California Government: Land of Blue State Bailouts, $365,000 Lifeguards, $446,000 Sheriff’s Deputies, $207,000 Tree Trimmers, $270,000 Janitors, $486,000 Firemen, and More!

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4 MIN READ - From the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

As some Cautious Rockers already know, the Economics Correspondent lives (serves time, is incarcerated, repays his debt to society) in San Francisco. 

Now that we all know about the record $360 billion blue state bailout that is baked into the recent $1.9 trillion federal Covid-relief stimulus package, the Correspondent thought he’d share some of his experiences over the years with how California’s state and local governments wisely and responsibly spend their tax dollars, yet have found their finances in a precarious position by no fault of their own. Peruse through this short list at your leisure.

Corroborating links included with each of the roughly twenty examples.

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1) Let’s start with “Pelosi’s Tunnel” which is BART’s (Bay Area Rapid Transit) proposed extension line that they just don’t have the funds for since BART typically loses $30-$40 million a year.

The $140 million earmarked for Pelosi’s Tunnel was yanked at the last minute, but Bay Area property and sales taxes subsidize approximately $300 million of BART’s near $1 billion annual budget, and those cities and counties will be getting stimulus money in an indirect transfer from federal taxpayers to BART.

Moreover the BART 2020-21 annual report indicates the system already received approximately $250 million from the original 2020 CARES Acts. Nevertheless BART will continue to receive transfers from the local governments getting a slice of California’s over $30 billion Covid stipend from President Biden, errr… I mean the next generation of red state taxpayers.

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1A) 2017: A BART janitor makes $270,000 in one year with superhuman amounts of overtime, and is then caught by local news reporters sleeping on those overtime hours in a BART station supplies closet.

https://www.sfgate.com/bayarea/article/BART-janitor-pay-270000-Powell-St-questions-10911932.php

The Correspondent saw the local news video where the reporters banged repeatedly for 10 minutes on the closet door before the janitor opened it, and it was clear from his face he had been sleeping.

1B) In 2012, 73% of BART workers earned over $100,000 in total compensation compared to San Francisco’s median individual income of $36,000 that same year. In 2019 dollars that’s $116,000 a year for BART workers vs San Francisco’s 2020 median individual income of $52,677 and the USA’s median income of $31,333.

https://www.econjobrumors.com/topic/73-of-bart-workers-make-100000-in-total-compensation

1C) Here’s just one BART station attendant who made over $200,000 in 2018. And a technician who rides the train and troubleshoots when something goes wrong made $253,000.

https://abc7news.com/bart-news-building-a-better-bay-area-overtime-pay/5953726/

1D) The Correspondent also has reliable inside information of BART ticket booth attendants earning $90,000 a year in pay back in the year 2000. In today’s money that’s $137,600 a year. He won’t share the details of his past interactions with those rude, lazy, and apathetic attendants behind the glass.

Of course these employees are all public union members.

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2) Most of us have heard about the “Poop Patrol” that cleans up human feces and syringes from the sidewalks of San Francisco. The job starts at $185,000 a year in pay and benefits.

https://www.theregister.com/2018/08/25/san_francisco_clean_up/

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3) Well maybe it would just be cheaper to have 24-hour public toilets instead, even though trust me when I say they’re absolutely disgusting.

No wait, at $28.50 per flush it’s not really cheaper after all.

https://www.sfchronicle.com/bayarea/philmatier/article/SF-s-public-toilets-a-big-relief-and-the-14879898.php

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4) The Correspondent generally supports the police and definitely backs them in the whole “defund the police” and BLM mania of late. However as underpaid as many cops are in many red state cities, and as hard as their jobs are, there has to be *some* limit to their compensation in blue states.

Last year San Francisco’s top paid sheriff’s deputy—the same department that released Garcia Zarate to avoid ICE shortly before he shot and killed Kate Steinle—made $446,000.

Unfortunately it wasn’t a fluke. San Francisco’s top paid 19 deputies raked in an extra $4.16 million in overtime or an average of $219,000 on top of their base salary.

https://www.sfchronicle.com/bayarea/article/SF-sheriff-s-deputies-top-earners-in-overtime-15470686.php

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5) The top paid San Francisco police officer made $592,000 last year although the city calls that a unique case.

https://www.sfchronicle.com/news/article/Eight-of-the-Top-10-highest-paid-California-14049859.php

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6) But it’s not as unique as they’d like you to believe.

The Correspondent couldn't find the old article but remembers several years ago San Francisco’s highest paid employee being a police sergeant who made about $550,000 in a last year “pension spike” where his retirement pay for the rest of his life would be 95% of his final year’s compensation.

When asked if the pay was fair to the taxpayer he replied “I’ve paid plenty in taxes.”

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7) Not to be outdone Oakland’s top paid police officer made $490,000 in 2016.

https://blog.transparentcalifornia.com/2016/06/27/1137/

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8.) In 2017 San Jose’s Police Chief earned $497,000, right ahead of the City Manager who made $492,000. 

https://www.mercurynews.com/2017/05/01/oakland-engineer-gets-300000-ot-san-jose-city-manager-police-chief-highest-paid-in-state-survey-shows/

OK at least these are the Chief and the City Manager, but half a million dollars is still a bit high wouldn’t you say?

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9) Speaking of head honchos, San Francisco Mayor London Breed received $452,421 in total compensation last year ($342,974 of which was salary).

https://www.theepochtimes.com/san-francisco-officials-make-huge-salaries-but-cant-keep-human-waste-drug-needles-off-the-streets_3487185.html

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10) But let’s not forget the lesser employees just yet. And let’s not let the San Francisco Bay Area have all the fun either.

Back in 2011 the national news caught on that lifeguards in Orange County were making over $200,000 ($237,000 today adjusted for inflation).

https://www.ocregister.com/2011/05/10/lifeguarding-in-oc-is-totally-lucrative-some-make-over-200k/

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11) And let’s not let Orange County solely represent all of Southern California either. This year 20,000 city of Los Angeles employees averaged $150,000 a year including a “tree surgeon” (trimmer) making $207,058 and a fireman making $486,674.

https://www.forbes.com/sites/adamandrzejewski/2020/12/17/why-los-angeles-is-in-trouble--average-pay-for-20000-highly-compensated-city-employees-nears-150000/

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12) And let’s spread the wealth a little to all of California which includes both expensive cites and affordable rural areas. 

Last year 340,000 of the state’s public employees pulled in more than $100,000 a year in pay or pensions (which excludes non-cash benefits) including..

-truck drivers making $159,000

-an L.A. lifeguard making $365,000

-UCSF nurses making $501,000, and

-1,420 city employees who all make more than the 50 U.S. state governors

https://www.forbes.com/sites/adamandrzejewski/2020/05/19/why-california-is-in-trouble--340000-public-employees-with-100000-paychecks-cost-taxpayers-45-billion/?sh=1505a3f95fb8

California’s median individual income was $31,960 in 2019.

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13) And the same egregious offenses occur in other deep blue states that will be receiving federal bailout money although the Correspondent doesn’t know those examples as well.

But in 2010 a New Jersey toll booth attendant made $321,985 ($393,000 in 2020 dollars).

https://www.npri.org/new-jersey-toll-worker-earned-321985/

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14) During the Obama administration when controversies began to erupt that federal government employees were on average earning over double their counterparts in the private sector, the press asked why they were being paid so generously.

“Public employee unions say the compensation gap reflects the increasingly high level of skill and education required for most federal jobs… …’The data are not useful for a direct public-private pay comparison,’ says Colleen Kelley, president of the National Treasury Employees Union.”

https://abcnews.go.com/Politics/federal-workers-earning-double-private-counterparts/story?id=11394757

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15) Finally, the discussion so far has only been about government employee salaries and compensation and there’s been no mention of costs for illegal immigration which would take a short book.

But just a taste includes:

15A) California doled out $500 Covid relief checks last spring to 150,000 illegals ($75 million).

https://www.marketwatch.com/story/california-to-give-150000-undocumented-immigrants-500-coronavirus-aid-payments-2020-04-15

15B) California’s budget includes money for free healthcare for illegal immigrants. It’s hard to estimate the total cost, but the state recently added illegals age 19 to 25 to MediCal rolls at an estimated annual cost of $260 million a year.

https://www.pacificresearch.org/californias-free-health-care-for-illegal-immigrants-courtesy-of-the-taxpayers/

California already covers all illegals 18 and under at a cost surely several times the $260 million budgeted for age 19 to 25.

And Gavin Newsom wants to expand healthcare to illegal seniors for another $80 million.

https://www.fresnobee.com/news/local/article239183528.html

All in all MediCal payments to illegals certainly exceed $1 billion per year.

15C) But this is all peanuts compared to cost of educating the children of illegals. There are an estimated 750,000 children in California public schools who have illegal immigrant parents.

http://laschoolreport.com/immigration-fears-in-california-schools-report-shows-1-in-8-students-have-undocumented-parents/

At a taxpayer cost of about $13,000 per student (higher if they aren’t English speaking) California spends at least $10 billion per year on free education for illegal children or anchor babies.

The Bad, the Good, and the Ugly of the Democratic-Biden $1.9 Trillion Stimulus Package

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8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff analyzes the bad, the good, and the ugly of the now-signed Democratic-Biden $1.9 trillion stimulus package, focusing on some macroeconomic theory explaining why government stimulus doesn’t assist in recovery (which ironically is the “good” part).

I. THE BAD

CO Nation has a good grip on the bad. The $1.9 trillion spending package is part relief for people thrown out of work by the pandemic and government lockdowns, but the “stimulus” is largely pork programs, political pet projects, and bailouts for profligate state and local governments and public pension funds whose finances were strained even during the boom years before Covid.

Altogether direct check payments, extended unemployment benefits, expanded tax credits, and small business assistance amount to $848 billion or less than 45% of the $1.9 trillion being spent.

Also Cautious Rockers generally get that while many Americans could use relief, the economy itself doesn’t need fiscal stimulus. GDP and employment have already been recovering strongly in concert with the level of lockdown abatement. 

Recently even the business press has been asking if stimulus is necessary given the strength of the most recent economic data: 10% annualized GDP growth in Q1, 379,000 jobs added in February and unemployment down to 6.2% from 14.2% in April.

Note also that no one was arguing a $1.9 trillion stimulus package was so urgent back in July of 2014 when the unemployment rate was also 6.2% under Obama—and declining at a snail’s pace compared to 2020/21.

CO readers are right to be skeptical that the rush to push through a giant stimulus package is little more than a hurried attempt to ensure this particular crisis—which is almost over—doesn’t go to waste, and that a supposedly struggling economy is being used as a pretext to push through as much gravy for politically-connected constituents as possible before the window of opportunity closes.

II. THE GOOD

This is the longest section but may be interesting to anyone who wishes to understand some of the theory behind what helps or hinders economic recovery from recessions.

On the question of “fiscal stimulus” the economics schools are divided roughly into two major camps.

Those for it: Keynesians, MMT’ers, and Socialists—roughly associated with Democrats and Socialists in the USA

Those against it: Austrians, Supply Siders, and most Monetarists—roughly associated with Republicans and Libertarians

The Keynesians argue that the economy needs more “aggregate demand" (spending power from consumers and business) to recover. And that government borrowing and spending money in ways that gets cash into lower and middle-income households’ pockets will produce more spending, thus stimulating the economy. 

If we assume for the moment that under this theory there are no viruses frightening consumers and no lockdowns, the concept is that businesses are reeling, have factories and shops running at only a fraction of capacity (ie. idle capacity), and that once businessmen see consumers spending more they'll respond by hiring more workers and raising operational and capital investment budgets. From there the economy will run strongly on its own.

The Austrians and supply-siders argue that stimulating spending just prolongs what was an original error that caused the recession to begin with. An analogy is helpful here but for two sentences let’s put it in nerdy econ language:

“The unsustainable investment errors made by businessmen during the boom must be liquidated, and physical resources and other factors of production that were misallocated must be redirected to rational business lines that consumers will support under normal economic conditions, not temporarily ‘stimulated’ back to boom levels only to slump right back into idleness once stimulus is removed."

and...

"The market process of reallocation results in some temporary job displacement, but the sooner it’s completed the sooner the economy can resume rational growth based on the consumption and saving decisions of the public instead of distortive central bank policy.”

To explain this in plain English we'll use a good analogy the Correspondent credits to Austrian economic historian Thomas E. Woods using a restaurant.

Take a restaurant owner in a small town doing a steady business.

Then one day the circus comes to town. The circus is an unsustainable boom or even bubble, usually produced by the central bank’s cheap money policy. 

We’ll assume the owner is not an Austrian or supply-side economist, so he’s thrilled to see his store overflowing with new customers: clowns, trapeze artists, and acrobats. Not having enough tables, food, supplies and employees to handle them all, he borrows from a bank and builds a new, larger restaurant right next door and operates both at once. 

This is the pre-recessionary boom.

But then suddenly, as is always the case, the circus suddenly leaves town when the bubble bursts, demand returns to its pre-bubble levels, and now the owner is stuck with a brand new, shiny, expensive second restaurant sitting empty and losing money—what Keynesians call “idle capacity.”

The Keynesian/Democratic line of thinking is for the federal government to borrow and spend trillions of dollars on stimulus—which strangely always takes the form of political payoffs and pork handouts to their friends and constituents—in hopes of getting something like the circus to come back. Then the owner can keep paying workers, ordering food, utilities, and equipment for his second restaurant.

But the Austrians/supply-siders ask “Is putting the second restaurant on life support really good for recovery?" 

We already know the 'second circus' can’t last, and the moment the stimulus runs out the second restaurant, which was never sustainable to begin with, will go empty again only we’ll have trillions of dollars of debt to repay as well.

The Austrians argue building the second restaurant was a mistake to begin with and, as much as we hate to see it idle, there’s no way we can go back to the conditions that prompted its erroneous construction. It was built based on an illusion created by the central bank.

So as painful as it is, resources have to be allocated away from the erroneous investments and back to sustainable ones that consumers will truly support. In other words, liquidation. And the sooner it’s over and done with the sooner the economy can get back to rational, sustainable growth.

Even the classical economists of the 19th century understood that bad businesses started in the mania of a speculative bubble were mistakes and that, painful as it might be, the market must redirect misallocated resources as logically as possible to get on with life.

It’s a tragedy that the central bank directed concrete, steel, and parking lot asphalt to an erroneous project, and some resources like restaurant supply, furniture, and dishware will have to be sold off at firehouse prices (ie. devalued capital). If we’re lucky some ingenious entrepreneur might think of a cheap way to transform the building into a more usable business venue. 

But there’s no reason to keep spending money on extra employees, food, restaurant equipment, and utilities that consumers won’t patronize without the government continuously borrowing and spending trillions of dollars in perpetuity.

If we go reductio ad absurdum to drive the point home: 

If a speculative bubble spurred a businessman to build the world’s largest shopping mall in Antarctica, would it make sense to spend trillions in deficit stimulus every year in the hope of generating enough customers to keep his mall going? 

Of course not. Let’s just admit it was a mistake and stop pouring even more money and resources into it.

OK, now apply the restaurant story to too much commercial real estate in the late 1980’s, or too many useless dot-com companies in the late 1990’s, or too much homebuilding in the mid 2000’s—all spurred by Federal Reserve cheap money bubbles—and apply the same logic. 

Borrowing and spending trillions of dollars to temporarily boost demand for too many strip malls, dot-coms, or houses is simply throwing good money after bad. The moment the stimulus stops, economic reality reasserts itself and the stores, dot-coms, and homebuilders start to lose money and retrench… which they should have been allowed to do from the beginning.

Incidentally this is why every time a round of stimulus money is spent we see headlines that GDP popped up for a quarter or two at most. Then when the stimulus money is gone the headlines report that GDP growth sharply declines and the economy returns to malaise, sometimes with talk of a double dip. We’ve all seen it before.

It’s also why the Obama administration racked up almost $10 trillion in debt during its two terms yet produced the slowest GDP recovery in American history and the second slowest recovery (behind only the Great Depression) from a financial crisis to full employment.

So taking medicine tastes bad and liquidating mistakes that can’t be sustained isn’t fun, but it’s necessary. Just as a hangover after a drinking binge is no fun, but it’s a necessary part of the body regaining its health. Austrians argue that following the Keynesian prescription—chasing the hair of the dog (drinking more alcohol to cure a hangover)—might feel better in the short term, but it only delays the necessary solution and at far greater cost.

III. SO WHAT’S GOOD ABOUT THIS STIMULUS?

What we’ve described with our restaurant example is a classic recession—irrational misallocations of resources incited by central bank easy money such as the slumps of the early 1970’s, early 1980’s, the late 1980’s post-S&L Crisis recession, the 2000-02 dot-com recession, and the 2007-09 Great Recession.

But 2020 is different.

In early 2020 there were very few massive misallocations of resources spurred by the central bank that failed en masse just waiting to be logically reallocated. The economy was functioning rather well, but it was artificially placed in a coma by a virus and lockdowns.

So what the economy needs today is to be freed—vaccines, herd immunity, and whatever else it takes to lift government restrictions and give consumers the medical confidence to resume their pre-Covid economic behavior.

And although the economy certainly doesn’t need stimulus, perhaps now you can see why government deficit spending won’t be as harmful this time around: there are no major resource misallocations for the government to perpetuate with its spending. Barring a new virus, the Fed jacking up rates to 10%, or an unexpected event like war, the economy will rebound very nicely all on its own once the virus is controlled and lockdowns ease.

So the good is the stimulus won’t have the opportunity to do as much damage to the recovery as it has in conventional recessions. At most it might produce an uptick in inflation, but not another 2008-15 malaise or three Japanese “lost decades.”

(BTW the correspondent is not ruling out *other* anti-growth initiatives that might come later from Congress and the White House, but history shows it's going to take a lot of really bad ones to stop this recovery)

IV. AND FINALLY, THE UGLY

The ugly part, other than the wasted money and pork handouts, is mostly rhetorical.

Time and again governments have tried stimulus measures to end conventional recessions only to prolong the slumps instead. 

Japan has tried stimulus more than anyone in world history and has three lost decades of sub 1% economic growth to show for it, and a giant debt to boot—the equivalent of a $55 trillion national debt in the United States.

Herbert Hoover and FDR tried the greatest Keynesian stimulus in the history of the United States and it took 17 years to get to full employment (if you include World War II when 12 million men were drafted and artificially removed from the workforce) along with the worst economic contraction in American history.

And we already mentioned the failure of Obama’s stimulus spending and deficits.

Yet Keynesians, who every time promised rapid recovery, backtrack in the wake of each failure with another “the stimulus just wasn’t big enough” or “we underestimated how bad the economy was” or “well, it would have been even worse without the stimulus.”

Never mind every recession before 1929, where fiscal stimulus was not only not tried, but didn't even exist as a policy yet, recovered years faster than 1929, 2008, or Japan’s three lost decades. The Depression of 1920-21, which was the second sharpest contraction of the 20th century, was over in 18 months and full employment attained in two years (precisely why it's not in the history books) while President Warren Harding’s administration did nothing other than cut the government budget.

But in 2021 we have an economy that is going to recover strongly on its own, and in fact already has when compared to the depths of last spring’s blanket lockdowns. 

Yet President Biden and the Democrats are about to borrow and spend $1.9 trillion anyway, and afterwards Keynesians will claim it was the stimulus that produced the recovery. “See, when you’re willing to employ a large enough stimulus the economy recovers quickly” they will say. “This proves Keynesian stimulus works.”

Hopefully Americans will be smart enough and have long enough memories to recall that, six months before the stimulus was even signed when lockdown measures were already being loosened, unemployment had already fallen eight points (14.2% to 6.2%) and GDP was growing at an annualized rate of 10% in early 2021 and even 33% in the third quarter of 2020.

But the Economics Correspondent suspects that won’t stop Keynesians from trying anyway. If they haven't given up after expensive failures in the 1930’s, Japan, and 2008, what makes anyone think they’ll stop this time?

San Francisco Puts Homeless in Parking Lot Tents: For $61,068 Per Tent

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From the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

$16 million for 262 tents.

It's gotten so bad that two of the San Francisco Board of (eleven) Supervisors actually asked about the cost last week.

ps. Some of the $1.9 trillion stimulus package will no doubt go to shore up the budget in Nancy Pelosi's hometown.

Read details at:

https://sanfrancisco.cbslocal.com/2021/03/04/san-francisco-pays-16-million-to-house-homeless-in-tents/

Free vs Regulated Banking: Scotland’s Free Banking Era (Part 2 of 4)

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6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff gets to the heart of financial stability under Scotland’s free-market banking system of 1716-1845, when regulated England suffered from ten crises and unregulated Scotland experienced none.

Contemporary account of the English and Scottish
experiences during the Great Financial Crisis of 1825

III. OVERISSUANCE, RISK, AND ECONOMIC DEVELOPMENT

From 1716-1845, Scottish banking operated in the closest to a laissez-faire environment the industrialized world has ever seen.

There was no central bank. There were no government privileges, protections, or barriers to entry. Banks were free to issue their own notes and lend any share of their reserves they chose. There was no deposit insurance, there were no bailouts, and failed banks that could not pay off depositors made up the difference from their owners’ pockets (ie. full liability).

Critics of capitalism contend that under such a system unregulated banks, left free to their own devices, will leverage themselves to the hilt, issue too many risky loans through notes and deposits, and their recklessness will bring the entire banking system down in crisis.

Yet Scottish bank failures—especially due to overleverage—were rare and credit quality was excellent.

The reason once again was unfettered market competition, unmarred by government-granted privileges, monopolies, backstops, and restrictions that are later called “the free market” by politicians after they’ve created full-blown crises.

Unlike in England there was no monopoly central bank to overextend or rapidly contract credit for the entire system, and any private Scottish bank that issued too many banknotes had to worry about large quantities of its notes returning for redemption and depleting its specie reserves. 

The private clearinghouse networks also settled mutual banknote obligations daily, so any bank felt the consequence of overissuance very quickly. Once again, absent bailouts from central banks and central governments, it was precisely market competition that kept the banks prudent.

Adam Smith, himself a Scottish resident of Edinburgh, marveled in “The Wealth of Nations” (1776) how effectively the threat of redemption and workings of the private clearinghouse systems kept banks honest. 

Clearinghouses even set standards of financial soundness for banks to become and remain members, and they established accounts for member banks to maintain a minimum balance so that in the unexpected event of failure their liabilities to other banks would not go fully unpaid. This reserve account mechanism was quite effective at stemming the contagion of panic if a large bank failed since other banks it owed to were protected with what were effectively escrow accounts.

Unlike in England Scottish banks were free to widely branch and diversify their depositor bases and lending portfolios.

Also given that there was no central bank standing by to make emergency loans, no government bailouts, and no deposit insurance, banks had great incentive to lend to only the most creditworthy clients and promising enterprises. 

Furthermore most Scottish banks operated in a full liability environment. If enough of a bank’s loans went bad and depositors were not fully paid off, the difference came out of the owners’ personal estates.

The Economics Correspondent is no expert on liability and imagines there are many advantages to our present system of limited liability that promote economic growth. However there can be no doubt that having their own assets at stake proved very effective at focusing the banks’ owners like a laser on sound lending.

Finally, while the Bank of England dominated English finance and diverted funds to the Crown for war, leaving small English country banks to scrape up what little capital they could muster, larger Scottish banks were concerned with the needs of commerce and contributed greatly to the nation’s economic development. 

In 1745 Scotland’s per-capita GDP was only half that of England’s. 

A century later it was equal to that of England’s.

Considering England itself was undergoing the first Industrial Revolution and an unprecedented expansion at the time, the pace of Scotland’s economic growth must be considered all the more impressive as Adam Smith also noted and credited largely to the free banking system.

IV. STABILITY IN SCOTTISH BANKING

But undisciplined by the omniscient wisdom of government regulators, didn’t Scottish banks still lower credit standards, lend recklessly, and spawn constant banking panics like the 2008 financial crisis? After all, we’re told by politicians, regulators, academics, and the media that a private, competitive system left to its own devices is a recipe for disaster and collapse.

As we’ve mentioned in previous columns, not a single systemic banking crisis struck Scotland during its 129 years of free banking. 

By contrast England, dominated by a monopoly central bank and hobbled by Six Partner Rule regulations that kept private banks small, weak, and undiversified, suffered from at least ten banking panics during Scotland’s free banking period: in 1721, 1745, 1772, 1783, 1793, 1797, 1810, 1815, 1825, and 1837.

During the tumultuous period of wars with Revolutionary and Napoleonic France, 300 English banks failed in the thirty years between 1791 and 1821. 

Scotland was tranquil by comparison. Of the joint-stock banks that dominated the market, not a single one failed in the even wider forty-year span of 1786-1826. What few failures did occur were limited to a handful of small private non-issuing banks—on average one per decade (versus one hundred per decade in England).

During the English Crisis of 1825, the largest banking panic in British history before 2008, 80 banks failed in England and 700-800 more appealed to the Bank of England for assistance which was effectively every bank in the country. In Scotland only four banks were even impacted, all smaller houses. One was acquired by a larger bank, two paid their liabilities in full in 1825 and 1826, and only one outright failed in 1829.

J.R McCulloch, heir to the Ricardian school after David Ricardo’s death, wrote in 1826 of Scotland’s “comparative exemption of this part of the empire from the revulsions that have made so much havoc in England.”

And as we’ve noted in previous chapters on England, conservative Prime Minister Lord Liverpool and future Prime Minister Sir Robert Peel urged their parliamentary colleagues in 1826 to consider the free banking system in Scotland as a model for England’s post-1825 crisis reform. Peel even noted in House of Commons debate that 300 English banks had failed in the previous thirty-three years while he could only find a single Scottish bank failure on record in the same period.

Another large panic struck England in 1837 and even spread to the United States which, with its own perversely regulated system (more on that in a future column), suffered the American Panic of 1837. Yet Scotland, even sitting on England’s border with a tightly integrated economy and common currency union, was again unaffected and its resilience once more did not go unnoticed.

Economist Robert Bell recorded in 1838 “While England, during the last year, has suffered in almost every branch of her national industry, Scotland has passed paratively uninjured through the late monetary crisis.”

And economic historian William Graham noted in 1911 that “In the heavy losses and banking failures [of 1837] which ensued, Scotland had little share.”

Scotland’s crisis-free record is particularly impressive considering its close economic ties to its much larger neighbor. A major banking crisis in England could more easily spread to the north than a Scottish crisis could destabilize the south, yet the Scottish system was so durable that it was practically immune to English dysfunction with a sole exception (the 1797 suspension) that we’ll examine in a future installment.

So the British experience completely contradicts the conventional wisdom that unregulated banking leads to industry recklessness and crisis while government regulation promotes stability.

Scotland’s zero crises during its 129 years of free banking stands in stark contrast to regulated England’s ten crises during the same period. And the reasons aren’t hard to understand once the history is unveiled.

In Part 3 we’ll talk about what few regulations did exist in Scotland, its few isolated bank failures, and the end of the free banking era.

Alexandria Ocasio-Cortez Hails Denmark's $22/Hour Wage at McDonalds, Omits $15 Bacon Sandwich Meals and Kiosks Replacing Humans

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The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff noticed Alexandria Ocasio-Cortez recently called a $15/hour minimum wage a "compromise" since she says Denmark's McDonalds workers make $22/hour and get six weeks of annual vacation.

AOC’s ghost writer tweet can be read at:

https://twitter.com/aoc/status/1366922134057058304

Since then the future House Speaker has been slammed by pundits over two errors:

1) Denmark has no statutory minimum wage. However it does have plenty of pro-union laws and the unions have secured higher wages for low-skilled workers.

2) Many European countries with high minimum wage make exceptions for younger workers, who tend to be even less skilled. In the Netherlands, for example, a 15 year old can be paid 2.92 euros per hour ($3.50) even though the adult fulltime minimum wage is 9.72 euros ($11.66) making *it* the compromise, not $15 (see Netherlands minimum wage schedule at the bottom of this post).

But AOC picked the most favorable country for her case from the over 40 in Europe and with a population smaller than metro Atlanta.

However the Correspondent has yet to see an even bigger glaring error in her reasoning being reported.

Simply going on Google Maps and looking at customer/tourist photos of McDonalds locations in Denmark discloses the consequences of such generous pay raises (see photo).

In the top photo the store menu reveals if you want a chicken sandwich meal with a small (what they call medium) fries and drink it will cost you 75 kroner or about $12.50USD. 

If you want the double bacon sandwich large meal (what we call medium) it's 88 kroner or just shy of $15.

And these photos were taken in 2018. 

The Correspondent hasn't been to a McDonalds for a while. He lives in San Francisco where he's seen the phased $15/hour minimum wage close down several McDonalds locations, as well as IHOP, Panera Bread, Burger King, Subway, and countless local restaurant names CO readers would probably not be familiar with.

But he suspects if one walks into a McDonalds in say, Texas (a state that abides by the federal minimum wage of $7.25/hour) the menu wouldn’t read $12.50 for a small chicken sandwich meal or $15 for a double bacon sandwich meal. In fact the Correspondent found a 2017 San Antonio Google Maps photo with a $6.09 Big Mac meal.

The Correspondent would also wager once the price is raised to $12.50 or $15, a lot of Texan McDonalds customers will quickly pay a whole lot fewer visits—as will Georgians and Iowans and the residents of dozens of other states—and the rapid contraction in demand will mean a lot of workers have less work to do and lose their jobs.

Which leads us to the bottom tourist photograph. Denmark has already shown us what's in store for the human cashiers in U.S. McDonalds if AOC gets her way.

ps. Every tourist photo the Correspondent found of a Danish menu board had zero human employees standing in front of it at the counter. In fact, human employees were rather scarce in all the photos as were customers. Probably not a coincidence either.

(Netherlands minimum wage schedule last updated for 2021)

https://www.government.nl/topics/minimum-wage/amount-of-the-hourly-minimum-wage

Free vs Regulated Banking: Scotland's Free Banking Era (Part 1 of 4)

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7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff suggests the next time a champion of statism tells you free markets can’t work in banking, ask them first for an example. 

If they say the United States, remind them the USA had the most heavily and adversely regulated banking system in the industrialized world from the Civil War through the Great Depression—regulations that precipitated panics in 1873, 1884, 1890, 1893, 1896, 1901, 1907, 1930, 1931, and 1933 (more on the USA in future columns).

If they don't cite the historical experiences of Scotland, Canada, or Sweden, educate them first about Scotland which, from 1716 to 1845, operated the closest to a laissez-faire banking system the modern world (post-Renaissance) has ever seen and was uncoincidentally crisis-free for the entire 129 years.

I. SCOTLAND’S FIRST BANKS AND THE NOTE DUEL

As we’ve learned in previous columns, the Bank of England received its charter from English Parliament in 1694 to begin immediate wartime lending to the government before acting as a quasi-central bank.

One year later in 1695 Scottish Parliament chartered its first bank, the Bank of Scotland. Far from being a central bank, the Bank of Scotland was simply a commercial bank that took deposits in silver coin and issued deposit claims and loans primarily in the form of its own written banknotes. 

Scotland was a much different place from England in 1695. Backwards and rural, Scotland was much poorer than its southern neighbor. It also had a great degree of autonomy and even its own parliament until the 1707 Act of Union merged the two countries into the Kingdom of Great Britain.

And although late 17th century Scotland was immersed in the same mercantilist policies that were so common throughout Europe, it was intellectually on the cusp of the Scottish Enlightenment, an era dominated philosophically and legally by principles of reason, natural rights, sanctity of the individual, liberty, and free markets that would later inspire founding fathers of the United States such as Thomas Jefferson, James Madison, Benjamin Franklin, and John Adams.

True to the mercantilist backdrop of 1695, Parliament granted the Bank of Scotland a 21-year monopoly, the original and only definition of monopoly that reigned for over three hundred years before John D. Rockefeller’s Standard Oil: the sole right to operate in a market at the exclusion of any would-be competitor, enforced by the power of the State.

Uncoincidentally Scottish Parliament also passed a law declaring it illegal for any Scottish bank to lend to governments without approval from Edinburgh. The Scots clearly saw English King William III’s strategy of financing war against France with private banks and wanted no part of it. William, surveying Scotland’s poverty, backwardness, and the legal difficulties he would face in securing loans from the Bank of Scotland, decided it wasn’t worth the effort and settled for relying on the Bank of England.

With a government-sanctioned monopoly commercial bank, Scottish finance could hardly be deemed a free market in 1695. However, the bank’s monopoly expired in 1716 by which time Scottish and English Parliaments had merged in the Act of Union. The now-British Parliament suspected the Bank of Scotland of Jacobite (House of Stuart Catholic) sympathies and was not amenable to granting any more privileges. 

Mindful of Parliament’s reluctance to extend its monopoly status and mistakenly believing the prospects for competition to be low, the Bank of Scotland’s directors chose not to press the matter further and operated in a marketplace now devoid of government barriers to competitive entry.

The era of free banking in Scotland had begun.

Despite the Bank of Scotland’s established position and virtual 100% market share, a new competitor emerged. In 1724 the Royal Bank of Scotland opened for business and received a charter in 1727. Henceforth we will refer to the original and upstart banks as the Old Bank and the Royal Bank.

The Old Bank was none too pleased at the appearance of a competitor and schemed to promptly put it out of business. Immediately its directors advised customers they would not accept the Royal Bank’s notes for deposit and believed the new rival could be ousted with their incumbent market power.

The Royal Bank countered by advertising it would accept not only its own notes for deposit, but those of the Old Bank as well. It then stockpiled Old Bank notes, later submitting them all at once for silver coin redemption and forcing the Old Bank into an embarrassing suspension as its directors scrambled to call in loans and even resorted to borrowing.

While the Old Bank scurried to raise coinage under cover of suspension, the Royal Bank publicly announced “The Old Bank is not paying in silver, we are the only bank honoring its commitments” and stole many customers away.

Months later the Old Bank was able to resume redemption and plotted to exact revenge. It began accepting the Royal Bank’s notes, hoarding them as well, and then submitted them all at once to antagonize its competitor in turn.

The Old Bank also added a clause on its notes giving it the option to delay redemption by up to six months but pay noteholders 5% annual interest as compensation for their inconvenience. This “option clause” was the first of what would be many financial innovations borne from the fierce competition between Scottish banks.

The Royal Bank had anticipated the Old Bank’s plot and held a large silver reserve as a defense. Soon both banks were hoarding specie as a precaution against surprise attacks.

However before long both banks realized they were forgoing significant profits by holding such large reserves when they could be issuing more interest-bearing loans, so they agreed it was in their best interests to cooperate. They met once a week to trade notes and settle balances after offsetting claims were settled. Soon they were meeting twice a week, and eventually every day. The world’s first private bank clearinghouse system was born.

With the clearinghouse system established, Parliament outlawed the banknote option clause in 1765 in one of the very few interventions of the time enacted by government.

Later a third bank was chartered in Edinburgh, the British Linen Company—named so since its original business was textile trading and its routine credit dealings led it naturally into the banking business.

Scotland’s history of private banknotes remains so renowned that the country is one of only four regions in the world—alongside Hong Kong, Macau, and Northern Ireland—where private note issuance is still permitted. Bank of Scotland, Royal Bank of Scotland, and Clydesdale Bank notes still circulate, although domestic gold convertibility was ended in 1914 and private banknotes must now be 100% backed by inconvertible Bank of England banknotes.

II. BANK COMPETITION IN THE SCOTTISH FREE MARKET

Throughout the remainder of the 18th century and the first half of the 19th century Scotland had no central bank, private banking was completely open to entry, the right of note issuance was universal, and government bestowed no special privileges, protections, or bailouts upon any bank. Although the English and Scottish parliaments were joined in the Act of Union, Scotland still enjoyed a great degree of economic autonomy and the anti-mercantilist, free market ideas of the Scottish Enlightenment had taken hold.

In this nearly laissez-faire environment where banks succeeded or failed on their own merits, competition was fierce, profit margins were thin, and enormous incentives to innovate prevailed.

In May of 1728 the Royal Bank of Scotland invented the account overdraft, a service regarded as commonplace today.

Soon after the next logical step was established: the line of credit, filling a need by the banks’ merchant customers who couldn’t predict precisely when the need for advances would arise and in what amount. 

Scottish banks printed Europe’s first color banknotes, the world’s first double-sided printed banknotes, and also pioneered widespread payment of interest on deposits.

Along with the private clearinghouse and option clause, these new services didn’t go unnoticed. In his 1750’s writings Scottish Enlightenment philosopher David Hume praised the influx of financial innovations that originated within the free, competitive banking system.

Initially banks operated in the largest city of Edinburgh with its diverse economy and leading population. At midcentury branches only operated within Edinburgh, but by the 1770’s both the Old Bank and Royal Bank had opened branches in Glasgow and the British Linen Company had already built a small branch network.

Scotland was not subject to the mercantilist Six Partner Rule of England that sought to keep banks small and impotent, so by the turn of the century branch offices were operating throughout the nation, the first such network of its kind. 

Unlike in regulated England nationwide branching was not restricted and Scottish banks diversified their loans and deposits across a wide array of trades and geographies, promoting greater credit resilience and industrywide stability.

Today consumers take nationwide branch banking for granted, but the concept was born in the bitterly competitive landscape of early 19th century Scottish finance. By the time British Parliament put an end to the free banking era in 1845 Scotland had over 50 banks with names like the National Bank of Scotland, Glasgow Bank, Dundee Bank, Clydesdale Bank, and Union Bank of Scotland. Of these, 19 were note-issuing institutions with 363 total branches.

363 branches may not seem like very many today when Chase Bank alone operates over 5,000 in the USA. But in 1845 Scottish banks operated one branch per 6,600 people, greater than the one per 9,405 in England and one per 16,000 in the United States.

In fact Scotland’s 1845 branch-to-population ratio was only slightly less favorable than the one FDIC insured branch per 4,320 people operating in the USA today. Scots had greater per-capita access to credit and financial services than Englishmen and Americans during the time of Queen Victoria and Texas’ admission to the Union.

In Part 2 we’ll discuss Scottish banking stability and the industry’s contribution to economic development.

Free vs Regulated Banking—Addendum to a History of the Bank of England: Do Modern Central Bankers Really Abide By Bagehot’s Dictum?

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8 MIN READ - From the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff

In the Economics Correspondent’s previous series on banking instability in England we learned that the first two centuries of the Bank of England's establishment and a slew of destructive banking regulations imposed by British Parliament led England to weather no fewer than seventeen financial crises. 

Ultimately a proposal for stability was penned by banker and The Economist editor Walter Bagehot (pronounced “badge-it”) in his famous 1873 book “Lombard Street.”

Bagehot blamed the Bank of England itself, its centralization of gold reserves, and the banknote monopoly bestowed upon it by Parliament for repeated systemic financial crises. Further he recommended throwing out the central bank and emulating the decentralized, deregulated, and nearly laissez-faire Scottish private banking system of 1716-1845 that had produced not a single crisis during its 129 years.

However Bagehot knew that it was politically impossible to dismantle the Bank of England since it had become so ingrained in the British psyche. Therefore his next best solution, assuming the central bank was to be upheld, was that it clean up its own mess, acting in a lender of last resort (LOLR) capacity: lending freely and early to solvent but illiquid banks at high interest rates during times of crisis.

Since then central bankers the world over have lauded Bagehot as a visionary, pioneer, and champion of central banking, and they’ve cited Bagehot’s Rule repeatedly as justification for their aggressive bailouts of troubled institutions.

In his book “The Courage to Act,” former Federal Reserve Chairman Ben Bernanke recounts the 2008 financial crisis and cites Bagehot more than any other nonliving economist (including Milton Friedman), justifying the Fed’s aggressive emergency lending programs by invoking Bagehot’s name over and over. 

Bernanke even goes so far as to suggest that if Bagehot were alive today he would wholeheartedly approve of such massive bailout programs. After detailing not only emergency lending and asset purchases for banks, but also TALF program lending on millions of auto loans, student loans, small business loans, and credit card loans he writes “Walter Bagehot would have been pleased.” (p. 469)

There’s no shortage of other central bankers asserting they were only following Bagehot’s antidotes and that Bagehot himself would have approved.

It may be no surprise to CO Nation that the Economics Correspondent disagrees.

BAGEHOT’S RULE ITSELF

We don’t have to look far to see what’s wrong with Bernanke’s characterization of archangelic Bagehot smiling down upon the 2008 Fed with patrimonial approval. We only need look closer for a moment at Bagehot’s Rule itself. 

The Federal Reserve’s website defines Bagehot’s Rule as:

“[T]o avert panic, central banks should lend early and freely (ie without limit), to solvent firms, against good collateral, and at 'high rates.”

This is an accurate summation, and even Bernanke himself states:

“To calm panic, Bagehot advised central bankers to lend freely at a high interest rate, against good collateral, a principle now known as Bagehot’s dictum.” (p. 45)

Why did Bagehot recommend that central bankers “lend freely (without limit),” to “solvent firms,” “against good collateral,” and “at high rates?”

-“Lending freely” is obvious. If many banks fail simultaneously due to illiquidity then panic and widespread depositor withdrawals could spread. Thus Bagehot argued the central bank should not skimp on short term lending assistance to bolster liquidity.

-As for “solvent firms” and “against good collateral,” that’s not too hard to understand either. 

Bagehot didn’t want the central bank pouring good money after bad into banks with negative equity. If banks were well managed but failing due to a simple liquidity run in times of panic, then the central bank would help savable institutions with its loans secured on good collateral. But for the minority of banks that were just badly managed and effectively bankrupt, they should be allowed to fail and not take central bank money down with them in the process.

-And “high rates” (sometimes referred to as “punitive rates”) were to ensure that illiquid banks regretted having managed their reserves so poorly. If they remembered paying so high a price for liquidity loans they were less likely to repeat their mistakes in the future (ie. moral hazard).

Also a punitive rate of interest ensured only truly needy banks would take central bank loans. If the interest rate was too low, healthy liquid banks would take advantage of the crisis to grab cheap funding and impose unnecessary leverage upon the central bank’s balance sheet.

As Bagehot himself wrote, a punitive rate of interest “will prevent the greatest number of applications by persons who do not require it… …that the [central] Banking reserve be protected as far as possible.” (p. 97)

-Finally it’s important to know Bagehot defined “solvent firms” as commercial banks only. (White, 2014)

BREAKING THE RULES

So just how faithfully did Bernanke, the Fed, and the world’s central bankers adhere to Bagehot’s Rule in 2008?

1) “Lend freely (without limit).” 

There’s no question they adopted this policy and took it to new heights. Not only did the Fed lend trillions of dollars to troubled banks, it gladly allowed investment banks, insurance companies, and other nonbanking firms to change to commercial bank status overnight and secure bailout lending. General Electric comes to mind, having hurriedly bought a tiny Connecticut community bank in the depths of the crisis and then receiving a $16 billion Fed loan that dwarfed its newly acquired bank’s entire balance sheet.

Major insurers also changed their status such as The Hartford, Lincoln Financial, Genworth, and most famously AIG. And as Bernanke points out in his book, the lending extended to hundreds of billions of dollars for auto loans, student loans, small business loans, and credit card loans.

2) “Lend… …to solvent firms.”

Not only were the largest, most troubled institutions in 2008 illiquid, many were also insolvent. Loaded up to the hilt with nonperforming mortgages and bad securitized loans, firms like Citigroup, Merrill Lynch, countless regional and superregional banks, and nonbank institutions all received huge discount loans from the Fed despite their solvency coming into question or simply being bankrupt.

As evidence the Fed advanced credit to several commercial and investment banks that ultimately failed anyway or had to be saved through acquisition such as Washington Mutual (failed) and Wachovia (failed) or Bear Stearns, Merrill Lynch, and National City (all acquired).

But if the Fed loaned to many firms that were insolvent and never acquired, why are some of them still with us today? Because the Fed not only granted emergency liquidity loans, it also purchased their lousy mortgage securities in open market operations, the first time in its century-long history that the central bank bought mortgage paper instead of traditional, safer U.S. Treasuries.

Buying assets directly from banks, particularly lousy assets, was never on Bagehot’s list of remedies either.

Finally extending massive loans to non-commercial banking institutions, even solvent ones, violates another tenet of Bagehot’s Rule.

3) “Lend… on good collateral.” 

Obviously lending to banks that are offering failing subprime and Alt-A mortgages as collateral directly violates Bagehot’s Rule also.

And…

4) “Lend… …at high rates [of interest].” 

As everyone already knows, the Fed loaned hundreds of billions of dollars through its discount window at nearly zero percent.

https://fred.stlouisfed.org/graph/?g=yD9r

One can hardly call zero or even 0.5% interest a high or punitive rate, and in fact securing so much money so cheaply would have been impossible during the preceding boom years.

And with Fed lending rates so low, countless healthy and liquid banks lined up for cheap credit, something Bagehot specifically wished to avoid. Even banks that didn’t want rescue money were coerced into taking it, most famously Wells Fargo whose CEO was threatened with punitive government action if his bank didn’t accept a $25 billion TARP injection that the bank ultimately repaid with interest.

So if Bagehot were alive today, he’d perceive the world’s central bankers fulfilling only one of the four commandments of his doctrine while brazenly contravening the other three—all in his name.

MORE BAGEHOT DISAPPROVAL

Furthermore, if we look closer into Bagehot’s book we find he was a staunch hard-money gold standard advocate who hated any suggestion of unbacked or overissued paper money. Bagehot went out of his way to criticize central banker John Law’s 1719 Mississippi Company paper money scheme that inflated world history’s first stock market bubble in Paris which burst and threw France into a protracted depression.

He also sneered at the unbacked paper "greenbacks" circulating in America during and following the Civil War, although Congress began redeeming greenbacks for gold two years after Bagehot's death (1879).

And as we’ve already mentioned, Bagehot wanted to get rid of the Bank of England completely, but reluctantly accepted that doing so was politically impossible. His argument in “Lombard Street” is rather lengthy but here are key corroborating passages:

“I shall have failed in my purpose if I have not proved that the system of entrusting all our reserve to a single board, like that of the Bank [of England] directors, is very anomalous; that it is very dangerous; that its bad consequences, though much felt, have not been fully seen; that they have been obscured by traditional arguments and hidden in the dust of ancient controversies.”

“But it will be said ‘What would be better? What other system could there be?’ We are so accustomed to a system of banking, dependent for its cardinal function on a single bank [the Bank of England], that we can hardly conceive of any other. But the natural system that which would have sprung up if Government had let banking alone is that of many banks of equal or not altogether unequal size. In all other trades competition brings the traders to a rough approximate equality…”

“I shall be at once asked ‘Do you propose a revolution? Do you propose to abandon the one-reserve System and create anew a many-reserve system [private competitive Scottish system of 1716-1845]?’ My plain answer is that I do not propose it. I know it would be childish. Credit in business is like loyalty in Government. You must take what you can find of it, and work with it if possible…”

“…Just so, an immense system of credit, founded on the Bank of England as its pivot and its basis, now exists. The English people, and foreigners too, trust it implicitly... …Nothing would persuade the English people to abolish the Bank of England; and if some calamity swept it away, generations must elapse before at all the same trust would be placed in any other equivalent. A many-reserve system, if some miracle should put it down in Lombard Street, would seem monstrous there. Nobody would understand it, or confide in it…”

“…On this account, I do not suggest that we should return to a natural or many-reserve system of banking. I should only incur useless ridicule if I did suggest it.”

-Lombard Street, pp.32-34.

So in conclusion, whatever one thinks of the emergency measures employed in 2008, the claims by Bernanke and modern central bankers that they were only doing Bagehot’s bidding fall flat in light of even a cursory glance at the evidence.

They only followed one of the four conditions of Bagehot’s Rule while blatantly breaking the other three.

And while the gold standard or animus towards monopoly central banks is not addressed directly in Bagehot’s Rule, his unwavering support of the gold standard is present throughout his writings, and his calls for abolishment of the Bank of England in favor of a private, decentralized, competitive banking system appear within “Lombard Street” itself. 

Bagehot would have expressed outrage and indignation at the Fed and particularly the Bank of England issuing unbacked fiat paper monies and computerized reserves without gold backing, blowing up the very asset bubbles he had blamed the monopoly central bank for inflating in his own time.

So after scrutinizing Bernanke’s claims of devotion to Bagehot’s Rule a bit more closely, we can safely conclude that “No Mister Chairman, Walter Bagehot would not have been pleased. He would have been very, very displeased by the conduct of central banks not only in 2008, but for many decades prior.”