SUPPLY SIDEWINDERS

I was watching Lawrence Kudlow on CNBC March 19, 2014.  He was hosting some of the Usual "Supply-Side" (admittedly) Suspects thereon, all validating each others' economic analyses in unison.  I swear, one of them actually admitted to being a "supply-side" thinker.  Kudlow prattled on about the non-existent "free market" for capitalism.  The US has highly-regulated markets, for good reason.  The antitrust laws are are valid example and are utterly inconsistent with a truly "free" market, which would otherwise favor monopoly.

Back in the old days, basic generic market analysis was a balancing act between the "supply" of goods and services vs. the "demand" therefor.  Because a huge demand remained a relatively constant force so long as we Baby-Boomers were fully in the marketplace, buying up and consuming all manner of objects and services, the post-WWII "supply-side" methodology worked; that is, tinker with the "supply" of things (like the money supply) and raise or lower costs to manipulate the otherwise-steady demand in the marketplace. 

Traditionally, the Fed(eral Reserve) has been able to manipulate the money supply with three basic statutory tools: (1) increasing or decreasing the "Reserve Requirement," which is the amount of cash that banks must keep on hand that cannot go into circulation, thereby increasing or decreasing the availability and interest cost of loaned money; (2) manipulating the (short-term) Federal Funds Rate, the interest rate paid on short-term (12 mos. or less, I think) Federal bonds, the ripple effect of which goes into the interest costs of short-term debt generally and, ultimately, all debt; and (3) manipulation of the Interbank Funds Rate, the overnight interest rates paid by banks to each other as the aggregate money supply is moved around from bank to bank.

Thus, manipulations of the money supply by the Federal Reserve were predictable and effective: increasing or decreasing the money supply overall to make "money" (and debt) more or less expensive.  Debt was relevant since there was so much of it created by us Boomers spending like drunk sailors to buy stuff!  Our "savings rate" stank to high heaven and instigated a lot of anxious paw-wringing!  We didn't save diddly!  As we Boomers have aged, though, I think those days are gone forever.  The Federal Reserve, limited to its three traditional tools, has recently been aggressively buying up Federal bonds (govt.-issued debt), thereby propping up artificially high bond prices to keep interest rates artificially low.  One must keep in mind that the price of fixed-income debt instruments (like bonds) and the rate of return (interest rates) are inverse to each other: one goes up--the other must go down.  Low interest rates favor those who borrow money ONLY, but the vast majority of people now do not borrow money they don't have to, and they are certainly not in the stock markets!  Most folks don't have an IRA or 401k plan--they will likely rely strictly on Social Security (SS) or employer pensions for retirement.  The contrived low interest rates have, however, inured to the immediate benefit of those who buy stocks on margin (borrowed money) who thus have additional stock purchasing power enabled by low interest rates.  That, along with companies buying up their own stocks, has recently kept stock prices and indexes high, but sooner or later I think the overall lack of purchasing power is going to force the chickens to come home to roost in the form of a serious stock-market sell-off.  The new Fed chair, Janet Yellen, simply made some remarks on March 19 indicating a possible (and utterly predictable) future reduction (not cessation) in Fed bond-buying, and just those remarks caused a modest market sell-off!  What is going to happen in the stock markets when the Fed actually DOES reduce or stop its bond-buying and/or companies reduce or stop their stock-buying?

I vehemently disagree with the "supply-side" approach to economics.  I think it is no longer relevant, if ever.  NO ONE among the so-called "experts" has addressed even as a possibility that the current economic crisis may have something to do with the rapid fall-off in DEMAND because of us Boomers aging AND people losing high-value employment.  We "neo-geezers" just ain't buying cars, refrigerators, homes, records, bar tabs, etc. anymore!  Just ask bar and restaurant owners!  Then add to that the serious degradation of the purchasing power of so many people who barely have enough cash to live, much less engage in discretionary spending.  We are now seemingly caught in a whirlpool of lower or loss of wages and middle-income salaries that have reduced purchasing power (demand), which then forces businesses to lay off employees, who thereby have no discretionary money to spend among the suffering businesses!  Why is all this not a subject of discussion among the "experts," even to debunk its accuracy?

Most truly "middle-class" people's primary wealth asset is their personal dwelling, not stocks.  Only a relatively few folks have any "skin" in the stock markets.  In my opinion, the currently high stock markets are masking the true economic conditions among us because so many "experts" are looking at only the stock markets as a measure of economic health.  Janet Yellen got a lot of criticism from the smug "experts" on Kudlow's show for her consideration of various "vague" employment data in the Fed's decision-making.  As I said, the chickens might soon be coming home to roost!

NOTE: the Fed does NOT "print money" as so many "experts" complain; the US Treasury prints money just down the street from the Smithsonian at the Bureau of Printing and Engraving.  The Treasury is an arm of the Executive Branch; the Fed is a totally independent agency, as much subject to the control of Congress as of the President.` The Fed makes "monetary" (money-supply) policy only; "fiscal" (Federal debt/deficit) policy is determined by statute between Congress and the President.

NOTE2: Many employers are now trying to change their retirement plans from "defined benefit" (fixed pay-out) plans to "defined contribution" (fixed pay-in) plans, more like 401k's.  Thus, employees' eventual retirement prosperity could more and more vary with the fickle health of the stock markets than before.

"POT" AND THE LAW

I have been following the recent marijuana legalization movement with a lot of interest.  I used to practice criminal defense law and was one of the first lawyers in my small rural county and town who would take on drug cases.  Many of the other defense attorneys in the area would turn up their noses and refuse to handle drug-crime defense.  I later joined NORML--the National Organization for the Reform of Marijuana Laws and became a member of their associated lawyers' group.

I have always believed that there were several serious flaws in drug prohibition, like the shifting of the burden of proof to the accused, the financial beggaring of court-appointed counsel (with the connivance of spineless and/or bigoted judges) AND corrupt practices pursued by many police officers and government generally, from the use of fraudulent lab reports (even the FBI Labs), illicit drugs planted on defendants by cops, especially black defendants (as reported to me by other cops), the increased harshness of punishment for drug crimes perpetrated by corrupt legislatures, and the often-successful efforts by politicians and editors to "poison" citizen juries with overt ads and messages to come down harshly on those accused of drug crimes, without regard for contrary evidence presented in courts. 

It was routine to impose incredibly harsh prison sentences on nonviolent drug offenders.  Even today, those convicted of "crack" offenses (mostly black and Latino) routinely get much harsher sentences than the (mostly white) folks convicted of possession of powdered cocaine, the exact same chemical substance as "crack."  The draconian manner in which the government and law enforcement used to come down on those hapless souls was disgusting beyond comprehension, and I felt very lonely in my pursuit of justice for these people.  Racism and bigotry at all levels was rampant, even into the late 1900's.  Urban blacks and Latinos routinely got much harsher sentences than white suburbanites for the exact same crimes.  Following the policies of both NORML and the National Association of Criminal Defense Lawyers, of which I was also a member, I refused to advise my clients to participate in "narc-ing" against other suspects in order to reduce their charges or likely sentences.  I was ethically obliged to inform them that my policy might well result in harsher dispositions of their cases, and that they were free to seek other counsel, but I stood firm by my policy, because I believe that to participate in such "narc-ing" amounts to committing more drug crimes.  The cops, the politicians and the judges, of course, did not agree with me, but I still believe that was correct.  There is no excuse--EVER--to commit more crime to prosecute crimes.  For my troubles, and having annoyed certain state-police "narcs," I believe that my telephone was illegally tapped (I was so warned by local court personnel).  For all I know, I may have suffered illegal and surreptitious searches.  The anti-drug insanity was rampant.

Another legal point that has always bothered me about drug prohibition is that everyone assumes that the government has the inherent power under the Constitution to declare any and all substances "contraband" and to impose criminal punishments accordingly.  To my knowledge, no one has ever questioned that assumption.  What has occurred to me is that it took a constitutional amendment (the 18th) to establish alcohol prohibition, so why would it not also require a constitutional amendment to establish drug prohibition?  I have never understood any distinction, other than popular sentiment.  As a "free" adult, I believe I have the inherent right to put anything I wish into my body, even if it is stupid to do so.  The government may well have the power to prevent me from buying it or someone else from selling it, but if I grow it and smoke it, it is my business ONLY.  The government has no business telling me what to do in that way.

When most people discuss marijuana legalization these days, it is always in a vacuum; that is, they ASSUME that the government has the inherent power and duty to protect us from ourselves; since there is no "proof" that marijuana is NOT harmful (the illogical proof of a negative), then "we" must ABSOLUTELY ensure that nothing bad ever comes from it, so we should continue to prosecute marijuana possession as a crime, and certainly not "allow" its decriminalized use, probably by "the children."  Who would possibly disagree, OTHER THAN godless hippies and liberals and socialists who should, of course, all be branded TERRORISTS who seek to enslave even children into drug-addled complacence?  The fear of undefined "terrorism" has succeeded the former paranoia about Communism, now mostly a joke.  After all, the "Cold War" had to be replaced with something to unite Americans in fear so that due-process short-cuts could continue unabated!  Some of the most absurdly reasoned abrogations of due process by the US Supreme Court have been promulgated in drug cases, where all sorts of search-&-seizure exceptions have been manufactured by the "Justices" out of whole cloth.

The drug-legalization-cost discussions almost never invoke a comparison with the costs of continued criminal prohibition.  Why not?  As I said, the discussions are mostly in a vacuum, invoking the horrifying "absolutes" of unpunished drug usage.  There is even a stern demand for "warning labels" on marijuana in an online news article received today, March 10, 2014.  Advocates of drug legalization do need to be forthcoming about possible problems with drug legalization.  There will surely be an initial spike in drug usage after legalization, though it will probably eventually settle back down near current usage profiles.  When asked, most people who currently don't use marijuana don't plan to change their behavior upon legalization.  There will surely be some impaired driving with marijuana, but there already is.  The current drug laws have never severely inhibited usage by those who are determined to do so.  Some minors will raid their parents' "stash" of legal marijuana and use it, but the current drug laws don't inhibit minors determined to use marijuana, anyway.  In short, removal of the current prohibitions will not likely change the longer-term usage patterns, it won't appreciably increase the likelihood of usage by minors, but it will definitely keep law enforcement and the criminal-justice system out of the business of attempted regulation of private conduct, it will eliminate the wanton criminalization of otherwise peaceful and law-abiding people, and it will obviously reduce the social and financial costs of incarceration for truly victimless crimes.  Why are those comparisons almost never mentioned by the doom-and-gloom crowd?  Because they are too obsessed with "sending the wrong message," as if anyone cares about the stupid message.

Marijuana usage probably has some adverse health effects, especially smoking it.  But, there are people smoking marijuana who do not use tobacco, and the frequency of marijuana usage will likely remain small.  Those who consume marijuana orally (as tea or in food) will have no adverse lung effects.  Adolescents probably should not use marijuana for hormonal reasons, and adults should continue to be prohibited from sharing marijuana with minors.  But, with legalization, the discussion about marijuana usage can be on the substantive merits and not about scary legal risks that have nothing to do with health effects.  Finally, there is a really important consideration rarely discussed: the "forbidden-fruit" factor.  That is the notion that humans are, by nature, perversely inclined to do things they would not otherwise do but for "authority figures" trying to coerce them.  No one wants to talk about that.

I believe the primary motivation for opposition to marijuana legalization is still grounded in political and racial bigotry.  Harkening back to the "evils" of marijuana fraudulently detailed in the mid-1930's movie, "Reefer Madness," there are plenty of people in charge today who still believe that marijuana usage corrupts morals and creates intemperate behavior, believed to be common among hippies, blacks and Hispanics.  There is a palpable fear that "the children" (mostly white children) will become like those "undesirable types" if marijuana is legalized.  So, we are again back to baseless paranoia, since the overwhelming evidence is to the contrary.  But not many people will openly admit to harboring such fears today.  Racism and bigotry have insidiously gone "underground" and are now much harder to identify and prove.  Many whites resent the continued calls for fixing these problems which they desperately want to believe no longer exist, since "Jim Crow" has been banned and their great-grand-daddies never owned slaves, etc.

Game, set and match.

But, the tighter we embrace the past, the more we are likely to repeat it.