Good as Gold

And serious difficulties exercising self-government

Welcome to another edition of The Mueller Report!

Updates

We’ve been engaged in a little bit of fall cleaning here at The Abbey. Our pattern of improvement tends to involve talking about ideas for weeks or months. Then in a sudden, often unanticipated, burst of energy, we try to knock out a bunch of projects all at once. We’ve been moving bookcases around, reorganizing rooms, hanging pictures, and cleaning (lots of cleaning).

While we have closed our online booking for the fall, we still have five rooms rented, a sixth that a friend is using for a few days, and a seventh that another friend just moved into for the foreseeable future – so things are far from quiet this fall! The five rooms have been rented to the same group for the past five weeks or so. It’s a traveling work crew who are out here installing powerlines throughout the area.

They had bounced around a few places before staying with us. The main thing that sold them on our place was being able to use the kitchen. Nearly every night we’ve got rotating groups from this crew cooking dinner (and lunch for the next day). Usually it smells great – they use lots of spices that we don’t and they cook a variety of dishes. Eggs, tortillas, rice, and chicken seem to be a part of just about every meal – with various bean dishes and salsa showing up now and then.

While the cooking can be a bit inconvenient (sometimes they cook for two hours!), the workers are friendly and clean up after themselves well. They seem to have a lot of camaraderie around cooking food. We’re glad to be able to provide these guys with a stable, comfortable place to be while they are away from home on these work projects.

Writing

I got quite a bit of writing in this week. Although only one piece came out (The U. S. Does Not Have a Housing Shortage), I drafted a book review, a couple op-eds, a letter to the local paper, and this newsletter. I also revised a longer piece about monetary policy. Still, there are several other writing projects I didn’t get to this week including:

• A longer essay developing the analogy of markets as gardens and the implications that analogy raises for public policy.

• A longer essay describing the importance of allowing experimentation in monetary institutions historically and today. It will also reflect on why reforming our current financial system seems like an intractable problem.

• I’d like to write an “Explainer” (4000 – 8000 words) about energy trends. Questions I plan to address include: How much has energy production grown by country and by person over the past quarter century? How much energy is generated by various sources? How much of a carbon footprint do solar, wind, and nuclear have relative to traditional fossil fuel power generation? Where is the demand for energy going over the next couple decades (hint: up, way up)?

Reflection

Engaging in local politics has been an educational experience. It’s raised a lot of questions in my mind about how to encourage productive policy and discourage negative policy. I often write to the local paper (which is bucking the trend of local news dying off). Our town is just the right size that the paper has enough material to run weekly and everyone has the opportunity to send in letters. It’s also a small enough community to have many shared events and experiences, but large enough that a fair number of things happen.

Unfortunately, the city and the county seem to be drifting towards higher taxes and greater community activism. We have a property tax increase proposal and a sales tax increase proposal on the ballot this year. I’m sympathetic to both issues – increasing teacher pay and funding a community pool – but I don’t think these tax increases are the right way to go about it.

The city and county governments have overextended themselves by taking on many functions that local government doesn’t need to have – including handing out hundreds of thousands of taxpayer dollars to all kinds of local nonprofits and directing significant resources towards building “affordable housing.” Adding the building and management of a community pool will continue that over-extension.

Teacher salaries in Lake County are pretty low, both in absolute terms and compared to nearby school districts. Rent and housing prices have also risen dramatically over the past couple years – exacerbating the low salaries for teachers. Yet it’s not clear that the difficulty recruiting and retaining high-quality teachers is primarily a money problem. Nor is it clear that the quality of teachers is the main problem in the schools. Lake County school test scores are abysmal, social activism is high, and behavioral problems are rampant. And even though teacher pay is low, it’s not as if the district doesn’t’ have money. The 2024-2025 budget had total revenue of about $22.5 million. While that is less than the Covid-infused 2022 budget with $26 million in revenue, it is far more than the $12 million in revenue in 2020.

School district revenue from property taxes are up too from about $7.7 million in FY 2021 and FY 2022 to $11 million in FY 2024 – even as the number of kids enrolled in the school district has fallen. What we really need is institutional reform, not an additional $1.2 million in extra property taxes. But how do you work towards that as a local resident? I suppose I could run for school board, but that position will have to get in line behind city council, planning and zoning, and county commissioner (if we’re just talking about public local offices).

It's really a conundrum. I believe in local self-government, but it’s hard to know what to prioritize and how to move the needle – especially when I’m stretched thin already.

Bookshelf

As I mentioned above, I drafted a book review this week. The review was of a book called Good as Gold: How to Unleash the Power of Sound Money by Judy Shelton. Here are some excerpts:

In the first couple chapters of Good as Gold, Dr. Shelton takes the Federal Reserve to task. The wide discretion Fed officials can exercise makes monetary policy unpredictable. Despite claims to being “data-driven,” Federal Open Market Committee (FOMC) decision-making only follows loose patterns. Data can change rapidly and unpredictably, which can make policy change rapid and unpredictable too. Although Fed officials argue that their decisions are countercyclical, that may not always be the case. As Milton Friedman famously noted, the effects of monetary policy decisions had “long and variable” lags.

Another problem is that the “data-driven” mantra invokes the assumption that the data always clearly indicate what ought to be done. In fact, this is rarely the case. Not only do a wide variety of inflation measures exist, but there are also a wide range of time intervals over which to compare inflation trends. But that’s not the worst of it!

Employment, unemployment, GDP, and a host of other economic numbers suggest different things are going on in the economy. Retailers expect strong record spending this holiday season while the NY Fed just released a study where the number of people reporting concern about their ability to make debt payments hit its highest level since 2020. How to weigh these various factors is far from clear.

But Good as Gold includes much more than criticism of the Fed. Dr. Shelton points out that unstable money and exchange rates create costs to doing business. International firms must devote time, energy, and money to protecting themselves from erratic fluctuations in currency exchange rates. Creating these “hedges” to protect their profitability necessitate additional classes of assets and asset traders – contributing to greater “financialization” of the economy. While the services being offered create real value for corporations, they come at a price and would not be needed at all under more stable monetary arrangements.

Besides the frictions and costs unstable money introduces into day-to-day business operations, it also creates long-term consequences when it comes to investing. If certain exchange rates can move 15%, 30%, or more in a single year, Dr. Shelton asks, then how can investors rationally allocate capital based on real factors and comparative advantage? The structure and mix of capital investment looks different across countries and within the same country than it would in a world of stable money.

In a later chapter, Shelton offers the problem of “currency manipulation” as a reason for implementing a sound money regime. Her argument basically asserts that countries that actively depreciate or weaken their domestic currency experience short-run benefits in the form of more competitive exports and long-term costs in the form of inflation (and capital outflows). Other countries, however, feel short-run pain as their exports decline and factories shut down – even though they also receive cheaper goods and reallocate much of the displaced labor and capital. I find this line of reasoning a bit curious.

Shelton rightly champions free trade and argues that it works best when countries do not artificially manipulate the value of their currencies. No objection here. But I am not convinced that a sound money regime, even a gold standard, would change other country’s incentives to devalue their currency. Gold convertibility of one currency does not prevent the issuer of a different fiat currency from issuing large amounts of that fiat currency to reduce the relative price of its exports.

A final question sound money advocates like Shelton must answer is: how do we get there? On the one hand, advocating a gold standard seems archaic and implausible. ON the other hand, it would not be very technically difficult to implement. And, in fact, given the dominance of the U. S. dollar, if only one or two other major currencies, such as the Euro, also chose to move back to gold redeemability, it is not hard to imagine other major currencies (Yen, Yuan, Pound, etc.) following suit. The political difficulty, of course, is getting the U. S. to take the first step.

All of these proposed changes will be vigorously resisted by those who benefit from the existing status quo – large commercial banks and financial institutions, Federal Reserve officials and bureaucrats, politicians and regulators, everyone who benefits from the Fed’s tendency to loose monetary policy. Still advocates of freedom and prosperity should continue to make the arguments and offer proposals for moving to a sound monetary regime.

And that is exactly what Dr. Shelton does in Good as Gold.

Game Corner

My boys have gotten into the Lord of the Rings trading card game recently. Kathryn and I received some decks of this game almost ten years ago from a friend. We played it a decent amount then but not as much recently. But one of the boys received a new deck from his brother for his birthday, which rekindled interest. They’ve roped me into a game or two this week.

Each player has a deck made up a fellowship and enemy cards. You alternate playing as the fellowship and as the enemy each turn. The game progresses through nine sites from the story. Each site has different effects and conditions associated with it. The first player to make it through all nine sites, or is the only player left standing, wins.

You play various character cards into your fellowship. You can also play item cards – weapons, horses, armor, etc. to make the characters stronger. But cards have a cost – they add “pool” or tokens that the other player can use to play enemy combatants. So the more cards you play, the more cards your opponent may be able to play.

At each site you engage in combat, giving or receiving wounds. You must move one site on your turn. You may move an additional site, but any undefeated enemy combatants remain and your opponent can draw and play more cards too. There are several kinds of event cards you may play during combat to strengthen your characters or to dismiss skirmishes.

Characters can only receive a certain number of wounds before you have to discard them. If Frodo dies, you lose. So the goal is to move as rapidly as possible through the sites while staying alive.

It's a fun game but it has a bit of a learning curve. The mechanics are only moderately complicated. Having a variety of decks increases the number of cards and situations you need to learn. Each deck also has its own dynamics for how the characters play off of each other that you need to get a feel for as well.

Have a good Sabbath!