in religious objects, which to the believers, are not just physical statues or candle holders but have a metaphysical significance and even life. But there is a fetish also to non-religious things. Marx says, “the productions of the human brain appear as independent beings endowed with life... So it is in the world of commodities with the products of men’s hands. This I call the Fetishism which attaches to the products of labor.”

Objects with sentimental value acquire such a “life.” But to Marx, fetishism applies generally, and in private enterprise, fetishism reduces labor to a disrespected commodity. The whole economic system of private enterprise becomes a fetish - something people think is holy and not to be disturbed.

The injustice and low wages of labor are rationalized away by this fetishism in economic thought. To Marx, the exchange value of commodities comes only from “the amount of labor bestowed” on objects. “Nature has no more to do with it, than it has in fixing the course of exchange.” Thus to Marxists, value comes from labor, and if the Worker is not paid that full value, he is exploited, and the Capitalist wrongly takes the surplus that should belong to Labor.

The concept of economic fetishism is a valuable addition to economic thought, but this has to be applied generally, including also to Marxist doctrine. It is understood in modern economics that labor is generally paid the contribution to output of the marginal worker, conceptually the last one to be hired, what economists call the “marginal product of labor.” Because of diminishing returns, the average product of labor is higher than the marginal product, and that is a surplus that by superficial appearance goes to the owner of the firm, the Capitalist. But Marx made a fetish out of “capital,” applying it even to the title of his major works. By denigrating nature, Marx also made a negative fetish out of nature.

In the analysis of the American economist and social philosopher Henry George, the surplus from production is ground rent. Suppose in some geographic region, the average product of labor is greater than the wage paid to workers. The existence of that surplus at that location makes the location valuable, and so entrepreneurs will bid up what they pay to be located there. They will keep bidding up the rent until the rent has soaked up all the surplus. Generally, what economists call the “producer surplus” is really land rent, and since landowners produce nothing, they are non-producers, and the surplus is better called the “non-producer surplus.”

Hence Marx is right that economists have fetishes. Most economists have made a fetish out of the producer surplus, imagining that it goes to the better producers rather than to non-productive landowners. This is what Mason Gaffney has called the “corruption of economics.” But Marxist economics falls to the same fetish in saying that nature is not involved in the course of exchange. In a market economy, each factor - land, labor, and capital goods - is paid its marginal contribution to output. There is no injustice in being paid what you contribute.

Karl Marx recognized that land rents grow not just out of soil but also from society. But rather than conclude logically that this rent should belong to society, Marx made a fetish out of labor and thought that the surplus is part of the economic wage. Marx did not understand that this surplus should be paid by the land title holder for the use of land, in order to have efficient economic calculation. The rent is an implicit reality apart from any explicit payments by tenants to landlords or no explicit payments by owner-occupants. If that rent is not explicitly paid, not only does the landowner take what comes from society and nature, but the rent generates land value that becomes an object of speculation that creates the boom and bust sequence.

Some followers of Henry George also have fetishes. When they treat George’s thought as religion, then Saint George becomes a fetish. The concepts that all taxation comes from rent, that services have a different function than tangible goods, and that “interest” is the yield of capital goods, all fetishize George. Of course it is difficult to not have any fetishes.

The prime achievement of Marxism is the adoption of the fetish term “capitalism” even by those who defend private enterprise. By applying “capitalism” both to the mixed economy and to private enterprise, Marxists have turned a nonsense word into a brilliant fetish term used to blame economic freedom for the social problems that come from government intervention. Those opposed to economic freedom also make a fetish out of the state, endowing it with god-like qualities of omniscience, omnipotence, and benevolence.

It is in human nature to create fetishes, but it is also in human nature to apply logic. There is nothing wrong with treating objects such as a photograph of a loved one or a special gift into a fetish, i.e. qualities that come from the mind, but we need to learn to apply unhampered logic when it comes to science, including the science of economics.

The Occupy Movement: A Failure of Democracy

Mass protests imply that democracy has failed. In a genuine democracy, if one seeks a change in policy, one contacts one's representative, and if that agent is not responsive and does not represent the consent of the people, then the voters replace the bum in the next election.

Mass protests arose in the Arab world because they had dictatorships which refused to respond favorably to grievances. The regimes responded with force, because the chiefs sought to preserve their privileged power. But in a democracy, the government is supposed to represent the people and respond to popular desires.

The most powerful weapon of protest is civil disobedience, the refusal to obey unjust laws. During the civil rights movement of the 1960s, the protestors went beyond calling attention to their demand for equal rights. With the refusal to obey segregationist laws, the movement put pressure on the authorities. Mass arrests placed a cost on the authorities and generated sympathy for the cause.

The occupy movements have practiced civil disobedience by putting up tents for a continuous presence in the occupied territory. The police have responded by taking down tents, destroying property, and arresting the demonstrators. This brute-force police reaction will not succeed, because the protestors have a passion for justice on their side, and the political machines have not been responsive. For the most part, the occupy movement has been ignored, dismissed, or disparaged by the political establishment. When democracy fails, the alternative is mass protest.

Mass protests seek to educate the public in addition to putting pressure on authorities. During the War in Vietnam, for example, the protestors made speeches and published literature on why the war was wrong. The majority at first did support the war, and later, both due to the protests and due to the continuing cost in lives and treasure, the public turned against the war.

The problem today is that those seeking change have to convince the majority of the mass of voters, and this persuasion is difficult and costly. But the core of the problem lies in democracy itself. We are used to democracy being our system of mass voting and representation, but there is an alternative democracy, a radical decentralization of power and voting.

Suppose that the political body is divided into tiny cells of a few hundred people. People would only vote for a local neighborhood council. Those councils would vote for the level-2 council, and so on to the top level of Congress or Parliament. If the country was engaged in a war you wanted to stop, the first place to engage in would be your local level-one council. If you could convince your neighbors that the war is unnecessary and unjust, then that council would send representatives to level-two to oppose the war.

The anti-war movement would take place in many neighborhoods, all seeking anti-war majorities in the level-one councils. Thus level-two would also be opposed to the war, and send anti-war representatives to level 3, and so on up to the Congress, which would end the war.

Thus with a cellular democracy, protests might take place to call attention to a cause and to help educate the people, but the push to change the policy would take place within the multi-level system of voting. With just a few hundred people in the level-one neighborhood, one could hold meetings, distribute literature, and just talk to people about the issues. The council would have to be responsive to the majority, otherwise it gets replaced.

If one could not persuade the majority, then so be it. One could just keep trying. If truth is on your side, eventually logic may well prevail. Prejudices may be difficult to dislodge, but most people think they believe in justice and liberty, so pointing out the contradictions in their thinking could well eventually erode their bias. For example, racism was deeply entrenched in western civilization for centuries, yet there was a quick turn in the culture, so that today it would be shocking to hear anyone exclaim racist ideas in American civil discourse.

The failure of democracy illuminated by the occupy movement is not a failure of the concept of democracy but of the misapplication into mass voting. The problems of mass voting are well known in the theories of political science and the branch of economics called "public choice." Everybody knows the perverse influence of the moneyed special interests, and that is one of the themes of the Occupy Movement.

Members of that movement have created an alternative democracy of general assemblies within the protest neighborhoods. If the local assemblies would then send representatives to regional assemblies, which then send members to a national assembly, they would create a parallel democracy. They might then realize that this bottom-up structure should replace some or all the structures of mass democracy. For example, one of the two legislative houses in the states could be elected by cellular democracy.

Mass democracy has failed to sustain prosperity, justice, and liberty. The Occupy Movement is a symptom of mass-democracy failure. Small-group bottom-up cellular democracy would provide a great enough voice to people so that they would no longer feel the need to live in tents and march down the street.

Nobel Prize in Economics for 2011

The 2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded jointly to Thomas J. Sargent and Christopher A. Sims "for their empirical research on cause and effect in the macroeconomy."

Thomas Sargent is a professor at New York University in New York City and a senior fellow at the Hoover Institution at Stanford, California. Christopher Sims is a professor at Princeton University, New Jersey. Their research on the economy has investigated questions such as the effects of changes in interest rates, tax rates, and government borrowing. They create models that apply econometrics, the application of statistical analysis and quantitative techniques, to discover trends and to make forecasts.

Thomas Sargent uses structural macroeconometrics to analyze changes in economic policy. This involves an equation which discovers how the dependent variable is affected by the independent variables. The coefficients of the variables tell their economic significance, and the statistical significance tells how well that variable affects the dependent one. If there is much variation in an independent variable, then it will not predict the action of the independent variable. For example, if we examine the effect of education on income, the coefficient would be something like income going up by twice the amount of education expense, and this would have statistical significance only if most of the time, higher education would raise income, rather than often less education being correlated with more income.

Sargent also helped develop and apply the theory of rational expectations, by which people form expectations not just from recent events but also by analyzing the likely future changes in the economy and expected government policy. So for example, if people anticipate the expansion of money by government, that policy will not increase output, as prices and nominal interest rates will rise at that time, to prevent the erosion of income and wealth that would happen if the inflation were unexpected.

Christopher Sims developed vector autoregression techniques to analyze how the economy is affected by changes in economic policy and by shocks to the economy. A “regression” is a line trend that best fits some relationship such as between income and education. “Auto” means “self,” and an autoregression includes the results of previous dependent variables as new independent variables. For example, the value of a dollar today depends to a great extent on the value of a dollar yesterday. A “vector” is a set of numbers such as “1, 2, 3.” Vector autoregression (VAR) measures the interdependencies among several regressions. Each variable has an equation explaining its changes based on its own lags and the lags of all the other variables in the model.

The models developed by these two prize winners are used by the Federal Reserve and other central banks and other policy makers to analyze the effects of changes in tax and interest rates and other variables. Earlier simpler models failed to take into account the complicated relationships that are included in the models by Sargent and Sims.

A major principle of science is that correlation is not causation. When variable A is correlated with variable B, the data will not tell you which is cause and which is effect. It requires theory to determine this, and the techniques of Sims and Sargent apply theory to arrive at a cause-effect conclusion.

Sargent and Sims have done excellent work in generating conclusions from a mass of data. But basic economics can be understood with three very simple concepts. First, people respond to incentives, doing more when the cost is lower, less if the cost is higher. Second, the knowledge of how to produce is so spread out throughout the economy, much of it not written down, and often changing, that a government planner cannot possibly do better than the decentralized decisions of the local actors. Third, prices and quantities move towards equilibrium, meaning that profits induce more output, losses less output; a surplus reduces prices, while a shortage increases prices; all moving production and consumption towards harmony.

Thus the best policy is to let producers and consumers choose their action without interference from government. Get government revenue without increasing the cost of production and consumption, by tapping a resource that is not produced but already here, land, whose rent is a surplus beyond costs, and a free gift to humanity to use to pay for community services.

The work of Sargent and Sims is useful in determining the result when there are shocks to the economy, but really, it does not require statistical analysis to understand that taxation imposes an unnecessary shock. Tapping the rent for public revenue will have a transitional, temporary shock, which we can minimize by compensating for net losses, but forever after, it will allow people to invest, produce, and consume according to their own subjective desires.

My dream is that Sargent and Sims will apply their powerful techniques to analyze the effects of switching from today’s punitive tax system to an efficient system of public revenue from land rent, pollution charges, and voluntary user fees. History would then award these two economists with a prize much greater than that of the Sveriges Riksbank, the honor of having helped to achieve a lasting universal prosperity for humanity.

The Decline of American Civilization

Since the first stamps issued by the United States Post Office in 1847, the rule had been that no living person may appear on a U.S. stamp. The first U.S. issue was a set of two stamps, one showing George Washington, and the other, Benjamin Franklin, the first postmaster general.

U.S. stamps since then depicted deceased presidents and other historical people, but never any living person. There was a good reason for this. In countries with kings, the monarch’s portrait appears on its coins and stamps. The king or queen is the sovereign. Today, Queen Elizabeth appears on the stamps and coins of the United Kingdom and the members of the British Commonwealth for which she is the head of state. However limited her powers, the Queen is the living personification of the state.

But the USA was a republic that rejected royalty. In the USA, all the citizens are individually sovereign. To put the president of the United States of America on an official stamp or coin would treat the elected servant of the people as a royal master. To put any person on a stamp or coin would treat them as exalted. It would confer a governmental privilege, in effect, royal treatment, contrary to the spirit of the Constitution of the USA, which declares, “No Title of Nobility shall be granted by the United States.”

Now the United States Postal Service has announced that henceforth it will issue stamps showing living persons. Stamps showing popular people would be big sellers. They could put sports and movie stars and musicians on stamps. Even worse, they could put the US president on the stamp, and then members of Congress and the Supreme Court.

The USPS has allowed people to issue their own stamps showing living persons. On a web site, one could upload a picture and provide the text, and then pay for special stamps that would be delivered to the buyer, valid for postage. But these were not national stamps officially issued by the USPS.

Now the USPS is exploiting its prestige for money. The coins and stamps of the US government represent the grandeur of the nation. When money means more to the USPS than the dignity of official philatelic images, it amounts to postal prostitution.

The breakdown of long established rules indicates an abandonment of discipline. Of course bad rules should be gotten rid of, but the rule that no living person appear on a US stamp had good reasons behind it.

The USPS is now inviting people to suggest people to be put on stamps. If it goes by popularity, we could see a set of stamps showing top stars and celebrities, such as Lady Gaga or Mick Jagger. Maybe the high value of the set will sell for $5, with others denominated at $2, $1, and a forever stamp for 44 cents. Collectors will want the whole set. And then the USPS will offer a souvenir package with a booklet, photos, and a chip with songs. It will be enough to make old-school collectors gag.

The USPS would like to promote the old hobby of stamp collecting. Young people will buy stamps showing their favorite musicians and movie stars, but they will not from that go on to collect the other new issues. Children once collected used stamps, saved from mailings, but the USPS does not profit from that. The Postal Service wants to sell mint stamps. But stamps made only to sell to collectors, with little or no actual use for postage, are not really postage stamps. They become stickers, just as medallions are not really coins.

These stickers and seals of living persons will raise some money for the USPS, but that will not solve its financial problem. The losses suffered by the Postal Service are too great to be covered by selling some more stamps. One problem is that the USPS has a board of directors of 535 persons - Congress. Members of Congress have prevented the USPS from closing post offices in their districts. The USPS must obtain approval for price changes from the Postal Regulatory Commission. The USPS should be let loose to make financial decisions like a private business, so long as it serves its mission to provide universal service.

If the USPS were to be privatized, then there would be no problem selling stamps showing living persons, as these images would no longer represent the state. But so long as the USPS is part of the federal government, its stamps should be treated like US currency. Imagine living persons such as current presidents on US currency. If living persons could be on a $1 bill, surely the president would be at the top of the list, followed by the head of the Federal Reserve system, and we would then have a royal currency, not the currency of a republic.

After the US Constitution was written, Benjamin Franklin was asked whether the US had gotten a republic or a monarchy. He replied, “a republic, if you can keep it.” When the US president appears on a stamp, we will know that we did not keep it.