On the Couch

Mises Daily by Doug French | Posted on 8/17/2009

2009-08-18T04:50:00.001-04:00

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Store 'em If You Got 'em

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With the Federal Reserve's daily debauching of the dollar, it's hard for a person to know in what form they should store their savings. Despite the machinations of the Fed, the demand for US dollars continues to be relatively high. As Murray Rothbard noted in The Mystery of Banking, the public-expectations component of the demand for money doesn't change suddenly and is based upon the record of the immediate past. These expectations are sluggish in adapting to new conditions.

We seem to be in phase one of Ludwig von Mises's outline of the typical inflation process: prices aren't rising nearly as much as the money supply. The public still has deflationary expectations. And why not? After all, the folks at the Bureau of Labor Statistics say that retail prices as measured by the consumer price index fell 2.1 percent this July from a year ago. Meanwhile, the M-2 money supply has increased by 8.7 percent year over year. The average Joe and Jane on the street don't care one whit that the Fed's balance sheet has exploded in size over the past year. And if the government says prices are going down, well, who are they to argue? Quantitative easing doesn't sound all that scary. CNBC says the financial system has been saved and Bernie Madoff is in jail — all is well.

But a few savvy folks are taking Bastiat's cue that it's more important to understand what is unseen as a result of economic policies, as opposed to just what is seen. While the fractional-reserve money-manufacturing process is currently broken in the commercial banking sector — because credit-worthy borrowers are hard to source and crumbling real-estate values have bank regulators closing a handful of small banks each Friday evening — the Federal Reserve has expanded its balance sheet to make up the difference and bailed out the large-money-center banks in order that the whole apparatus doesn't collapse.

So instead of allowing the market to provide a healthy cleansing deflation, the Fed, the Treasury, and bank regulators are fighting valiantly to keep the fractional-reserve-bubble machine operating, with the ultimate result likely to be inflation and possibly hyperinflation. "As inflationary pressures mount anew and the financial markets increasingly shun US Treasuries," wrote John Williams on his Shadow Government Statistics website this past January,

an inflationary depression can evolve quickly into a hyperinflationary great depression. Although hyperinflation became inevitable in the last decade, the onset of the process just recently was triggered by Fed and the Treasury actions in addressing the systemic solvency crisis.

What Williams describes is phase two of Mises's inflation outline: instead of a rising demand for money moderating price increases, a falling demand for money will instead intensify price inflation. Finally, we come to phase three, where prices go up faster than money supply, the demand for money drops to zero, and government fiat currencies collapse.

In anticipation of the coming inflation, more than a few folks are squirreling away gold coins, and, because of that demand, these coins are still selling at inflated premiums and the spot price of the yellow metal continues to hang stubbornly above $900 per ounce. But gold may not be the only thing to hoard.

Interestingly, when asked if there is anything else a person can store their savings in, globetrotting investor Doug Casey recently offered up an item that has historically been used as money — cigarettes. "Well, they keep raising the taxes on cigarettes — a pack now costs $10 in some places in the US, that's 50 cents per individual cigarette," Casey says.

If you're American and are going to be storing things, you probably can't go wrong building a stash of cigarettes. Even if you don't smoke — or perhaps especially if you don't smoke — every time you return to the US, you should buy the maximum amount of duty-free cigarettes allowed and store them.

Cigarettes, despite flunking the "durability" test, meet all the other criteria to make them a good monetary instrument. They are generally marketable, despite the constant attacks on their use as being unhealthy. Cigarettes are divisible, recognizable, (somewhat) homogeneous, and, due to the increased taxation, fairly stable in value and have a high value per unit weight. In fact, a 7-Eleven at the Jersey shore recently advertised selling cigarettes priced "at the state minimum."Download PDF

Cigarettes are so valuable that they are being stolen by the truckload to be sold in high-tax states — like New Jersey, New York, and Washington. But individual counties also ladle taxes on each pack leading to smuggling within a single state with varying county tax rates, reports the Wall Street Journal. "It's a big business and it's getting horribly bigger," Paul Carey III, enforcement coordinator for the Northern Virginia Cigarette Tax Board, told the Wall Street Journal.

As in the case of counterfeiting, states don't take cigarette bootlegging lightly. Undercover agents for the New York State Department of Taxation and Finance arrested 18 people, including two 7-Eleven operators, for buying untaxed cigarettes. Smugglers are even willing to trade cocaine for cigarettes. "That tells you about the profit margin they saw on cigarettes," the ATF's Edgar Domenech told the Wall Street Journal.

R.A. Radford famously wrote in his November 1945 Economica article "The Economic Organization of a P.O.W. Camp,"

Most trading was for food against cigarettes or other foodstuffs, but cigarettes rose from the status of a normal commodity to that of currency.

Radford explained that each barracks had an "Exchange and Mart notice board" where sales and wants were posted. Over time all transactions were recorded in cigarettes with the price of smokes "tending to equality throughout the camp, although there were always opportunities for an astute trader to make a profit from arbitrage." WHGDtOM?

In his amazing account, Radford recognized that cigarettes preformed the functions of money nicely especially "as a measure of value and as a store of value." Some prisoners, as many kings had before, even "clipped or sweated [cigarettes] by rolling them between fingers so that tobacco fell out." With the currency value of all cigarettes the same, more popular cigarettes were saved or smoked, while poorer quality cigarettes were used for trading, just as Gresham's law would dictate. When cigarette supplies were interrupted, the amount of currency declined, transactions dried up, and prices fell. But when a Red Cross shipment of several hundred thousand cigarettes arrived over a short period of time, "Prices soared, and then began to fall, slowly at first but with increasing rapidity as stocks ran out, until the next big delivery."

The Fed has essentially created the biggest shipment of currency ever, but the crippled banking system hasn't yet delivered it to our prison camp. When it arrives, it might be handy to have some spare smokes around to trade with.

Mises Daily by Hans-Hermann Hoppe | Posted on 8/14/2009

2009-08-15T10:52:00.001-04:00

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A Four-Step Healthcare Solution

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It's true that the US health-care system is a mess, but this demonstrates not market but government failure. To cure the problem requires not different or more government regulations and bureaucracies, as self-serving politicians want us to believe, but the elimination of all existing government controls.

It's time to get serious about health-care reform. Tax credits, vouchers, and privatization will go a long way toward decentralizing the system and removing unnecessary burdens from business. But four additional steps must also be taken:

1. Eliminate all licensing requirements for medical schools, hospitals, pharmacies, and medical doctors and other health-care personnel. Their supply would almost instantly increase, prices would fall, and a greater variety of health-care services would appear on the market. Competing voluntary accreditation agencies would take the place of compulsory government licensing — if health-care providers believe that such accreditation would enhance their own reputation, and that their consumers care about reputation, and are willing to pay for it. Because consumers would no longer be duped into believing that there is such a thing as a "national standard" of health care, they would increase their search costs and make more discriminating health-care choices.

2. Eliminate all government restrictions on the production and sale of pharmaceutical products and medical devices. This means no more Food and Drug Administration, which presently hinders innovation and increases costs. Costs and prices would fall, and a wider variety of better products would reach the market sooner. The market would force consumers to act in accordance with their own — rather than the government's — risk assessment. And competing drug and device manufacturers and sellers, to safeguard against product liability suits as much as to attract customers, would provide increasingly better product descriptions and guarantees.

3. Deregulate the health-insurance industry. Private enterprise can offer insurance against events over whose outcome the insured possesses no control. One cannot insure oneself against suicide or bankruptcy, for example, because it is in one's own hands to bring these events about.

Because a person's health, or lack of it, lies increasingly within his own control, many, if not most health risks, are actually uninsurable. "Insurance" against risks whose likelihood an individual can systematically influence falls within that person's own responsibility.

All insurance, moreover, involves the pooling of individual risks. It implies that insurers pay more to some and less to others. But no one knows in advance, and with certainty, who the "winners" and "losers" will be. "Winners" and "losers" are distributed randomly, and the resulting income redistribution is unsystematic. If "winners" or "losers" could be systematically predicted, "losers" would not want to pool their risk with "winners," but with other "losers," because this would lower their insurance costs. I would not want to pool my personal accident risks with those of professional football players, for instance, but exclusively with those of people in circumstances similar to my own, at lower costs.

Because of legal restrictions on the health insurers' right of refusal — to exclude any individual risk as uninsurable — the present health-insurance system is only partly concerned with insurance. The industry cannot discriminate freely among different groups' risks.

As a result, health insurers cover a multitude of uninsurable risks, alongside, and pooled with, genuine insurance risks. They do not discriminate among various groups of people which pose significantly different insurance risks. The industry thus runs a system of income redistribution — benefiting irresponsible actors and high-risk groups at the expense of responsible individuals and low-risk groups. Accordingly, the industry's prices are high and ballooning.

To deregulate the industry means to restore it to unrestricted freedom of contract: to allow a health insurer to offer any contract whatsoever, to include or exclude any risk, and to discriminate among any groups of individuals. Uninsurable risks would lose coverage, the variety of insurance policies for the remaining coverage would increase, and price differentials would reflect genuine insurance risks. On average, prices would drastically fall. And the reform would restore individual responsibility in health care.

4. Eliminate all subsidies to the sick or unhealthy. Subsidies create more of whatever is being subsidized. Subsidies for the ill and diseased promote carelessness, indigence, and dependency. If we eliminate such subsidies, we would strengthen the will to live healthy lives and to work for a living. In the first instance, that means abolishing Medicare and Medicaid.

Only these four steps, although drastic, will restore a fully free market in medical provision. Until they are adopted, the industry will have serious problems, and so will we, its consumers.

Mises Daily by Llewellyn H. Rockwell, Jr. | Posted on 8/13/2009

2009-08-15T10:50:00.001-04:00

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Obama and the Post Office

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ART THIS ONE CAME EARLY IN THE MORNING OF THE 14th, THE FIST OF (2) REC'D ON THE 14th. NONE WAS RECEIVED ON THE 13th.

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Writing in The State and Revolution in 1917, Vladimir Lenin summed up the economic aim of socialism as follows: "To organize the whole economy on the lines of the postal service…."

Incredible, isn't it? After centuries of treatises and miles of paper and tubs of ink, this is the great historical turning point: government employees carrying sacks of paper mail from house to house — and operating at an economic loss.

It's fascinating how it all comes down to the post office, again and again, in the history of public policy. And so it is in our time, with Obama's admission/gaffe/slip concerning the post office and its analogy to what he wants to do with healthcare.

Here is a transcript of his spontaneous talk at a high school. A student raised a question about the government's provision of health services and its impact on private services.

How can a private company compete against the government? My answer is that if the private insurance companies are providing a good bargain, and if the public option has to be self-sustaining, meaning that taxpayers aren't subsidizing it, but it has to run on charging premiums and providing good services, and a good network of doctors, just like private insurers do, then I think private insurers should be able to compete.

They do it all the time. If you think about it, UPS and Fed-Ex are doing just fine. It's the post office that's always having problems … there is nothing inevitable about this somehow destroying the private marketplace. As long as it is not set up where the government is being subsidized by the taxpayers so that even if they are providing a good deal, we keep having to pony up more and more money.

Now, these comments are nothing short of incredible. The post office has been on the loser list for many decades. Most recently, it has been included on the GAO's high-risk list, increasing its debt to $10.2 billion and incurring a cash shortfall of $1 billion.

Note that the post office is not being shut down for this mess. On the contrary, it is being subsidized not only with tax dollars but, most importantly, with laws. Title 18 (I.83.1696) says that "Whoever establishes any private express for the conveyance of letters or packets" can be fined and jailed. Moreover, another law (39.I.6.606) says that any letter delivered by unlawful means can be seized and stolen by the government. It is immune from antitrust action and criminal liability. You can read the whole Post Office Gosplan here.

If the post office were really a market institution, it would go belly up in about half an hour. So, no, there is no competition here. Only the government is permitted to deliver first-class letters. How do UPS and Fed-Ex get away with it? They slip through a hole in the law by delivering packages, not mail. And even then it wasn't easy for them to survive .

Lysander Spooner

Just as in the 19th century when the federal government waged war on Lysander Spooner's American Letter Mail Company and on Wells Fargo (and Benjamin Tucker defended "private enterprise in the letter-carrying business"), the government has been hounding private services in our time, whether through wicked labor-union bullying or by restricting their services as much as possible.

The freedom of UPS and Fed-Ex to operate at all is hard won. But the government has succeeded in destroying the private marketplace in the one area that government monopolizes by law. It took the innovation of digital messaging to finally horn in on that area. And this has worked in a big way, with a massive collapse in the number of people choosing government mails over digital alternatives.

Therefore Obama is right in a strange way: private enterprise has triumphed and government service is terrible. Everyone knows this. It is utterly preposterous that a government mail service exists at all. There is no theory of economics that supports it. There is not now nor has there ever been any economic reason for a government postal service. It should immediately be abolished, and private enterprise should take over. Even on the basis of Obama's thin and strange statements, you might argue this conclusion.

But perhaps Obama meant to suggest that the reason the post office is so bad is because it has to compete with private enterprise. If he meant that, he lives in a socialist fantasy land, and we have a very dangerous man on our hands. In the real world, no living person could possibly believe that mail service would be improved by getting rid of the efficient producers and granting a totalitarian monopoly to a single, government-backed provider.

How can a private company compete against the government? Simply because government is so terrible at what it does that even a private company that is beaten down and attacked and competed against with all the tax dollars in the world will do better than the government. It is true in mail and it is true in healthcare. But what they will not be able to do is thrive to the point of universal service, especially when there are laws that prohibit direct service-by-service competition.

Another point that needs to be addressed is Obama's claim that the government service will operate just like the private service, with self-sustaining financing.

But here is the question that socialists have never been able to answer: if the goal is to get government to operate like a private service, what is the value added by having it provided by the government in the first place? The only reason for a government service is precisely to provide financial support for an operation that is otherwise unsustainable, or else there would be no point in the government's involvement at all. And let us set aside the amazing and preposterous claim that if the government service doesn't work according to market principles, it will be shut down. Never in the entire history of government has that been true. No matter how bad, no matter how financially egregious, no matter how much the people suffer, the propensity is for government services to last forever and ever, precisely because they are protected from market-based tests of profit and loss.

The right path to healthcare reform is the market path (no subsidies, no monopolies such as drug patents, no licensure, no anything) that tends toward universal distribution at very low prices and relentless improvement in service. The wrong path is to make healthcare run the same way as the post office. Obama seems to favor the latter path, even though he admits that it is the least-well-performing one. This is surely the definition of fanaticism. If the mobs aren't angry, they should be.

Mises Daily by Robert P. Murphy | Posted on 8/12/2009

2009-08-15T10:47:00.001-04:00

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Kudlow's Cuckoo for Clunkers

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Here at Mises Daily, we often poke fun at left-liberal Democrats for their Keynesian ways. To prove that this is about ideas, not parties, today we'll focus on a recent blog post in which Republican economist Larry Kudlow came out in favor of extending the "cash-for-clunkers" program.

As we'll see, Kudlow's arguments are pure Keynesian nonsense. Sadly, many of today's ostensibly radical, "free-market" economists basically look at the economy in the same way as Paul Krugman. They just have a slight technical disagreement over the best way to prod people to spend money. Only the Austrian approach offers a different paradigm and allows us to see just what is wrong with the "aggregate demand" view of the economy. Kudlow Taking a Cue From The Juice?

Right out of the gate, Kudlow's column is impressive in its internal contradictions and utter prevarication:

As a free-market capitalist who does not believe in artificial spending and pump-priming from Uncle Sam, I'm going to eat a little crow with the following statement: At this moment in history, if we're going to use fiscal stimulus as Washington insists, I favor extending the cash-for-clunkers car-rebate program.

The above quote is truly breathtaking. It's a bit like saying, "As a self-professed vegan, I'm going to get a lot of ribbing from my associates when I declare that, if we're going to pig out on meat the way American society tells us to, then I favor barbecued pork sandwiches at my next birthday party."

Not only is Kudlow's opening paragraph nonsensical, it also provides him with a blank check for the rest of the post. He is going to take it as a given that "we're" going to use fiscal stimulus. The last time I was this stunned by such a self-serving setup was when O.J. Simpson agreed to write a book titled If I Did It.

Channeling Maynard

Now that we've recovered from the shock of Kudlow's announcement, let's at least give him a chance to explain:

In virtually no time, the clunker program has become a national pastime. It has captured the public's imagination in a way that no other federal stimulus has. Everyone is talking about it. And I truly believe that consumer spirits have been buoyed by the prospect of going out and buying a new car — even with federal assistance, and even under the duress of federal mileage standards.

Is anyone else a little concerned that Kudlow wants to spend $2 billion of our tax money in order to buoy consumer spirits? When you stop doing economics and instead wander into mass psychology, anything goes. In fact, throwing virgins into a volcano might boost GDP, depending on what the public believes. And if so, Kudlow would be giving suggestions on how to pick the unlucky girl.

At this point, the reader might be tempted to dismiss Kudlow with a reductio ad absurdum. Yet the author anticipates that move:

Now, I wouldn't want the government to pass out free money for everything. But in this particular case, the cash-for-clunkers rebate program is working. It's working so well that it's running way ahead of the computers that are administering it at the Transportation Department and Citibank.

Well, sure. That's government for you. But unlike most of the rest of the fiscal-stimulus plan, this program actually works because the federal cash rebate actually contributes to a consumer purchase. It's not just another welfare-type transfer program.

Again, it's difficult to know how to begin. What Kudlow writes is so patently ridiculous that piercing the shell of his errors is a formidable task.

For starters, what does it mean when Kudlow says that this program of passing out free money for cars is "working"? Does it mean, "People are taking the free money"? If so, does Kudlow think this wouldn't work if the money applied to DVDs, computers, and restaurant dinners?

Furthermore, in contrast to the very successful cash-for-clunkers program, what would "another welfare-type transfer program" do? Does Kudlow mean to suggest that welfare recipients are saving up their food stamps and WIC checks, rather than spending them on groceries?

It's true that most of the $787 billion "stimulus" package hasn't been spent yet, but that's not due to government incompetence. No, the politicians quite deliberately designed the program so that its maximum seduction of the voters kicks in shortly before the 2010 midterm elections. There's no point in buying votes too early; people have short memories.

Later on in the article, Kudlow again anticipates an obvious objection to his discussion:

Right about now you're probably saying, "Well, why not just spend another $100 billion and give consumers checks for everything?" Or, "Why not spend another trillion?" Well, I don't want to go there. Just this one cash-for-clunker program — that's all I want. Fund it again for a couple of billion dollars more.

Nice. I'll have to remember that line. The next time someone brings up a slippery-slope argument against me, I'll just declare, "I don't want to go there."

Bastiat Who?

Yet it gets even worse. After endorsing Keynesian pump priming, Kudlow decides to become a protectionist too:

The biggest trade out there seems to be selling the Ford Explorer and buying the Ford Focus. Of the top-five-purchased higher-mileage cars that qualify, Toyota has three, the Corolla, Prius, and Camry. The Prius is made overseas, but the other two are manufactured mostly in the United States. The number-three trade, the Honda Civic, is made in Indiana, while the Dodge Caliber and Chevrolet Cobalt rank in the top ten.

Now in fairness, Kudlow doesn't explicitly say, "Really they ought to restrict the program to 'cash-for-clunkers-as-long-as-you-buy-domestic.'" But in the context of the rest of his post, it sure sounds as if he is lamenting the fact that only some of the clunky transactions will fuel US job creation, since some of the sales will regrettably leak to foreigners.

It surprised me when Paul Krugman — who won his Nobel Memorial award for work on trade theory — so quickly abandoned free trade because of the recession. I guess it shouldn't surprise me that Larry Kudlow has done the same.

Conclusion

The true defender of the free market needs to learn more than a quick lesson about incentives and tax cuts. He or she must really understand how the market economy works, including its complex capital structure. Only the Austrian School can explain how the central bank causes boom – bust cycles, and why "stimulus" deficit spending only makes things worse.

It's bad enough when a self-professed "progressive" spouts Keynesian nonsense. But when one of the most visible cheerleaders of capitalism does the same — and proudly — it's really disappointing.

Mises Daily by George Koether | Posted on 8/11/2009

2009-08-15T10:43:00.002-04:00

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Economics of Oblivion

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ART SEE THE ONLINE VERSION...

Albert Jay Nock believed Gresham's Law operated in ideas as surely as in economics, with error displacing reason from men's minds as inexorably as bad money drives good money from men's markets. Nock's theory seems fast on the way to proof a posteriori, especially in our colleges and universities and particularly in the teaching and textbooks of the "new economics."

The "new economics" S as propounded by Professors Samuelson, Tarshis, Bowman and Bach in these textbooks used in hundreds of America's best-known colleges and universities S is nothing more than Keynesianism, which, in turn, has many points of similarity to Marxism and the theories of that hyperinflationist, John Law. In sum, the "new economics" is simply socialism, not "new" at all, but the same old bird dressed up in the feathers of "compensatory fiscal policy," "national income approach," and the "mixed economy."

Keynes, who popularized but did not spawn the "new economics," frankly admitted his affection for socialism:

The State will have to exercise a guiding influence on the propensity to consume u a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment u the necessary measures of socialization can be introduced graduallyu.[1]

Today's professors are more cautious. They look down their noses at "socialism," preferring the phrases "public economy" and "welfare economics." All the while they pay ostentatious lip service to the achievements of freedom:

[O]ur mixed free enterprise system u with all its faults, has given the world a century of progress such as an actual socialized order might find it impossible to equal. (Samuelson, p. 746)

[I]it must not be supposed that to seek profits is an act of villainyu. Naturally everyone wants to make as much income as he canu. These actions are not censured. (Tarshis, p. 30)

Traditionally, American ideology has glorified such a [private enterprise] system. Individual initiative and independence are its positive valuesu. The state exists for the individual rather than the individual for the state. (Bowman and Bach, p. 42)

The Mixed-up Economy

Naturally the professors do not want to kill the free market entirely, else where would they get prices from which to calculate their impressive computations in the "new economics"? But even while embracing "free enterprise" they suffocate it. Their consummation of this love-death is curiously contrived. They begin by assuming that laissez-faire died a deserved and natural death.

[I]nequality in access to profit and job opportunities [implies] an inherent inconsistency in the private-enterprise, free price system itself. (Bowman and Bach, p. 14)

Even if the system worked perfectly u many would not consider it idealu. The private economy is often like a machine without an effective steering wheel or governor. (Samuelson, pp. 39, 397)

We have given up our psychological and philosophical predilection for laissez-faire reluctantly. Most of us have not welcomed government intervention in economic lifeu. We have been compelled to call upon the government. (Tarshis, pp. 53l4)

Laissez-faire is dead, long live the "mixed economy!" Unfortunately it is often difficult to tell which is more mixed, the economy or the professors. They try their best to seem as sincerely opposed to "complete" socialism as they are obviously cocksure rugged individualism is gone forever. Their "mixed economy" seems to be a course midway between capitalism and socialism, with careful avoidance of the "bad" in each.

The difficulties they encounter in trying to steer between the Scylla of socialism and the Charybdis of capitalism would be amusing if the implications were not so tragic. Samuelson, for example, begins bravely:

After one has thoroughly mastered the analysis of national income determination, it is not hard to steer one's way with confidence in these seemingly difficult fields (p. 11).

Then, embarking on a carefully calculated Keynesian course, he asserts that private enterprise cannot

guarantee that there will be just exactly the required amount of investment to ensure full employment: not too little so as to cause unenlployment, nor too much so as to cause inflation u the system is without any thermostat u the system is in the lap of the gods. We may be lucky or unlucky u (pp. 261l2)

and so, to prevent the ill luck that might result from private investors following their own inclinations in a free market, Professor Samuelson pompously tells us,

Fortunately, things need not be left to luck. We shall see that perfectly sensible public and private policies can be followed which will greatly enhance the stability and productive growth of our economic system. (p. 262)

Wherewith he plots a pretty series of "propensity-to-consume" and "propensity-to-save" curves based on figures compiled by the Bureau of Labor Statistics taken from a 1944 study of urban families ("with data for all families rounded and smoothed off") and shows us how to compute, numerically, the "marginal propensity to consume (MPC)" and its "Siamese twin" the "marginal propensity to save (MPS)," triumphantly concluding: "We are now prepared for the theory of income determination." But wait, there is a catch coming.

[A] few final warnings are in orderu. Suppose my income were to go from $5000 a year to $40,000 a year. Would I spend and save my money in the same way that the budget studies showed $40,000-a-year people spend their money? Not necessarily. Especially at the beginning, I would be a nouveau riche and have different patterns of behavior. (p. 269)

Cake Is When You Eat It

So statistics are too tricky to trust as a basis for generalizations in economic theory. The elaborate equations, graphs, curves and charts, must take into account "important qualifications" and "other reasons why the propensity-to-consume schedule might shift around." Samuelson admits,

[A]t the end of World War II, many economists made a famous wrong prediction. They neglected the fact that people came out of the war with greatly u savings; for this and other reasons, the consumption schedule turned out to be at a higher level than many pessimistic predictions had indicated. Again we are reminded that no social science can have great exactitude. (pp. 269l70)

Wrong again. Economics does have great exactitude, but it is a qualitative, not a quantitative exactitude. The economist cannot know the number or size of all the cakes in the world, or when they will be eaten, but he is dead certain that whoever eats his cake no longer has it.

That is more than the Keynesians seem to know. Their theory implies you cannot have your cake until you do eat it. You can spend your way into prosperity. The formulas say so:

Could a nation fanatically addicted to deficit spending pursue such a policy for the rest of our lives and beyond? u the barrier to this would not be financial. The barrier would be political. (Samuelson, p. 416)

There is no sign that a high debt exhausts the credit of the governmentu. And since as a last resource "it can borrow from itself," there need be no fear on this account. (Tarshis, p. 535)

Even the Brannan Plan fits into the "new economics":

Government programs to limit crops u and to raise the price to the producer while keeping it low to the consumer are all understandable in terms of diagrams of supply and demand. (Samuelson, p. 452)

As for the problems of increasing American investment in foreign lands (i.e. the problem of the "dollar shortage"), Professor Tarshis has the typical Keynesian answer:

If we could only export one of the printing presses used for the manufacture of Federal Reserve notes to, let us say, China, our foreign investment would be enormously higher. (p. 391)

This "new economics" is neither new nor economics. Instead, it is a concatenation of statistics, mathematics and social philosophy used in support of the age-old sophistries of government inflationism. Every one of these old nostrums, served up with formulas and charts, was exposed long ago. The "periodic business crises," lamented as an inherent deficiency of free enterprise, have been shown to be nothing more than inevitable periods of deflation following repeated periods of inflation brought on by government-directed credit expansion. These followers of Keynes forget, when they reiterate the necessity of "maintaining full employment," that labor is more scarce than the material factors of production, that in a truly free market there can be no such thing as prolonged mass unemployment.

They forget, when they apply their formulas and extend their curves, that there are no constant magnitudes in economics, that statistics of "national income" are merely data of history not useful for the development of economic theory. They forget that trying to maintain a high "national income" with printing-press money is as hopeless and as helpless for people as trying to cure sick patients by writing unfilled prescriptions. And they forget, when advocating government intervention, that government does not own anything which is not first taken from the people, that government can only help some people at the expense of others or, by inflationism, make matters worse for everybody.

These advocates of a "mixed economy," well meaning and sincere though they may be, fail to realize that there can be no such thing as a "mixed economy" S part capitalistic and part socialist. Production is directed either by the market or by a National Production Authority. One ends by precluding the other. In the long run Americans will have either economic freedom or socialism in toto. Textbooks like these will certainly not help them retain what measure of freedom they have left.

Absent-Minded Professors

Through all the record of history is strewn the wreckage of nations ruined by inflationism. Yet these Keynesians stubbornly pursue their will-o'-the-wisp of managed money and the magic of a multiplier. When, under a government-induced inflation of the money and credit supply, unemployment shrinks or completely disappears, the phenomenon does not corroborate the "triumph" of their theories. It is due, simply, to the fact that the rise in wage rates has lagged sufficiently behind the rise in prices to cause a drop in real wage rates, precisely as the classical economists have long insisted. The Keynesians forget this obvious fact. Theirs is the economics of oblivion. One can explain the widespread popularity of socialist ideas, despite their inconsistencies, among the uninformed masses. But the authors of these textbooks claim competence in economics. Presumably they are as familiar with B÷hm-Bawerk, Jevons, Walras, Wicksell and Mises as they are with Marx and Keynes. One would not think so, to read their books.

What is even more inexplicable is their insisting they do not want socialism when their hero, Keynes, served notice more than thirty years ago:

[T]he sharp distinction, approved by custom and convention during the past two centuries, between the property and rights of a State and the property and rights of its nationals is an artificial one, which is being rapidly put out of date u and is inappropriate to modern socialistic conceptions of the relations between the State and its citizens.[2]

and sixteen years later added,

It will be, moreover, a great advantage to the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain and will need no revolution.[3]

Apparently Gresham's Law is functioning S as Albert Nock felt it would S upon the minds of Professors Samuelson, Tarshis, Bowman and Bach.

Mises Daily by Art Carden | Posted on 8/10/2009

2009-08-15T10:41:00.001-04:00

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Video Games and Violence

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How do our choices of amusements affect our behavior and, therefore, society? Whenever newer, more violent video games are released, some commentators inevitably call for government regulation because of studies linking video games and violence. This became an issue at the beginning of this year when some officials argued for federal labeling guidelines.

Some time ago, I heard part of a radio program in which the host and her guests discussed how music, movies, and video games affect people's behavior. I didn't get to listen to the entire program, but there were a couple of things said during the part I listened to that I found interesting.

First, the host asked whether the fact that someone is committing crimes vicariously in video games — for example, taking on the role of a criminal in Grand Theft Auto — impacts their real-world behavior.

Second, one of the guests questioned whether the physical activity people are getting by playing Nintendo Wii is really doing much good for their health. Legislation concerning what children and adults do with their free time is often supported by "expert" analysis along these lines. Thus, attempts to regulate video games will have important implications for our safety and liberty.

The effect of video games on crime is not as obvious as it is often suggested. The same guest mentioned that the perpetrators of the 1999 Columbine school shootings were avid video game players and reported that, according to rumors, one of them had practiced for the raid by creating a mock-up of their school using a map editor from one of their favorite first-person shooters. Statistically, people who play violent video games are also those who are more likely to commit heinous crimes than others, and some experts infer from this correlation that violent video games encourage violence. On its face, the connection seems clear.

However, whether there is a real, causal relationship between video games and violence, or whether that relationship is correlation, is a deeper and more complex issue. For example, another plausible explanation is that the people who are likely to commit crimes are also likely to be attracted to violent video games. Therefore, what we observe is simply correlation, with both phenomena being explained by a common third factor.

The hypothesis that video games cause crime is further complicated by the idea that violent video games might actually serve as a substitute for violent crime — that is, people who are likely to commit violent crimes might be able to get their violence "fix" by playing video games instead of committing crimes. Regulating video games would thus treat a symptom of the disease, but not the disease itself. Moreover, if video games are indeed a substitute for real-life violence, regulating the games might even make violence worse.

Studies of the relationship between pornography and rape suggest that this thesis is more plausible than it might seem at first. Separate empirical studies by Winai Wongsurat and Todd Kendall have shown that increased access to pornography actually leads to reductions in the rates of divorce and rape. Wongsurawat cites the availability of PO boxes, which increase access to pornographic magazines but do not have an independent effect on crime, to identify the effect of pornography on sex crimes and divorce. Kendall looks specifically at the diffusion of internet pornography and shows that access to the internet and (presumably) internet pornography is associated with reductions in sex crime. Kendall's hypothesis that this is a causal relationship is strengthened by the fact that the effect is strongest for crimes committed by the group whose consumption of pornography is most likely to be affected by access to the internet: young males who live with their parents.

I am not aware of any studies that use similar methods to analyze the effect of video games on crime. However, if people are going to advocate restrictions on liberty, the burden of proof is on them to demonstrate that their hypothesized relationship is real and widespread enough to cause concern. For even if it is shown that violent video games lead to more crime, the case for government intervention is complicated by measurement issues, concerns over personal liberty and personal privacy, and the tendency for regulation to lead to ever more regulation.

Taking an "I-know-it-when-I-see-it" approach to identifying unacceptable video game violence — much like the standards currently used to define pornography — would introduce substantial uncertainty into production decisions, because there are no objective standards that define "acceptable" and "unacceptable." Politically made rules are also subject to political manipulation and a cat-and-mouse game of regulate-and-evade played by the regulators and the regulated. This will wastefully consume resources and lead to further encroachments on individual freedom as standards are contested.

Attempts to regulate cultural goods like video games may involve far more than considerations of personal liberties alone. Regulations that restrict access to pornography, for example, may actually increase the social problems they are intended to correct. Regulations restricting access to violent video games could do the same.

Mises Daily by Jörg Guido Hülsmann and Stephan Kinsella | Posted on 8/7/2009

2009-08-15T10:39:00.001-04:00

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Essays in Honor of Hans-Hermann Hoppe

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Hoppe Festschrift cover

Hans-Hermann Hoppe is one of the most important scholars of our time. He has made pioneering contributions to sociology, economics, philosophy, and history. He is the dean of the present-day Austrian School of economics, and is famous as a libertarian philosopher. He and his writings have inspired scholars all over the world to follow in his footsteps and to provide a scientific foundation for individual freedom and a free society. The following pages are a modest attempt to honor the occasion of Professor Hoppe's 60th birthday. The contributors are former students, colleagues, and collaborators, united in admiration for, and friendship with, the laureate.

Hans-Hermann Hoppe was born in the German town of Peine on September 2, 1949. In the late 1960s and early 1970s he studied history, sociology, and philosophy at the universities of Saarbrücken and Frankfurt am Main. His 1974 doctoral dissertation, published in 1976, dealt with the praxeological foundations of epistemology. Its central thesis was that all cognitive processes, and thus the sciences, are but special forms of human action. It followed that the laws of action were also the basic laws of epistemology. Hoppe would soon discover that, a few years before him, the Austrian economist Ludwig von Mises had come to essentially the same conclusion. This was his first contact with Austro-libertarianism and it was the beginning of a process in the course of which young Hoppe, at the time a left-leaning statist, came to revise his political beliefs. The process accelerated when he started reading Murray Rothbard and discovered that Misesian "subjectivist" economics could be combined with objective political philosophy. But he first continued his philosophical studies, developing a new epistemology and methodology of the social sciences, based on the insights he had received from Mises and Rothbard.

Eventually, Hoppe turned into a full-blown Austrian when, in the early 1980s, he went to the United States on a prestigious Heisenberg fellowship. This time his research project concerned political philosophy, but it was again squarely built on Austrian economics. In 1986, he became Rothbard's colleague at the University of Nevada, Las Vegas (UNLV), where he would teach for the next 21 years. After Rothbard's untimely death in 1995, Professor Hoppe assumed a place of uncontested leadership among Austro-libertarian scholars, becoming the editor of the Journal of Libertarian Studies, a coeditor of the Review of Austrian Economics, and then a coeditor of the Quarterly Journal of Austrian Economics. Professor Hoppe, now Professor Emeritus of Economics at UNLV and Distinguished Fellow with the Ludwig von Mises Institute, also serves on on the editorial board of Libertarian Papers. In addition to authoring numerous scholarly articles, his important books include Handeln und Erkennen (1976), Kritik der Kausalwissenschaftlichen Sozialforschung (1983), Eigentum, Anarchie, und Staat (1987), A Theory of Socialism and Capitalism (1989), The Economics and Ethics of Private Property (1993, enlarged 2nd edition 2006), Democracy: The God that Failed (2001), and The Myth of National Defense (editor, 2003). His works have been translated into at least 21 languages, not counting English.[1]

Among Professor Hoppe's many achievements we should stress in particular his brilliant critique of positivist methodology as applied to the social sciences, a new praxeological approach to political philosophy, an encompassing comparative analysis of socialism and capitalism, and a theory of secession as a means of political reform. Most importantly, in his book Democracy: The God that Failed, Professor Hoppe has delivered a profound critique of democracy, as well as an original reinterpretation of Western history in the twentieth century, both of which have stirred international debate in academia and among the wider public. Other influential works from his pen have dealt with the role of migrations within a free society, and with the role of public intellectuals in political transformation processes. Moreover, he has excelled as an historian of thought and made path-breaking contributions to other areas such as monopoly theory; the theory of public goods; the sociology of taxation; the positive methodology of the social sciences; the theory of risk; the production of security; the transformation of formerly socialist countries; and the evolution of monetary institutions and their impact on international relations. And Professor Hoppe's work is ongoing: he is currently working on a major book project that will restate and elaborate on his previous work in the fields of epistemology and ethics — more generally, the nature of human rationality. The goal of the book is to provide "a systematic and interdisciplinary reconstruction of human history (pre-history, hunter-gatherer societies, agricultural societies, industrial societies)."[2]

The preceding list reveals that Professor Hoppe is not only an academic and scholar, but also a public intellectual of the first order. He has tackled important and controversial subjects even where this was likely to bring him into conflict with colleagues, politicians, businessmen, and conventional wisdom. He has not shied away from advancing provocative ideas, but has done so in a thoughtful and clear-cut manner that, more often than not, has garnered enthusiastic acclaim in lecture halls and among readers all over the world. His competent verve has inspired students and colleagues, such as those who have contributed to the present volume.

Finally Professor Hoppe has shown leadership not only in the realm of ideas, but also through the practical promotion of scientific enquiry and open debate. Most notably, in August 2005, he initiated the foundation of the international Property and Freedom Society, which eventually held its inaugural meeting in May 2006 and elected him president.

The purpose of the Property and Freedom Society is to promote the scientific debate of the politically relevant questions of our time without regard to the concerns of party politics. It acknowledges the expediency of intransigent libertarian radicalism, which, in the long run, is the surest path to a free society. It therefore seeks to promote Austro-libertarianism, which ties back to the 19th-century economists Frédéric Bastiat and Gustave de Molinari. It stands for justly acquired private property, freedom of contract, freedom of association — which logically implies the right to not associate with, or to discriminate against anyone, in one's personal and business relations — and unconditional free trade. It condemns imperialism and militarism and their fomenters, and champions peace. It rejects positivism, relativism, and egalitarianism in any form, whether of "outcome" or "opportunity," and it has an outspoken distaste for politics and politicians.[3]

The present liber amicorum is testimony to the fact that these ideals have a universal appeal and inspire scholars from all over the world. It is therefore fitting that the name of Hoppe's beloved Property and Freedom Society inspire the title of the present volume.

The editors wish to express their appreciation for the enthusiastic cooperation of all who have helped with this project. Our special thanks go to the contributors, as well as to Mr. Llewellyn Rockwell for his unflagging support in producing and publishing the present beautiful volume. We also gratefully acknowledge the efficient editorial assistance from Mrs. Judy Thommesen and Mrs. Kathy White, both at the Mises Institute, and translation assistance from Mrs. Arlene Oost-Zinner.

Mises Daily by Cecil Palmer | Posted on 8/6/2009

2009-08-15T10:37:00.001-04:00

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Rereading Our Enemy, the State

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Our Enemy, the State

For many more years than I now care to revive in my memory, I have publicly and privately proclaimed that there are at least three outstanding books in the English language which, if they had been read as widely and thoughtfully as they deserve to be, might have spared the world many of its present misfortunes. The books I have in mind are Milton's Areopagitica, Mill's On Liberty, and Spencer's Man versus the State.

The lamps of liberty are going out, one by one, throughout the whole world. Indeed, this widening darkness is the supreme human tragedy of the age in which we live. In our desire to flirt with knowledge, we have jilted wisdom. There is only one end to this illicit kissing of the ephemeral – a stubborn, stupid unwillingness to embrace the eternal. Moral rot is eating away the very roots of individualism, and thereby destroying the soul of man at the fearful price of granting secular exaltation to a soulless State.

From now onwards I, for one, intend to add a fourth book to the jeweled necklace of libertarian literature. Our Enemy, the State, by the late Albert Jay Nock, is given this high precedence in my humble estimation because it has in common with the classics I have mentioned, all those qualities of clear thinking, objective presentation and lucid exposition which distinguish the wise philosopher from the merely intellectual pamphleteer. The one writes for all eternity: the other for the moving moment that must inevitably pass away.

Superficially, one of the grimmest paradoxes of the twentieth century is the emergence of the atom bomb at a time when it is painfully evident that the overwhelming majority of mankind is afflicted with delayed adolescence. Substantially, however, it is not a paradox at all. May it not be that the universality of the adolescence and the splitting of the atom are patterned in the natural law of cause and effect? Is it unlikely that we have been inflicted with the super-scientific bomb because we have refused to grow up and because we have failed to cherish and honor the spiritual bounty of our inheritance?

Albert Jay Nock obviously absorbed every word of Herbert Spencer's masterpiece and, having done so, his own mighty pen began where Spencer left off. Nock's prescience is uncanny. Reading his book in this Year of Grace, 1952, it is difficult to realize that it was written in 1935. It reads like contemporary journalism, but with this tremendous difference: it is written in prose of such majesty and simple beauty that it will rank, for all time, as imperishable literature. Furthermore, it states a case against Statism that is as fearless and provocative as it is profound and unchallengeable.

The State, as Nock implies over and over again, is merely the politicians' dreams come true. It is political conjuring, whereby "all the people all the time" are invited to believe that the State and Government are one and the same thing. The truth is, of course, that whereas Government has its roots in society, the State is a parasitical, malignant growth that seeks to destroy society by bribery, corruption and compulsion.

Our Enemy, the State, as the very title emphasizes, warns every thinking man and woman to remember that the price of human liberty is eternal vigilance. It stresses, also, that liberty, unlike justice, is not a right. It is an attitude of mind, and a beatitude of the soul.

This very great book reminds us that the State is at once a myth and a terrible reality. It is a myth in the sense that it has no validity outside the twisted, crooked mentalities of totalitarians. It is also a reality in the sense that, whenever it is allowed to usurp the throne of Government, it not only commandeers the power that corrupts but, in order to give finality to its ascendancy, it must acquire for itself, and for itself alone, the absolute power that corrupts absolutely.

Albert Jay Nock made the point that history divorced from political economy is a story without background. The present writer ventures the assertion that political economy divorced from history is about as utilitarian as a teapot without a spout.

The great value of Nock's diagnosis of Statism, and all its implications, is that it establishes a pregnant matrimonial alliance between philosophical history and political science. We are able, therefore, to see the evolutions and revolutions of human understanding, and misunderstanding, in perspective.

In other words, the author enables us to contemplate objectively the State's progressive efforts to subjugate society. Statism is political ideology, seeking outlets in the body politic whereby it can subtly transmute social power into State power. Communism, socialism, fascism, and all the other left-wing ideological variations, are the outward and visible signs of this inward and secular infiltration.

Herbert Spencer invited his generation to recognize the natural antagonisms that must exist between man, as man, and the State, as master. Nock was able to extend and widen the invitation for his own day and generation. Much that Spencer conceived in creative and prophetic intuition, Nock saw with his own eyes as contemporary phenomena. But, like Spencer, he too reinforced his fine scholarship with intuitive "second sight" into the future.

It is impossible to read this burning, passionate essay on the State as tyrant without realizing that man himself is all too frequently his own worst enemy.

It would be bad enough if we merely admitted that man is in danger of selling his soul for a mess of political pottage, in terms of the so-called Welfare State. Unhappily, truth demands the unequivocal admission that man is, today, showing too many signs of his guilty willingness to give his soul away, in blind obedience to a State masquerading as Father Christmas.

I could wish that a thousand millionaires would pool their petty cash in support of a literary crusade dynamically inspired with the will and purpose to make this dead man's masterpiece a living monument in the land of his birth, and beyond.

Our Enemy, the State should be in the hands, and in the minds, of the new and rising generation which is being so cleverly and so wickedly seduced by power-drunk State idolaters. It is a book which offers inspired guidance to those who have ventured off the known way, only to find themselves in a jungle of frustration and perplexity.

Above all, it is a sincere, honest, courageous and finely documented libertarian approach to the urgent spiritual, social and economic problems which beset us, and which mankind must resolve if declining civilization is to escape total eclipse.

Mises Daily by Art Carden | Posted on 8/5/2009

2009-08-15T10:25:00.000-04:00

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The Unintended Consequences of Rent Control

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Suppose that you want to destroy a city. Should you bomb it, or would it be sufficient just to impose rent control? It's a bracing question at first, but some economists have argued that the two are roughly equivalent. When the price of rent is held below the market-clearing level, shortages emerge and the housing stock rapidly deteriorates.

Those who advocate price controls often do so on the basis of their views on distributive justice. It isn't right, they might argue, that someone who has lived somewhere his entire life should be priced out of his neighborhood; nor is it right for fat-cat landlords to enjoy high rents simply because a lot of people want to live in New York or San Francisco. The typical rent control proposal is based on the assumption that the same amount of economic activity will take place but with a different distributional outcome. That is, the same number of apartments will be provided, and they will be provided to the same people and in the same quality. The only difference, according to rent control advocates, is that the hapless renter won't have to line the landlord's pockets. Any change in the housing stock is then viewed as a moral failing on the part of the landlord.

According to rent control advocates, landlords aren't working for the high rents they enjoy. They are just sitting around, watching the prices increase. This view, however, ignores the information-transmitting function of prices. A building can be used for many different things. It can be used for rental housing. It can be used for condos. It can be used for office space. It can be torn down, and the land can be used to grow crops. Prices tell us the most valuable use of the building and land. Under rent control laws, the signals are distorted.

In her 2008 article, Norcross reported that there were 43,317 apartments in New York City controlled by 1947 rent-control laws and 1,043,677 "rent-stabilized" units. This was about 70 percent of the New York City housing stock. Originally, rent control was a temporary program aimed at helping people find places to live in New York City without paying exorbitant rents during World War II. Now, over sixty years after the war has ended, rent control still dominates the market.

Norcross reports that there are 43,317 apartments in New York City controlled by 1947 rent control laws and 1,043,677 "rent-stabilized" units; in total, she tells us that this is about 70 percent of New York City's housing stock. Originally, rent control was a temporary program aimed at helping people find places to live in New York City without paying exorbitant rents during World War II. Now, over sixty years after the war has ended, rent control still dominates the market.

At the height of the debate over whether capitalism or socialism was the most productive way to run a society, Ludwig von Mises argued that government intervention begets further government intervention. When rents are held below their market-clearing value, people take rental units off the market or convert existing units into condominiums, luxury housing, or offices. Something like "key money" might also emerge, whereby the rent is held artificially low, but the landlord demands a massive payment to rent the apartment's key. Other enterprising landlords have attempted to get around the restriction by providing "furnished" apartments, for which the tenant pays the controlled rent but must also pay a marked-up price to rent the apartment's furniture. Government officials and landlords find themselves in an endless cat-and-mouse game of regulate-and-evade that has created its own legal infrastructure in the form of the New York City Housing Court. The court has fifty judges and handles over three hundred thousand cases annually.

When will they learn?

Rent control also destroys landlords' incentives to maintain the housing stock. With rent control in place, people are lined up for housing, and therefore, the landlord can discriminate on the basis of who will take the most meager accommodations. Eliminating a landlord's ability to enjoy the return from investing in higher-quality housing means eliminating the landlord's incentive to invest in basic upkeep.

So which is worse, rent control or bombs? On the Mises Institute's website, Pace University economist Joseph Salerno has a video lecture on prices, in which he offers a compelling visual exercise. He shows his audience pictures of destroyed urban areas and asks whether these are areas that have been subject to rent control or whether these are areas that have been bombed. It isn't easy to tell, but the lack of difference suggests a tragic but predictable irony. When a city is bombed, it is destroyed by people with evil intentions. When a city is subjected to rent control, it is destroyed by people with good intentions.

Mises Daily by Butler Shaffer | Posted on 8/4/2009

2009-08-15T09:10:00.001-04:00

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Meet the Enemy

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Half a century ago, as I was struggling to articulate a social and political philosophy with which my inner voices could find approval, I discovered one of my earliest introductions to what has since come to be known as libertarian thought. I had read – and enjoyed – classical philosophers John Locke, John Stuart Mill, the Stoics, and others who took seriously the plight of the individual at the hands of political systems.

Discovering the writings of H.L. Mencken during the early days of my inquiries introduced me to a number of contemporary critics of governmental behavior. It was at this time that I read a book, titled Our Enemy, the State and written by Albert Jay Nock, that began the real transformation of my thinking. I soon became less interested in the pursuit of abstract philosophic reasoning and increasingly focused on the realpolitik of political systems.

A major problem with political philosophies is that they involve the playing out of the abstract thoughts of their authors. Are the differing visions of a "state of nature" as seen by Hobbes, Rousseau, or Locke grounded in empirical studies of the history of stateless societies, or are they only the projection of the life experiences, intuitive speculations, indoctrinations, the collective unconscious, and other internally generated influences upon the mind of the writer? As our understanding of the world is grounded in subjectivity, the same question needs to be asked of anyone engaged in speculative philosophy: is it possible to stand outside our own minds and comment upon the world free of the content of our own thinking? Our understanding of the world is grounded in subjectivity, and we are easily seduced into confusing the reality of political systems with our expectations as to how such systems ought to work. Was Heisenberg right in telling us that the observer is an indispensable ingredient in what is being observed?

Who was this observer I had just discovered? Albert Jay Nock began his career as an Episcopal priest, later turning to journalism. At different times, he wrote for the magazines The Nation and Freeman, publications with different perspectives than their current versions. A self-described Jeffersonian and Georgist, he was an articulate spokesman for classical liberalism and an advocate of free markets and private property who had a strong distrust of power. He wrote at a time when the concept of "liberalism" was being intellectually and politically corrupted into its antithesis of the state-directed society; and he was troubled by the detrimental effect such a transformation would have on both individuals and the culture when the resulting debasement of character and behavior became accepted as the norm.

Nock had an abiding interest in the epistemological question that asks how we know what we know and how changes in our thinking generate the outward modifications that occur in our world. In his classic Memoirs of a Superfluous Man, he observed that

the most significant thing about [a man] is what he thinks; and significant also is how he came to think it, why he continued to think it, or, if he did not continue, what the influences were which caused him to change his mind.

Albert Jay Nock was what in my youth would have been described as an exponent of a "liberal arts" education. He understood not only that "ideas have consequences" – a proposition later expounded upon by Richard Weaver – but that organizations have a certain dynamic which, when mobilized, can generate unexpected consequences. He acknowledged the pursuit of individual self-interest as a principal motivating factor, but he saw how corporate and political interests can combine to promote such interests, coercively, at the expense of others.

Nock's intellectual development was greatly influenced by the works of the German economist and sociologist, Franz Oppenheimer. Nock focused much of his attention on Oppenheimer's analysis of the two principal means – expounded upon in Der Staat – by which human needs can be met. Satisfying such needs through the exercise of "one's own labor and the equivalent exchange of one's own labor for the labor of others" Oppenheimer defined as "economic means." By contrast, pursuing such interests through "the unrequited appropriation of the labor of others" he termed "political means." Nock elaborates upon Oppenheimer's thesis to describe how the state actually works. Because people tend to act with "the least possible exertion" in pursuing their ends, they will tend to prefer the political to the economic means, a trait that has produced the modern corporate-state – or what Nock referred to as the "merchant-State."

The efforts of earlier political philosophers to explain the origins of the state either as an expression of "divine will" or as the product of an alleged "social contract" begin to melt away when confronted by Nock's realism. He tells us that the state has its genesis not in some highly principled pursuit of a "common will" to resist some imagined perverse human nature, but in nothing more elevated than "conquest and confiscation." He echoes Voltaire's observation that "the art of government consists in taking as much money as possible from one class of the citizens to give to the other." The Watergate-era mantra "follow the money" reverberates this more-prosaic theme.

Those who chide critics of the state as being "idealistic" or "utopian" must, themselves, answer for their visionary faith that state power could be made to restrain itself. As Nock understood, and as more recent history confirms, it is those who believe that written constitutions can protect the individual from the exercise of state power who hold to a baseless idealism, particularly when it is the state's judicial powers of interpretation that define the range of such powers. Words are abstractions that never correlate with what they purport to describe and must, therefore, be interpreted.

Supreme Court decisions continue to affirm Nock's realistic assessment that "anything may be made to mean anything." The 20th century alone provided thinkers such as Nock with a perspective that allowed them to see how their earlier speculations about the nature of the state actually played out. The post-9/11 years have seen a wholesale retreat by the American government from the illusion of limited government, with constitutional prescriptions for and proscriptions against state power widely ignored. Anthony de Jasay has added his critique of the imaginary nature of limited government by observing that "collective choice is never independent of what significant numbers of individuals wish it to be." Has history shown that political systems and the citizenry retain the sense of mutuality that is implicit in the "contract" theory that supposedly underlies the modern state? Does the avowed purpose of political systems to protect the lives, liberty, and property interests of individuals remain intact?

The modern state increasingly manifests itself as the ill it was the purpose of centuries-old philosophies to identify, and of constitutional systems to prevent. This raises the question whether the very existence of the state, with its self-interested exercise of a monopoly on the use of force, could portend other than the continuing cycles of wars, repression, economic dislocations, and other forms of collective conflict and disorder. Will today's young minds, desirous of understanding the reality rather than just a theory of politics grounded in hope, be able to resist a shift in thinking such as is offered by Nock and others who offer explanations for statism grounded in principled pragmatism?

Such a question brings us to a consideration of Nock's purposes in writing. He had no interest in political reforms, seeing such efforts as superficial in nature. Neither was he motivated by a desire to educate mass-minded men and women, as such people lacked both the depth of character and the intellectual capacity to understand the principles underlying "the humane life."

He saw his task, rather, as being to care for those he called "the Remnant," those independent men and women whose intellectual and emotional inquisitiveness provide them a profound understanding of such principles. Unlike mass-minded persons who are easily manipulated and mobilized in service to various institutional causes, the Remnant remain skeptical of proselytizers who seek converts to ideologies, or who desire to save mankind. Trying to find members of the Remnant will be futile, Nock tells us, for it is they who will seek out like-minded spirits. Nock sees his role as providing the support and nurturing to such individuals who will, once the civilization has collapsed, be the ones to "build up a new society" on the basis of their understanding of the "august order of nature." For such people alone, Nock tells us, was this book written.

Our Enemy, the State was first published in 1935, when the economic consequences of the New Deal were beginning to be felt. In 1943, Nock spoke of writing a second edition, to elaborate on these economic effects. In the summer of 1945, however, Nock died without accomplishing this task. Nonetheless, as his friend Frank Chodorov commented in his preface to this work, "Our Enemy, the State needs no support," and stands as a sufficient indictment of political systems.

Mises Daily by Robert P. Murphy | Posted on 8/3/2009

2009-08-15T09:05:00.002-04:00

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Brad DeLong’s Erroneous Defense of Greenspan

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Brad DeLong and Alan Greenspan

Even as the Austrian critique of Greenspan's housing bubble gains more adherents, some economists have tried to exonerate the former Maestro. Previously on these pages, I have responded to Henderson and Hummel's defense of the former Fed chairman, and I also took on Greenspan's own list of excuses.

In today's article I'll go through Brad DeLong's recent defense of Greenspan's policies.[1] DeLong's argument is of particular interest to Austrian economists, because he relies on Wicksell's "natural rate" of interest, a concept that Ludwig von Mises adopted for his own explanation of the business cycle.

As we'll see, I find DeLong's defense somewhat perplexing. Even on the Wicksellian criteria that DeLong sets up, Greenspan failed and should be held at least partially accountable for the housing boom. Greenspan, Wicksell, and the "Natural Rate" of Interest

To his credit, DeLong admits that, "In hindsight, Greenspan was wrong." However, DeLong argues that perhaps Greenspan took a proper gamble when he began slashing interest rates following the dot-com crash. At the very least, DeLong claims, the conventional critique of Greenspan misses its mark:

People claim that Greenspan's Fed "aggressively pushed interest rates below a natural level." But what is the natural level? In the 1920s, Swedish economist Knut Wicksell defined it as the interest rate at which, economy-wide, desired investment equals desired savings, implying no upward pressure on consumer prices, resource prices, or wages as aggregate demand outruns supply, and no downward pressure on these prices as supply exceeds demand.

On Wicksell's definition…the market interest rate was, if anything, above the natural interest rate in the early 2000s: the threat was deflation, not accelerating inflation. The natural interest rate was low because, as the Fed's current chairman Ben Bernanke explained at the time, the world had a global savings glut (or, rather, a global investment deficiency).

You can argue that Greenspan's policies in the early 2000s were wrong. But you cannot argue that he aggressively pushed the interest rate below its natural level. Rather, Greenspan's mistake — if it was a mistake — was his failure to overrule the market and aggressively push the interest rate up above its natural rate, which would have deepened and prolonged the recession that started in 2001. [emphasis added]

Before looking at the substance of DeLong's claims, let's pause to note a rhetorical trick. Remember, we are talking about Alan Greenspan, who was the head of a nationwide cartel of banks established by the government in 1913. From January 2001 to January 2004, Greenspan wrote electronic checks backed up purely by his charisma, in order to expand the monetary base $140 billion — a 23 percent total increase over the three-year period. Now whether you think Greenspan acted wisely or foolishly, surely we can agree that his behavior should not be classified as a "failure to overrule the market"!

The very existence of the Federal Reserve is a slap in the face to the purely free market. Back in 1913, when the Fed was established, the big bankers' propagandists told the American people that a central bank (though they didn't use such a scary term) was necessary to (1) avoid business fluctuations and (2) preserve the value of the dollar. The Fed's record on those two counts is about as good as the record of any other massive government program. No matter what happened since 1913 — and that includes the Great Depression as well as our current crisis — it is on the heads of Fed officials. They said they had the expertise to steer the market, and they were frequently proven wrong by a crashing economy.

Did Greenspan Really Follow Wicksell's Advice?

I know that some Austrians historians of economic thought have, in private email discussions, challenged DeLong's interpretation of Wicksell.[2] I am not an authority on the subject, so I leave that question aside.

What's ironic is that even if we accept DeLong's reading of Wicksell at face value, he still hasn't exonerated Greenspan. According to the portion I italicized in the block quotation above, if Greenspan had actually kept the market rate of interest equal to the Wicksellian natural rate, then consumer prices, wages, and resource prices would have remained stable throughout the years when the housing bubble really took off.

Yet this is obviously not what happened. All three categories of prices rose during the period of ultralow interest rates. Thus, even if DeLong's interpretation of Wicksell is correct, Greenspan still fails the test. Let's give some examples to see with our own eyes.

The following chart shows the year — year percentage increase in the Consumer Price Index over the last twenty years:

Clearly, Greenspan didn't obey Wicksell's dictum when it came to consumer prices. They rose throughout his tenure, even during the early 2000s when he was allegedly removing upward pressure on prices.

Perhaps DeLong would argue that the rate of consumer price inflation was lower than usual during the housing boom years, but even there the 2002 experience was not qualitatively different from the 1998 experience, and by 2003, annual price inflation was back up to 3 percent, which is a far cry from zero percent — the target that DeLong's own test requires.

The situation is more extreme when it comes to commodity prices. First let's look at oil prices as an example:

Here, it looks like Greenspan generally followed Wicksell's advice until the housing boom really kicked in. Now in DeLong's defense, he could point out that oil prices fell sharply following the dot-com crash, and they remained flat into 2002.

But then they took off like a rocket. From June 2003 to June 2004, Greenspan held the federal funds target at an unusually low 1 percent, so this is where the action would occur, if we want to test just how "natural" his policy was. The annual average price of oil jumped more than $10 a barrel from 2003 to 2004, a whopping 34 percent increase in a single year. As the chart shows, there was no looking back. Oil zoomed ever upward, finally peaking at more than $140 per barrel in July 2008.

Greenspan fared no better at containing gold prices, either. From June 2003 to June 2004 — the period when he pinned the fed funds target at 1 percent — gold increased more than $35 per ounce, an annual increase of almost 10 percent.

As the chart above illustrates, there were large portions of Greenspan's tenure when he held gold prices steady, or even allowed them to fall — but not in the low-interest rate years of the housing boom. Rather than crediting him with maintaining stable commodity prices, the chart above shows that we should accuse Greenspan of setting off a boom in gold prices as early as 2001.

Conclusion

The evidence against Alan Greenspan continues to mount. Brad DeLong's invocation of Knut Wicksell in an attempt to defend Greenspan turns out to be just one more indictment of him. No matter how you slice it, the former Maestro spawned housing, commodity, and stock booms with his reckless policies.

Mises Daily by Gabriel E. Vidal | Posted on 7/31/2009

2009-07-31T19:33:00.011-04:00

Caritas in Iustitia Distributiva

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Pope Benedict XVIThe encyclical Caritas in Veritate or "Love in Truth," was published on July 7th, 2009. In it, Pope Benedict XVI describes how the social doctrine of the Church is to be framed by love in truth: "The Church does not have technical solutions to offer" to the grave socioeconomic problems we face, but "she does have a mission to truth to accomplish" (Caritas in Veritate paragraph #9). Only with truth, is man capable of grasping the values that are necessary to ensure that political systems do not trample on freedom and do deliver the justice they promise.

At an interpersonal and small group level, "to love someone is to desire another person's good" (#7). At a larger societal level, the Pope points to a love that desires the "common good," that is, the good of the community of people. Every Christian, he asserts, is called to practice this love of the common good according to his vocation and level of influence, just as he is called to practice the love of neighbor directly and outside the mediation of institutions (#7). This love for the common good must take place within an environment of ethics and freedom in order to produce integral human development. Economic structures and institutions are by their nature instruments of human freedom: "Only when it is free, can development be integrally human" (#17). The economy, therefore, is not autonomous and cannot be divorced from ethics. When such a separation is attempted, economic, social, and political systems trample on freedom and fail to deliver the justice they promise (#34).

40 years ago, Pope Paul VI's Populorum Progressio included, among other goals, rescuing people from hunger, deprivation, diseases, and illiteracy. It also advocated promoting their active participation in the economic process, their evolution into educated societies, and the consolidation of democratic regimes capable of freedom and peace. In Caritas in Veritate, Pope Benedict asks to what extent these expectations have been met by the model of development adopted in the past decades, particularly in the light of successive economic crises. Since these expectations have not been met under the current model, Benedict calls for a redefinition of the meaning and the goals of economics (#32).

From a classical-liberal, Austrian, and free-market perspective, many will agree with the general framework that the Pope has outlined above, particularly those who accept an Aristotelian, Thomistic, and Rothbardian approach to the ethical foundations of voluntary exchange. However, when Benedict transitions from a philosophical framework to specific economic analysis and policy recommendations, particularly as he tries to carefully maintain a "middle of the road" approach to the logic of the market and economic crises, many will take exception.

Perhaps one policy recommendation encapsulates the problem: Benedict calls for a reform of the United Nations so that the concept of the family of nations can acquire real teeth.… To arrive at a political, juridical, and economic order which can increase and give direction to international cooperation for the development of all peoples in solidarity. To manage the global economy; to revive economies hit by the crisis; to avoid any deterioration of the present crisis and the greater imbalances that would result … for all this, there is urgent need of a true world political authority. (#67)

Oh, my! Whatever happened to "the Pope is infallible"??? Benedict's logical support for this policy stems from the following faulty arguments:

1. The market is the institution that permits the exchange of goods of equivalent value between two individuals in order to satisfy their needs (commutative justice) (#35).

2. Since the market cannot solve all social problems, since it creates problems of its own, and since economic action is merely an engine of wealth creation, it must be complemented by the political action of the state to intervene for the purposes of redistribution of wealth (distributive justice) (#36).

3. Profit is a means for the allocation of scarce resources, but profit risks destroying wealth and creating poverty if it does not recognize the common good as its ultimate goal (#21).

4. The market cannot produce by itself the social cohesion that it requires to function well (#35).

5. In a world economy, redistribution of wealth and regulation of financial institutions cannot be carried out by the current territorial constraints of states; therefore, a world political authority is needed.

Since Benedict makes a call for truth, the reader should expect the encyclical to go through a step-by-step logical deduction, via cause and effect relationships, to connect voluntary exchanges between individuals in a free market to the deficiencies observed in the current model of economic development. Benedict does not take this approach. Instead, he simply assumes that this correlation is obvious and true.

But Benedict's definitions of the market and of commutative justice are mistaken. In a free market, individuals do not exchange goods of equivalent value. They exchange goods of unequal value. If the values were equivalent, market participants would be indifferent and there would be no reason to make the exchange. It is precisely because a buyer values an apple more than 25 cents and because a seller values 25 cents more than an apple, that the buy/sell transaction takes place. This error originated in Aristotle's treatment of exchange in his Nichomachean Ethics (Book V, p. 5), it was restated in Aquinas's treatment of commutative justice in his Summa Theologica (q. 61 a. 2) and is repeated by Pope Benedict.

As Ludwig von Mises argues, "it is precisely the disparity in the value attached to the objects exchanged that results in their being exchanged." This insight means, Mises continues, that "just as there is no standard and no measurement of sexual love, of friendship and sympathy, and of aesthetic enjoyment, so there is no measurement of the value of commodities."[1] We cannot measure value, we can only prefer one good to another. In other words, I can say "I prefer this apple to 25 cents; therefore I will make the exchange," or "I prefer Susan to Beth; therefore I will ask Susan to dinner," but I cannot say "this apple is worth 10% more than 25 cents" or "I like Susan three times as much as Beth." Since we cannot measure value, we cannot define the market as the place where actors establish equivalency of value between goods.

Now why is this such a critical insight? If central planners and their supporters believe they can objectively measure the value of goods, then they will believe that equivalence can be established. It follows that belief in redistribution of income and wealth — based on an arbitrary standard — can be justified. Once a policy of redistribution is pursued, it is a very small step for the state and its apologists to justify intervention in matters of commutative justice itself, such as wages, prices, costs, and interest rates. Examples of these errors in theory and practice abound, but the most notorious one is Marx's labor theory, which erroneously states that capitalists rob workers of the surplus value of their work and maintain them at subsistence income levels. According to the socialists who follow Marx, then, the state is justified not only in expropriating the means of production to correct this distributive injustice, but also in managing the factors of production and the economy as a whole by central planning, statistics, and other mathematical tools.

Even if we were to accept Benedict's definition of commutative justice, it does not follow from the inner logic of his argument that he can justify state intervention in the regulation of wages, prices, and income, precisely because each of these is a commutation matter between individuals and not a distributive justice matter pertaining to common goods. And moreover, even if we were to accept the Pope's policy recommendation encouraging the political action of the state to intervene in commutative justice for the purposes of wealth redistribution, it does not logically follow that the redistribution itself should be aimed at achieving a certain desired level of equality between the haves and the have-nots. Indeed, Aquinas states very clearly that redistribution of common goods under distributive justice does not use the principle of equality but the principle of proportion between things and persons (Summa Theologica, q. 61 a. 2); therefore, in distributive justice, the more prominent a person's position in the community, the more of the common goods he should receive.

Benedict's call to temper the pursuit of profits with the pursuit of the common good misunderstands the function of the entrepreneur in creating wealth and ameliorating poverty.[2] It is impossible to conceive of the common good apart from its connection to entrepreneurial action. The French word 'entrepreneur' comes from the Latin "prehendo," to lay hold of, seize, grasp, catch, detain, or arrest.[3] It is an individual's entrepreneurial action in the pursuit of the goals he values most, using scarce factors of production, taking into consideration his costs, and guided by expected future prices in an unhampered market economy that creates wealth and diminishes poverty for society. Motivated by profit, the entrepreneur plans and then acts to satisfy the needs of other individuals. The common good is the unintended, but logically necessary byproduct of the entrepreneurial process. There exists no other rational mechanism to achieve the common good.

Pope John Paul II recognized the contribution of the entrepreneur when he stated that

organizing such a productive effort, planning its duration in time, making sure that it corresponds in a positive way to the demands which it must satisfy, and taking the necessary risks — all this too is a source of wealth in today's society. In this way, the role of disciplined and creative human work and, as an essential part of that work, initiative and entrepreneurial ability, becomes increasingly evident and decisive.[4]

It is precisely distributive justice mechanisms controlled by the state which interfere with entrepreneurial activity, destroy wealth, and create poverty. The common good is the result of an integral dynamic process of human action in an environment of freedom. The process is dynamic because it changes every second by the trillions of individual interactions in the economy. If this process is manipulated or controlled partially or totally by political action through central planning, taxation, fiat money, etc., with the noble intent of improving social cohesion, the process is no longer dynamic. It becomes static, predetermined, and dead, because it is no longer a reflection of the trillions of individual subjective valuations of the marketplace. A static conception of the economy destroys wealth and capital, and creates the very malfunctions of the current model of development that Benedict deplores.

The social cohesion, solidarity, mutual trust, emancipation, friendship, reciprocity, and the pursuit of the common good of which Benedict speaks (#35 & #36) are the result of individual human actions. Society is the outcome of human action in an environment of the division of labor. Humans perceive that it is more efficient and effective to specialize in a particular function and then trade in the marketplace. It is because humans intuitively know this truth that friendship, belonging, solidarity, and even charity can and do arise in society; but the cause and effect relationship between human action and feelings of cohesion flow from the first to the second and not the other way around. Cohesion is the result of individual human action and not its precondition.[5]

Unhampered entrepreneurial action in free markets is not merely the most efficient and best way to achieve the common good, it is the only way. There is no "middle of the road." As Mises puts it, "The market economy … and the socialist economy preclude one another. There is no mixture of the two systems possible or thinkable. Production is either directed by the market or by the decrees of a production tsar."[6]

Profits, the benefit and incentive that the entrepreneur obtains from his actions, are critical not only in guiding him to most efficiently allocate scarce resources, but in guiding the selfish interests of all economic actors to work towards the common good. Contrary to Benedict's assertions that the market becomes a negative force if it is guided by selfish ends (#36), actors in a free market — and the entrepreneur in particular — do not have to be angels, saints, or unselfish to act to the benefit of the common good. Individuals simply need to employ means with the aim of attaining the goals they value and entrepreneurs simply need to comply with the wishes of the consumers who patronize them.

Caritas in Veritate represents a lost opportunity to continue to develop the classical-liberal ideas contained in Pope Benedict's first encyclical, Deus Carita Est, in his previous writings on Christianity as a philosophy of creative freedom, and in John Paul II's treatment of Catholic Social Doctrine in Centesimus Annus.

John Paul II placed the state in its proper role, that of guaranteeing individual freedom and private property; he placed individuals, groups and associations (and not the state) in the primary role of overseeing human rights in the economy; he reinterpreted the principle of subsidiarity, asserting that it limits the role of the state even when it has to intervene in cases of emergency or market failures; he criticized the role of the welfare state and placed responsibility for welfare in the hands of "neighbors," individuals, and associations; he recognized the universal social dimension of labor markets, individual initiative, and entrepreneurship; he recognized the primacy of the free market as the most efficient and effective economy; he acknowledged the proper role of profit and pointed out how critical human capital is to the firm; he recognized the importance of religious values in capitalism and the necessary role of freedom in all dimensions, not just the economic; and, finally, he derived private-property rights in the same fashion that John Locke and other classical liberals do.[7]

Benedict had already moved in the direction of John Paul II's breakthrough by stating in Deus Carita Est that

we do not need a State which regulates and controls everything, but a State which, in accordance with the principle of subsidiarity, generously acknowledges and supports initiatives arising from the different social forces and combines spontaneity with closeness to those in need.… In the end, the claim that just social structures would make works of charity superfluous masks a materialist conception of man.[8]

I speculate that, in his deep concern to respond to the current worldwide economic depression, Benedict surrounded himself with advisers who believe in using political power to redistribute income and resources. As a result of his misunderstanding of economic theory, he failed to see the connection between every depression we have experienced in modern times and governments' intervening in the free market — the very system that, if left free of distributive-justice actions on the part of governments, would guarantee the attainment of the common good.[9]

Mises Daily by Tim Swanson | Posted on 7/30/2009

2009-07-31T19:30:00.001-04:00

Can Bubbles Also Be Made in China?

Despite all of the shimmering skyscrapers and industrial output, unless market forces are allowed to truly dictate economic exchanges, today's Chinese megacities and their residents will merely be facades and actors within a 21st-century Potemkin village, and growth will remain stagnant for years to come. This is due in large part to continual state intervention through centrally planned investment.

Roughly eight months ago, Premier Wen Jiabao announced a $586 billion stimulus package to combat a plunge in economic activity.

At the time, analysts such as James Pressler noted that the stimulus might simply be a rebranding of previously known spending packages rolled into a big fancy plan.[1]

Suffice to say, this is not the case. I was wrong.

Beginning in November, lending quotas have been scrapped and interest rates have been held at a four-year low: unsurprisingly, bank lending has surged.[2] According to the People's Bank of China, for the first six months of this year, new lending amounted to more than 7.3 trillion yuan (about $1.1 trillion) — which, according to the Royal Bank of Scotland, is equivalent to two years worth of credit.

Furthermore, Wei Jianing estimates that roughly 20% of the stimulus funds have ended up in the domestic stock bourses, creating a speculative bubble much akin to the previous dotcom and housing-heavy cousins. Another 30% of the funds are believed to have been shuffled into the ailing property markets.[3] [4]

In fact, residential property rates in places like Beijing are once again climbing at a spectacular rate — 6.5% in one week alone.[5] What was intended as a means to boost infrastructure improvements has been used instead to continue erecting villas and skyscrapers — with little productive value — in an already oversaturated market created by the previous boom.

For example, at the end of last year, roughly 91 million square meters of apartment space lay empty throughout China. This figure does not include the 587 million square meters of apartment space that has been sold but left vacant over the past five years or the millions more that are built but left off the depressed market.[6] More specifically, since 2006, roughly 152 million square meters of commercial office space has been built in Beijing — more than all of the office space in Manhattan — yet 30 million square meters is still vacant.[7] And in Shanghai, the vacancy rate for commercial space is estimated to have hit 25% at the end of last year.[8]

However, as an illustration of unintended consequences, during this new real estate boom, several investigations have discovered that real estate developers, desperate to offload nonperforming properties, have dumped mortgages onto state-run banks that are "facing enormous pressure from Beijing to rapidly increase lending to boost the economy."[9]

Thus, while market forces would have reallocated unused property, pushing prices down, the stimulus has catapulted markets such as Beijing and Shanghai into the top 50 most expensive globally, despite that the average resident earns a fraction of their industrialized peers.[10] Raw Materials

Economist Andy Xie has arguably written the most concise case as to how the stimulus money has created extremely problematic unintended consequences for a developing China.

For instance, in its objective to jumpstart or simply smooth over the plunge in economic activity (primarily exports), Chinese state-owned industries have gone on a commodity buying binge that actually has worked against them:

But China's imports are mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation. The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. Demand from China's army of speculators is driving up prices, making their expectations self-fulfilling in the short term.

The failure of Chinalco's investment in Rio Tinto has been costly for China. After watching its share price triple, Rio Tinto saw it could raise money more cheaply by issuing new shares to pay down debt. The potential financial loss to Chinalco isn't the point. Rather, higher costs will stem from a further monopolization of the iron ore market because Rio Tinto, after scrapping the Chinalco deal, entered into an iron ore joint venture with BHP Billiton. Even though these two mining giants will keep separate marketing channels, joint production will allow them to collude on production levels, significantly impacting future ore prices.

While the rest of his research is worth reading in length, in a nutshell he suggests that the current commodities boom is entirely unsustainable and counterproductive. How big is this commodity boom?

The NY Times recently noted that among other imports to China, iron ore increased 33% from a year earlier, crude oil increased 14%, aluminum oxide increased 16% and refined copper increased 148%. These jumps have corresponded with similar price increases in the commodities. And as Xie, the Times and others have noted, like all artificial bubbles, it will eventually lead to an unpleasant pop.[11]

Over the past year, both Yasheng Huang and Mark DeWeaver have noted that these soon-to-be-seen ill aftereffects are directly attributed to an economy that is still heavily managed by government planners.[12] [13]

While huge swaths of state-owned enterprises have been privatized, many more are owned or operated by government officials. Still worse, many companies, while nominally private, operate in markets that are currently being politically right-sized. For instance, over the next decade Chinese policy makers aim to shrink domestic automobile manufactures by forced consolidation.[14]

Furnaces Aflame

As an economy develops and becomes more productive, DeWeaver notes that investment in fixed-capital formation typically decreases as a percentage of GDP. In China the opposite has occurred — increasing from 33% to 42% between 1981 and 2007 — creating what many commentators label as "overcapacity."

Regardless of the debate over identifying what the "proper" level should be, China makes a lot of steel. China has roughly 700 steel companies that produce at least 100 million more tons than the sum total of the United States. In fact, while steel producers in other countries like Germany and Japan have cut back 20–30% due to global stagnation, Chinese producers have turned the dial to the proverbial "eleven," increasing output by 1.2% in the first six months, and breaking the previous record, which was also held by China. Full smelting ahead![15]

This is not due to more efficient technology, creative entrepreneurship or economies of scale, in fact, it is just the opposite.

During the 1950s, as part of Mao's Great Leap Forward to out produce Western capitalists, many provinces and counties subsidized and encouraged the creation of iron smelters. According to Maharshi Patel, between 1958 and 1961, Mao oversaw a policy which encouraged "every commune and neighborhood" to build furnaces. Whereas Roman politicians promised a chicken in every pot, and modern-day American politicians promise suburban houses with white picket fences, political careers in China became intertwined with the construction of smelters and ancillary industries. As Patel noted,

Like the auto industry in North America, steel in China came to be considered an essential industry, too big to fail. It directly employs 3.58 million people. Millions more live off it in support roles. As of 2007, it contributed 4 per cent of China's gross domestic product and 9 per cent of industrial profits.

And realizing that something has to be done, as part of the never-ending crusade to right-size, Chinese planners finally announced in May that they would begin to try to shut down certain refiners and "actively guide" others into merging.

Back to the Future

While Yasheng Huang and others argue that the decentralizing reforms of mainland China in the '80s were reversed during the '90s, in the past decade Chinese policy makers have emulated many of the same export-centric programs of other "tiger" economies like Singapore, South Korea and even Japan.[16] Their neo-mercantilist, export-centered preferential policies involved three primary forces: an artificial devaluation of domestic currencies, large inflows of FDI, and most importantly, Western consumers with insatiable appetites.

Unfortunately for most of the East Asian economies, this model was unsustainable and, to paraphrase Mohd El-Erian of PIMCO, this current low is the new normalcy.[17]

Roughly 40% of China's GDP is accounted for by exports, which was not a problem during the boom years. However, in May alone, exports dropped more than 25% from the year before. This drop was not a statistical outlier, as each preceding month for nearly a year had had double-digit drops as well, including a 21% fall last month. And foreign direct investment has also dropped like a rock, nearly 18% alone in the first six months this year compared to last.[18]

Acknowledging that consumption levels in Western countries will not rebound to previously seen highs, China's policy makers have begun executing contingency plans aimed at boosting domestic demand.[19] However, these are unlikely to replace spendthrift Joneses anytime soon.

The War Chest

Surely there is a bright light on the horizon? After all, the government does sit on large holdings of foreign assets.

Nope.

Gordon Chang recently noted that unfortunately for policy makers in Beijing, the large foreign reserves that China holds cannot be used to any large degree to fend off the ill effects of the current financial order. Chinese agencies such as SAFE are at the complete mercy of the United States, because there is no exit plan with Treasuries.

Despite the recent flurry of eye-popping headlines, if the Chinese unloaded their foreign reserves, they would destroy their own currency, which is pegged to the US dollar. In the event they continue gobbling up commodities, they will simply "inflate" those asset prices too.[20] Furthermore, because their currency remains pegged to the dollar, any yuan appreciation will squeeze exporters that are already reeling from the large drop from overseas.

Thus in order for them to sell any substantial portion of the Treasuries, the Chinese will have to wait until real growth begins to take place in the United States.

Uncertainty and Unpredictability

Over the past 30 years, China has changed dramatically. Despite all of the interventions and misallocations, real, inflation-adjusted growth could still take place. [21] Areas like Yunnan and Guangxi will presumably benefit due to free-trade agreements with ASEAN participants. Previously isolated rural communities will benefit from modern infrastructure links as they can finally develop and participate in China's industrial revolution.

Low personal debt and high personal savings can also be a positive factor even if depositors receive very little in return.[22] Furthermore, if the policy makers allows land-owners to actually sell land or use it as collateral, there will be some huge dividends there as well.[23]

However it is the unseen details, the unseen consequences, the unseen opportunity costs that currently dictate and bedevil the economic growth of the world's most populous country. And despite the three decades of reforms, the effects of socialist planning, even the "lite" variety, will still generate business cycles — with prolonged corrections and purges.

Mises Daily by Jeffrey A. Tucker | Posted on 7/29/2009

2009-07-31T19:28:00.005-04:00

No Such Thing as a Free Search

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Not being an authentic geek (I just play one at the office), I still have a front-row seat to the exciting process of web development in real time. The most recent series of events was a wild ride from top to bottom, with seemingly endless learning along the way, something the user of Mises.org doesn't see directly but which makes an enormous difference in the overall experience of the site and its capacity for further development to keep up with the resources and technology.

It all began with the search engine (can we formulate a rule that it always begins with the search engine?). Google has been very sweet to Mises.org all these years, given us public results we could use in a nifty (AJAX) application running on every page of the site. Bliss was it to be alive in these times. Then one day we discovered that we had exhausted the limits of our benefactor's charity.

It seemed that Google's public search was not so kind to our book files, which were too large for Google to index. That meant that many of our free books were not appearing in search engines, or, rather, the titles were appearing but not the text itself. Now, we go the extra mile in these things to make them searchable (OCR) so this was unwelcome news. Thus commenced the great search for a search-engine replacement that we could run on the site itself — our own system that doesn't depend on the kindness of strangers.

To be sure, whizbang-webmaster David Veksler had built a great system for indexing, but the user interface didn't correct for spelling errors and the search results weren't prioritized in an intuitive manner. We needed more. In the course of looking, we enjoyed presentations of many products, the most impressive of which can read audio and video files into text, rendering even group conversations into searchable units.

How is this possible? It's the sort of sci-fi dazzlement that the private sector provides these days, just before selling it to the Department of Homeland Security, a tragic fact of which we were made aware by the vendor's salesman. Where would the state be without the private sector to provide its technology? Probably still bonking us on the head with wooden clubs, a form of coercion somehow less threatening than artificial intelligence that digitally scans conversations within a crowd.

In any case, what we finally settled on was a version of Google in the form of a privately owned Google Search Appliance, a box you can host alongside the server itself. The so-called Mini GSA was enough for us, since the full version is used to manage both the internet and intranet presence of huge universities and multinational corporations. We paid for minimum indexing and quickly had to upgrade to cover the many tens of thousands of files on the server.

After some more customizations, the new box — so beautiful and blue in the pictures, but of course we never saw it in real life — was ready and how glorious it was revealed to be. Suddenly hundreds of books were revealed in the search. The results even provided a cached copy of large PDF files, so we got HTML without even going to the trouble of making it by hand. Bliss was back!

Now, it was clear even from the first day that, for whatever reason, our new friend Google Mini did not like our store, a point first noted by our technologically savvy store manager Brandon Hill. The new machine was crawling the store but not displaying the results. Somehow it seemed like something we could live with (in retrospect, why?) and so we settled into our new mini life with great complacency. Then one day, we were looking at the analytics data. The store was far less trafficked than it had been only recently, and sales reflected that. Clearly, we had an issue and it had to be fixed.

A half day of fiddling within configuration settings convinced us that we had to rule out one contingent explanation (OK, it was my off-the-cuff theory), namely that the confusion was over two different domains on the server: Mises.org for the entire site and www.mises.org for the store in particular. Why was it set up this way? There is this thing called a secure cert that allows for encrypted transmittal of credit-card data. You can't do any business or take any donations without a secure cert.

It seems that Mr. Cert was issued in the name of www and not mises.org as such. We had to buy a new one. Buying a cert these days isn't as hard as adopting a child but nearly so. We had to fax our this-and-that and be subjected to detailed interviews, all to obtain a slightly different version of what we were already running. One attempt was thwarted, for example, because the server-generated encrypted certificate (CRS) didn't append the words "for Austrian Economics" following Ludwig von Mises Institute, thereby causing some great confusion. In any case, once the cert was issued, we figured that all problems would be over.

But no, all problems were not over. It turns out that a server such as ours doesn't like to run two certs at once — or, at least, doesn't want to, and so has to be tricked in order to do so. In order to trick the server, you need a second IP address and a duplicate copy of the site running. I requested and received that second IP, but better minds suggested that code trickery is the last thing you want on a security device. We had to make a choice: all or nothing, whether mises.org or www. We made the choice: all for Mises.org.

This required that we shut down the old cert and install the new. But wait just a minute. The license key on our store software was issued in the name of www and thus did we need a new license key. And so of course that meant digging through a pile of ancient logins to find the right ones, making the request, and waiting it out.

At some point in this process, I did grow impatient, even to the point of becoming slightly bonkers. I called up the software company early in the morning and asked when we could expect the new key.

"We just got in the office and fired up the coffee maker," he said.

"How many cups do you have to have before you generate a new license key?" I asked.

"At least one," was his annoyed retort.

And so I waited an eternity of 20 minutes when the glorious thing finally arrived. It was a snap to install and, hosanna! the new store key was nuts for the new cert, and everyone worked and played well together — until we noticed all the images on the site that were broken because the URLs were pointing to the wrong domain.

David swung into action with his amazing site-wide search-and-replace tool, which ripped through tens of thousands of pages and repaired images. The newest redirect tools do things I could not even imagine five years ago and, in no time, the entire site stabilized.

Brandon cleaned up the last bit of dust and debris, and the entire task was complete. There were cheers all around for a job well done. I even posted a blog item about this geeky triumph. At least one person even offered sincere congratulations! But wait just one minute. What was the point of this long exercise anyway? Of course it is nice to have all things running on the same domain, very tidy and clean. But why did we do all of this again?

Oh yes, I recall: it is all about search and particularly about whether the store results are showing in the main search engine. They still don't. But, oddly, it doesn't seem to matter that much anymore. You get this far down this crazy trajectory and the starting point recedes into the distance. In any case, we'll find the workaround at some point, and we are that much closer having eliminated one possible fix from the list.

The latest theory is that the search omission stems from a conflict between the store software and — wait for it — another free Google tool embedded in the store. In the end, there's no such thing as a free search. But there are a group of professionals out there driving the price as low as possible, and they certainly earn my admiration.

Mises Daily by Thomas J. DiLorenzo | Posted on 7/28/2009

2009-07-31T19:25:00.008-04:00

Socialized Healthcare vs. The Laws of Economics

The government's initial step in attempting to create a government-run healthcare monopoly has been to propose a law that would eventually drive the private health insurance industry out of existence. Additional taxes and mandated costs are to be imposed on health insurance companies, while a government-run "health insurance" bureaucracy will be created, [LABEL] ostensibly to "compete" with the private companies. [LABEL] The hoped-for end result is one big government monopoly which, like all government monopolies, will operate [snooty] with all the efficiency of the post office and all the charm and compassion of the IRS.

Every time I see somebody inventing motives for somebody else, it occurs to me that those motives are in the mind of the inventor.

Of course, it would be difficult to compete with a rival who has all of his capital and operating costs paid out of tax dollars. Whenever government "competes" with the private sector, it makes sure that the competition is grossly unfair, piling costly regulation after regulation, and tax after tax on the private companies while exempting itself from all of them. This is why the "government-sponsored enterprises" Fannie Mae and Freddie Mac were so profitable for so many years. It is also why so many abysmally performing "public" schools remain in existence for decades despite their utter failure at educating children. America's Healthcare Future?

Some years ago, the Nobel-laureate economist Milton Friedman studied the history of healthcare supply in America. In a 1992 study published by the Hoover Institution, entitled "Input and Output in Health Care," Friedman noted that 56 percent of all hospitals in America were privately owned and for-profit in 1910. After 60 years of subsidies for government-run hospitals, the number had fallen to about 10 percent. It took decades, but by the early 1990s government had taken over almost the entire hospital industry. That small portion of the industry that remains for-profit is regulated in an extraordinarily heavy way by federal, state and local governments so that many (perhaps most) of the decisions made by hospital administrators have to do with regulatory compliance as opposed to patient/customer service in pursuit of profit. It is profit, of course, that is necessary for private-sector hospitals to have the wherewithal to pay for healthcare.

Friedman's key conclusion was that, as with all governmental bureaucratic systems, government-owned or -controlled healthcare created a situation whereby increased "inputs," such as expenditures on equipment, infrastructure, and the salaries of medical professionals, actually led to decreased "outputs" in terms of the quantity of medical care. For example, while medical expenditures rose by 224 percent from 1965–1989, the number of hospital beds per 1,000 population fell by 44 percent and the number of beds occupied declined by 15 percent. Also during this time of almost complete governmental domination of the hospital industry (1944–1989), costs per patient-day rose almost 24-fold after inflation is taken into account.

Post hoc ergo propter hoc

The more money that has been spent on government-run healthcare, the less healthcare we have gotten. This kind of result is generally true of all government bureaucracies because of the absence of any market feedback mechanism. Since there are no profits in an accounting sense, by definition, in government, there is no mechanism for rewarding good performance and penalizing bad performance. In fact, in all government enterprises, exactly the opposite is true: bad performance (failure to achieve ostensible goals, or satisfy "customers") is typically rewarded with larger budgets. Failure to educate children leads to more money for government schools. Failure to reduce poverty leads to larger budgets for welfare state bureaucracies. This is guaranteed to happen with healthcare socialism as well.

Or perhaps there is some other problem, something undiscovered, something the government fights with dollars. Maybe the Arthurian economics has found a flaw in mainstream policy, something even the Austrians have overlooked.

Costs always explode whenever the government gets involved, and governments always lie about it. In 1970 the government forecast that the hospital insurance (HI) portion of Medicare would be "only" $2.9 billion annually. Since the actual expenditures were $5.3 billion, this was a 79 percent underestimate of cost. In 1980 the government forecast $5.5 billion in HI expenditures; actual expenditures were more than four times that amount — $25.6 billion. This bureaucratic cost explosion led the government to enact 23 new taxes in the first 30 years of Medicare. (See Ron Hamoway, "The Genesis and Development of Medicare," in Roger Feldman, ed., American Health Care, Independent Institute, 2000, pp. 15-86). The Obama administration's claim that a government takeover of healthcare will somehow magically reduce costs is not to be taken seriously. Government never, ever, reduces the cost of doing anything.

All government-run healthcare monopolies, whether they are in Canada, the UK, or Cuba, experience an explosion of both cost and demand — since healthcare is "free." Socialized healthcare is not really free, of course; the true cost is merely hidden, since it is paid for by taxes.

Whenever anything has a zero explicit price associated with it, consumer demand will increase substantially, and healthcare is no exception. At the same time, bureaucratic bungling will guarantee gross inefficiencies that will get worse and worse each year. As costs get out of control and begin to embarrass those who have promised all Americans a free healthcare lunch, the politicians will do what all governments do and impose price controls, probably under some euphemism such as "global budget controls."

Price controls, or laws that force prices down below market-clearing levels (where supply and demand are coordinated), artificially stimulate the amount demanded by consumers while reducing supply by making it unprofitable to supply as much as previously. The result of increased demand and reduced supply is shortages. Non-price rationing becomes necessary. This means that government bureaucrats, not individuals and their doctors, inevitably determine who will get medical treatment and who will not, what kind of medical technology will be available, how many doctors there will be, and so forth.

All countries that have adopted socialized healthcare have suffered from the disease of price-control-induced shortages. If a Canadian, for instance, suffers third-degree burns in an automobile crash and is in need of reconstructive plastic surgery, the average waiting time for treatment is more than 19 weeks, or nearly five months. The waiting time for orthopaedic surgery is also almost five months; for neurosurgery it's three full months; and it is even more than a month for heart surgery (see The Fraser Institute publication, Waiting Your Turn: Hospital Waiting Lists in CanadaDownload PDF). Think about that one: if your doctor discovers that your arteries are clogged, you must wait in line for more than a month, with death by heart attack an imminent possibility. That's why so many Canadians travel to the United States for healthcare.

All the major American newspapers seem to have become nothing more than cheerleaders for the Obama administration, so it is difficult to find much in the way of current stories about the debacle of nationalized healthcare in Canada. But if one goes back a few years, the information is much more plentiful. A January 16, 2000, New York Times article entitled "Full Hospitals Make Canadians Wait and Look South," by James Brooke, provided some good examples of how Canadian price controls have created serious shortage problems.

* A 58-year-old grandmother awaited open-heart surgery in a Montreal hospital hallway with 66 other patients as electric doors opened and closed all night long, bringing in drafts from sub-zero weather. She was on a five-year waiting list for her heart surgery.

* In Toronto, 23 of the city's 25 hospitals turned away ambulances in a single day because of a shortage of doctors. *

In Vancouver, ambulances have been "stacked up" for hours while heart attack victims wait in them before being properly taken care of. *

At least 1,000 Canadian doctors and many thousands of Canadian nurses have migrated to the United States to avoid price controls on their salaries.

Wrote Mr. Brooke, "Few Canadians would recommend their system as a model for export." Canadian price-control-induced shortages also manifest themselves in scarce access to medical technology. Per capita, the United States has eight times more MRI machines, seven times more radiation therapy units for cancer treatment, six times more lithotripsy units, and three times more open-heart surgery units. There are more MRI scanners in Washington state, population five million, than in all of Canada, with a population of more than 30 million (See John Goodman and Gerald Musgrave, Patient Power).

In the UK as well — thanks to nationalization, price controls, and government rationing of healthcare — thousands of people die needlessly every year because of shortages of kidney dialysis machines, pediatric intensive care units, pacemakers, and even x-ray machines. This is America's future, if "ObamaCare" becomes a reality.

Mises Daily by Robert P. Murphy | Posted on 7/27/2009

2009-07-28T05:52:00.070-04:00

Does the Fed Need an Exit Strategy?

In a recent article, Paul McCulley, managing director of PIMCO, was very enthusiastic about Bernanke's handling of the financial crisis, and argued that the Fed had the tools necessary to avert large price inflation. Unfortunately, McCulley's arguments have gaping holes; he has hardly dispelled my prediction of massive stagflation. Because McCulley's piece crystallizes what many analysts have been saying, it will be instructive to pick apart his main points. Perfect! This is exactly what I am looking for! Economic analysis.

No Need for Fed to Soak Up Reserves?

McCulley's most significant claim is that the Fed will be able to hike interest rates without selling off the assets on its balance sheet:

[T]his is really, really important stuff to understand, given the widespread yammering about the need for the Fed to have an exit strategy to de-create all the excess reserves it has created, as if they are intrinsically the kindling for an (eventual) rip-roaring inflationary fire. They are not.…

It is … simply wrong to get wrapped around the axle about the amount of excess reserves in the system. The Fed now has the ability to hike the Fed funds rate, despite a huge reservoir of excess reserves, because it now has the legal ability to pay interest on those reserves.

Okay. So the PIMCO guy is saying that the interest paid to banks by the Fed is an alternative to the interest banks pay each other ("the Fed Funds rate") when they borrow each other's reserves. A bank with excess reserves wants to make money on them. Used to be, they'd loan the reserves to some other bank that was short on reserves. Now they can keep the reserves on reserve at the Fed, and still earn interest.

Before evaluating McCulley's claims, let's set the context. Since the summer of 2008, Bernanke has more than doubled the Fed's balance sheet. In essence, the Fed wrote checks on itself [LABEL] — drawing on money created out of thin air — in order to buy mortgage-backed securities and other "toxic" assets from financial institutions that had made horrible investments during the housing boom.

When the Fed buys (say) $10 million in mortgage derivatives, the asset side of its balance sheet rises by $10 million. The seller of the mortgage derivatives — let's call him Joe Smith — deposits the Fed check in his own bank account. Thus Joe Smith's checking account balance goes up by $10 million, while his bank itself clears the check with the Fed, so that the commercial bank's reserves (on deposit with the Fed) also go up by $10 million.

Under normal circumstances, the process wouldn't stop there. As many readers will recall [LABEL] from [LABEL] (horribly boring) principles lectures , our fractional-reserve banking system leads to a multiplier effect. The initial injection of $10 million into the banking system cascades into a much bigger expansion of the money supply held by the public. Specifically, what normally happens is that the commercial bank makes additional loans because of the increase in reserves.

The two paragraphs above are a good summary of the system.

Yeah. I don't think anybody now can forget that banks only need to have a fraction of their customers' checking accounts backed up. That's the root cause of the fiscal crisis. There's no forgetting it. Remember that banks only need to have a fraction of their customers' checking accounts "backed up" by either cash in the vault or reserves on deposit with the Fed. So in our example, Joe Smith's bank saw its reserves go up by $10 million, while its total customer deposits also went up by $10 million (in Joe Smith's checking account). That means the bank now has "excess reserves," i.e., reserves on deposit with the Fed over and above what it needs to cover its legal reserve requirement. Let us not fail to point out that reserves are what make a bank sound! The problem is that bankers always talk central bankers into reducing the reserve requirement as the years go by, until we get another one of those once-in-a-hundred-years fiscal crises.

To get a sense of how much Bernanke's policies have increased the total amount of banks' "excess reserves," look at the following chart:

Figure 1

I've not seen the numbers on this. But the Fed at one point explained that much of the shocking increase in reserves was simply money that banks were choosing not to lend out! In other words, not new money at all. Just a result of the reduction of bank lending. When the Fed started paying interest on reserves, it drew the money in. On top of that of course there is the new money the Fed has been printing. This raises a question: What are the chances that the Fed's new practice of paying interest on reserves will delay recovery by inducing banks to keep excess reserves on hand for too long?

The above chart illustrates why more and more people are preparing for large price inflation. Thus far, the banks have been content to sit on those excess reserves, rather than granting new loans (which would expand the public's money supply). But if and when things begin to pick up, won't Bernanke (or his successor) need to reverse the huge expansion of the Fed's balance sheet? In other words, to prevent all of those excess reserves from fueling a huge increase in the public's checking-account balances, won't the Fed need to sell off its assets in order to destroy those reserves?

McCulley argues no. If the Fed wants to hike the federal-funds rate — which is the interest rate banks charge each other for overnight loans of reserves — it doesn't need to reduce the supply of reserves, [LABEL] as the textbooks teach us . Another option, according to McCulley, is for the Fed to simply increase how much interest it pays to banks, for keeping their reserves on deposit with the Fed. In the grand scheme, McCulley is saying that the banks won't use their excess reserves to make new loans to their customers, so long as the Fed itself offers a high enough interest rate to entice the banks to keep those excess reserves parked at the Fed.

The Fed can sell off assets at any time of course, to reduce bank reserves again. Robert Murphy does not say this is a bad idea or that it would not work. In fact, Mr. Murphy never returns to the idea of selling Fed assets. He only uses it to shoot down the PIMCO guy's statement. It's like Murphy is more concerned with shooting down the other guy than he is with preventing inflation.

Here, where Mr. Murphy needs a strong argument to make his case, he fails utterly. Even if paying interest makes the reserves grow "exponentially," the exponent is a low number. This exponential growth is slow. The "doubling" that is a feature of exponential growth, takes a very long time. The growth of reserves should be more than offset by the resumption of economic growth. Excess reserves will dwindle. McCulley's point is correct, as far it goes, but it's hardly a long-term fix. As I pointed out elsewhere, at best this "solution" (and the related one, of letting the Fed issue its own bonds) postpones the day of reckoning. The basic problem is that (at some point) the huge glut of excess reserves will start fueling expansions in the money supply, and hence price increases. Paying interest on reserves simply amplifies the problem, and exponentially at that. When the Fed "pays interest" on reserves, it doesn't offer to cut lawns or babysit for the bankers in question. No, it pays interest by further increasing the banks' reserves on deposit with the Fed.

Here, Murphy simply restates his fear of inflation, this time adding the weak parenthetical "at some point."

[LABEL] If the Fed pursues McCulley's strategy, it will have to inject larger and larger amounts of new reserves into the banking system, in order to [LABEL] bribe bankers to keep their (excess) reserves on deposit with the Fed. As the supply of excess reserves grows exponentially, it will become more and more attractive for banks to lend some of them to their clients, and thus expand the money supply. REMINDER: The phrase "exponential growth" does not mean 'insanely fast' growth. It describes a kind of acceleration. Specifically, it indicates that the thing which is growing doubles in size at a constant rate. Sort of the opposite of the "half life." The point I make and Murphy misses is that the doubling period for excess reserves is a long time. How long? It depends on the rate of interest. Oh, and by the way: The rate of interest varies. So the resulting growth is an exponential curve where the doubling rate varies. And this is not an exponential curve at all!

Smelling a Rat With PIMCO's Strategy

[LABEL]

Imagine a head chef in a restaurant who is horrified to discover rats in his kitchen. He calls a few companies to decide what to do about the situation. Some people advise him to lay down traps; others suggest poison. But one advisor — steeped in the wisdom of Paul McCulley — recommends that the chef stop putting his discarded food scraps in the dumpster. Instead, he advises the chef to dump the food in the alley, just outside the kitchen door. This would entice rats to leave the kitchen for the food in the alley.

The chef is puzzled by this recommendation. Yes, it might temporarily solve the problem of the rats currently living in the kitchen, but wouldn't it just attract more rats in the long run? "Yes, that is possible," the maverick responds. "So you should be prepared to dump ever larger piles of food into the alley, to satisfy as many rats as show up, so they don't wander into your kitchen."

The Fed's Medicine Sometimes Takes Years to Work

McCulley wraps up his article with the following prediction:

And when is all this going to happen? Last week, the markets started to romance the notion of before the end of 2009. To me, this is simply silly. In the matter of cutting off, and then killing, the fat tail risk of deflationary Armageddon, boldness in execution is no vice, while patience in declaring victory is indeed a virtue. The Fed has been bold and is committed to patience. Bravo! And the first Fed rate hike? Call it no sooner than 2011.

This is at the core of Austrian economics -- the notion that after a boom, the economy needs to rehabilitate itself. As though economic growth were some kind of sickness. And anyway, the "boom" wasn't that great. There are several things wrong with this. First, it ignores the fact that interest rates are prices and they really mean something about scarcity and individual preferences. The Fed doesn't "stimulate" the economy by pushing down interest rates, all it does is screw up the market's attempts to rehabilitate itself after a boom — which itself was fueled by previous Fed attempts to push down interest rates and "stimulate" the economy.

But beyond the unwitting endorsement of central planning (when it comes to interest rates), notice the odd timetable. Let's be generous with McCulley's prediction and say that the Fed's "virtuous" and "bold" behavior finally turns things around by January 2011.

Recall that Bernanke's extreme money pumping — necessary to avoid the "mistakes of the Great Depression" — began in September 2008. That means almost two-and-a-half years will have passed, before these wonderful remedies work their magic.

[LABEL] Am I the only one who wants a refund? Back when Bernanke and Henry Paulson were bailing out AIG et al. with hundreds of billions of dollars, they told us it was necessary to avert a global economic catastrophe. Did everyone realize that the lesser of two evils involved two-and-a-half years (at least) of stagnation and interest rates at 0 percent?

Yeah, I think everybody realized that. Oh and by the way, I think Bernanke and Paulson by opening their mouths as they did pretty much created the global economic catastrophe.

People may be surprised to learn that the Federal Reserve cut interest rates down to (then) record lows following the 1929 stock market crash as well. Herbert Hoover established the Reconstruction Finance Corporation to bail out financial institutions that had made bad loans during the late 1920s boom.

I wonder if Paul McCulley has ever entertained the idea that massive fiscal and monetary bailouts actually retard recovery? Isn't it funny that the two times in US history when the government intervened the most — namely the 1930s and today — we had the two worst economies in US history? Maybe the cause-and-effect is the opposite of what Krugman, PIMCO, and everybody on CNBC are telling us?

No, not funny. But I think the one time that the U.S. government intervened the most was World War II.

Mises Daily by Briggs Armstrong | Posted on 7/24/2009

2009-07-24T12:11:00.019-04:00

Why I Pay with Two-Dollar Bills

I recently decided that I am going to pay for as many things as is practicable using only two-dollar bills. I will now attempt to explain my purely symbolic gesture and the reactions I have received so far.

[LABEL]

A few weeks ago I determined that I should be doing something to express my dissatisfaction with current monetary policy, and get people interested in the topic. Inflation was my main concern. I tossed around a few ideas of how to get others interested. I needed to do something dramatic enough to get attention, and interesting, or eccentric, enough [LABEL] It's not that people don't know about monetary policy and price inflation. It's that they hold a different view than Briggs Armstrong, or perhaps that they don't realize how jocular things are at Mises dot org. to prompt people to educate themselves about monetary policy and price inflation. But how could I both express my discontent and get people to learn that the Fed's printing of trillions is disastrous? Yeah, I think you mean how can you get people to learn that you think the Fed's printing of trillions is disastrous?

My first idea was to pay for everything with one-dollar bills. Theoretically, this was to alert people to the declining value of the dollar; after all, it takes a surprisingly large stack of ones to pay for most purchases now. I quickly rejected this idea for obvious reasons. Ones are ubiquitous and it is not particularly unusual for people to pay with them. My next crazy idea was to pay with pennies. Clearly, this was an even worse idea than paying with dollar bills. It would definitely get attention, but who wants to carry around a giant — and very heavy — bag full of pennies?

I looked up "neomercantilism" on Wikipedia. An interesting opening paragraph, but it doesn't seem to apply to the U.S. economy. Oops. My next plan was to refuse to accept ten-dollar bills. After all, Hamilton is on the ten and his mercantilist policies are largely responsible for the current American version of neomercantilism. But who the heck cares if I don't want tens? Plenty of people don't want tens for various reasons and I certainly don't want to have to give everyone a long boring speech as to why I won't take their tens in order to make my point. No, I needed something that wouldn't require a captive audience or a long explanation.

Then it dawned on me. Why not pay with two-dollar bills? After all, Thomas Jefferson is featured on the two, and as all Jeffersonians and Austrians know, Jefferson had a deep hatred of central banks and inflation. (Not to mention that his vice president shot and killed Hamilton.) What's more, two-dollar bills are something of an oddity.

The front of the bill is the oldest design still in production. The reverse features Trumbull's Declaration of Independence. The two-dollar bill serves my purpose well because, [LABEL] as Austrian economists have taught us, price inflation is the result of the Federal Reserve printing money. The two is rarely printed, making only about one percent of all notes! One series was printed in 1976 to commemorate the bicentennial, another series was printed in 2003, and the last series in 2006. The two is perfect: it is not widely circulated and most people regard it as something of a curiosity. As of 2007, there were only about $1.5 billion worth of two-dollar bills in circulation, and many of those have been hoarded away. So. If Mr. Armstrong's plan catches on and everybody starts asking for $2 bills, the government will likely print more of them in response to the increased demand. So Armstrong's plan calls forth a response opposite to what he says he wants. Odd.

My mind was made up. The two-dollar bill was the perfect way to spread my message without being intrusive or a mere annoyance. Paying this way is just odd enough to get people to say "why twos?" Furthermore, twos are easy enough to use so that paying with them is not a major burden. The symbolism of Jefferson being on the least-printed Federal Reserve note in existence further sweetened the deal. So it was time to put my plan into action.

Obviously, the first step in paying for as many things as practicable with two-dollar bills was obtaining said bills. I headed down to my local Wachovia, where I do my banking. When I asked the teller for two-dollar bills, I received the expected (and desired) look of utter bewilderment. She then scrounged around, asking all the other tellers for any twos that they had. She took a quick trip to the back in her quest to satisfy my strange request. She did the best she could, returning with only $18 worth. Then the efficacy of my plan was confirmed, as she asked the question that I most wanted to hear.

After counting them out for me she said "Why do you want twos?"

I was thrilled, but I never showed my inner delight. I replied "I just prefer them."

After all, this article had not yet been written and I knew that she didn't want to hear a long rant about inflation and the Federal Reserve. Nor did I want to give such a lecture. As I prepared to leave the bank, the ever-helpful teller said she would start saving twos for me.

Later that week, I purchased a copy of Meltdown by Tom Woods at the Mises bookstore. As I shelled out the two-dollar bills, our librarian said, "You are going to pay me in twos?" Perfect. It was working better than I could have hoped! I just told him that they had my favorite president on them. After all, the Mises librarian already knows about the Fed and inflation.

The next week, when I went back to my bank to cash a check, I once again requested two-dollar bills. There was a different teller, and once again I was delighted to receive a bewildered look. Once again there was a scramble to find enough twos to satisfy my strange request. Alas, there were none in the entire bank! After profuse apologies, she informed me that they would be getting some twos in very soon. Then she asked the question that I was so anxious to hear again. I replied the same way as to the previous teller.

Now I am able to pay with twos just about everywhere I go. I do discriminate, so to speak; I try to save my twos for small local businesses. My thinking is that these places are more likely to recirculate them throughout the small college town where I live — and are more likely to inquire about my eccentric payment method. Once this article runs, when I am asked why I am requesting or paying with so many two-dollar bills, I will be able to say, "If you google 'why pay with two-dollar bills,' you will find out exactly why."

I'm starting to think that Austrian economics has a single focus: Inflation. The true point of this experiment is to encourage people to educate themselves about our current inflationist monetary policy. My hope is that my readers will begin to request two-dollar bills from their banks and direct people to this article. There is no need to brow beat a captive audience with economic mumbo jumbo, [LABEL] just say, "Google 'why pay with two-dollar bills.'" If they are curious enough, it will lead them to use the wonderful resources available at Mises.org to shake off the heavy chains of complacency that facilitate this stealthy crime. If you found this article because someone has been paying you with two-dollar bills, then I thank you for your interest. I strongly suggest you read some of the fantastic articles available at Mises.org. There are also numerous books available for free download. There are even audio versions of books and articles for free download. What could be easier? One of the best ways to get started is to watch this amazing free documentary: Money, Banking, and the Federal Reserve. In the current state of the economy, with the Federal Reserve printing trillions of dollars, and the government bailing out everyone in sight, it is more important than ever to be well informed. Mises.org can help.

Mises Daily by Doug French | Posted on 7/23/2009

2009-07-23T10:05:00.046-04:00

You Can't Print Production and Prosperity

Maybe you can't print prosperity, but you can definitely print problems. In my economics, Arthurian economics, money is the source of most of the problems. But it's not only printing too much that can mess things up. Borrowing too much can mess things up, too. As I see it, the Fed's current policy of excessive printing is the necessary response to the policy that caused the problem: excessive borrowing. It's hard to imagine that the monetary policy talk can get any [LABEL] nuttier , but we've likely only just begun. After all, despite the Federal Reserve growing its balance sheet by 140 percent and dropping rates essentially to zero, the bankruptcies just keep on coming. Ex-Fed governor Wayne Angell told Larry Kudlow's CNBC audience, "monetary policy always works!" Although Angell does stipulate that it takes time [LABEL] before the tromping on the monetary gas pedal will spin the economic tires and spray the prosperity gravel. I see in these Mises Dailies an excessive concern about printing money: An excessive fascination with the Fed's emergency response. And an undue neglect of the previous forty years of policy, the years when this emergency was taking shape.

But [LABEL] good grief, the Fed started cutting rates in September 2007, dropping the federal-funds rate from 5.25 percent to 4.75 percent, and it was cut, cut, cut until [LABEL] daddy set the target rate at 0 to .25 percent in December of last year. In the meantime, one trillion dollars has been added to the M-2 money supply. ... and still no inflation....

Despite all this money creation, Circuit City, Sharper Image, Goody's, Gottschalk's, Comp USA, Levitz Furniture, Chrysler, General Motors, General Properties, and — most recently — Eddie Bauer have filed for bankruptcy protection. And personal bankruptcy filings are up in every state and soaring in Nevada, Georgia, Alabama, Tennessee, Indiana, and Michigan. So, imagine how bad it might have got without all that emergency monetary aid.

In May, forty-eight states had more people out of work than in the previous month or year, with the national unemployment rate increasing from 8.9 percent to 9.4 percent. Moreover, California, Nevada, North Carolina, Oregon, Rhode Island, and South Carolina had their highest rates of unemployment on record. Maybe Mr. Angell will change his mind when he gets laid off. Just how long are we supposed to wait for this monetary magic to work? Well, I'm tryin' to say it is working.

Now the word is that zero-percent interest rates are just too darn high. That's why we haven't seen [LABEL] a reinflation of bubble America. The Financial Times reports the existence of a Federal Reserve staff memorandum that makes the case for a negative-five-percent federal-funds rate. Meanwhile, Japanese authorities are toying with the idea of outlawing cash in their country. Despite using every fiscal trick in the book and keeping interest rates at zero percent for a decade, that economy has been mired in a postbubble depression. So the current theory "would suggest that nominal interest rates of [negative four] percent might be closer to what is required to rescue the economy from another deflationary spiral," reported the Times Online. Well... This is not an indication of how bad the current policy is. But it shows how bad the previous (pre-crisis, say 1967-2007) policy was and how severe is the result.

The talking heads and policy wonks are trying to tell us that we're not borrowing enough, and that's why we're in a depression [LABEL] and why the Japanese economy has been depressed for more than a decade. Yeah, I know. That's just silly, isn't it. We're "not borrowing enough." I keep expecting Bernanke to wake up and realize there's a better way out of this mess.

However, the real reason we're in a depression is because businesses and individuals borrowed too much and invested it poorly. [LABEL] Economist Murray Rothbard explained that a depression is the recovery stage: "The liquidation of unsound businesses, the 'idle capacity' of the malinvested plant, and the 'frictional' unemployment of original factors that must suddenly and en masse shift to lower stages of production — these are the chief hallmarks of the depression stage." Oh! I almost agree with this! The real reason we're in a depression is because businesses and individuals borrowed too much.

That's why monetary policy isn't working and won't work. People must save and pay off their debts. The malinvestments of the boom must be liquidated. New liquidity and zero-percent interest rates will only create new malinvestments, not a sound economy.

Again, I can almost agree with Doug French. Almost. The malinvestments didn't look "mal" until the crisis hit. Now, everything looks mal. So we really can't judge between good and bad investment at this point. If you try to focus on malinvestment, you'll get lost in an endless, pointless tangent.

Mr. French is right about one thing: We do indeed need to pay off some debt.

There is something else.

Let's review our points of agreement, Doug French's and mine:

Money is a source of problems.
Policymakers say we're not borrowing enough.
We're in a depression because we borrowed too much.
We must pay off debt.

Oh yeah, one more:

The Fed has add a trillion dollars to the money supply.

Given these points of agreement, what are the reasonable policy options?

Nobody seems to like the fact that the Fed is printing money. But I agree with the Fed that it had to be done. Give me a minute here.

It makes no sense to print all that money and use it to create even more debt by lending it out to banks and such.

We borrowed too much, and we must now pay off debt.

I propose a debt forgiveness program, funded using the Fed's newly printed dollars. Print money, and use it to pay off debt.

The use of credit adds to the quantity of money in circulation. So, paying off debt reduces the quantity of money in circulation.

Printing money adds to the quantity of money in circulation. And using that money to pay off debt reduces the quantity of money in circulation. So, printing money to pay off debt is not inflationary, yet it reduces debt.

As long as the Fed is printing money like crazy anyway, that money should be used to directly address the problem of excessive debt.

But you won't hear that on TV or read it in the New York Times. The Nobel Prize–winning economist and Gray Lady columnist Paul Krugman is now worried about the "paradox of thrift," the theory that, when consumers save too much en masse, the economy is worse off because there is not enough consumption.

But as economist Frank Shostak explains, it is savings — not demand — that enables the expansion of production of goods and services. "In short, no effective demand can take place without prior production," Shostak writes. "If it were otherwise, then poverty in the world would have been eradicated a long time ago." In other words, you can't print production and prosperity, much as the Fed may try. And Ben Bernanke is trying.

Nah. This paragraph is a jumble of thoughts.

First of all, the phrase "effective demand," (which comes from Adam Smith via Keynes) means "the demand that has an effect," or "the demand that calls forth supply." By definition, effective demand calls forth supply.

It may be technically true as a rule that "no effective demand can take place without prior production." Without demand, on the other hand, production ceases. This is why Krugman and others worry about the paradox of thrift. Too much saving means too little demand. Too little demand means inventory accumulation. Inventory accumulation means production cutbacks. Production cutbacks mean employment cutbacks. Employment cutbacks mean even less demand. It is a self-reinforcing loop.

For those not familiar with Krugman's policy suggestions, he wrote back in August 2002 that "[t]o fight this recession, the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

Sir Alan followed Krugman's advice, and look where we are now. More of the same will only create more financial pain.

Mises Daily by Tyler A. Watts | Posted on 7/22/2009

2009-07-23T06:25:00.008-04:00

Green Baptists Preach Salvation by Breaking Car Windows

Who could possibly claim that buying up drivable used cars at prices far in excess of their market value, for the express purpose of destroying them, will be beneficial for the economy or the planet? You guessed it: a combination of economy-saving politicians and earth-saving green activists are peddling the wonders of a new government program popularly known as "Cash for Clunkers." The Consumer Assistance Recycle and Save Act of 2009 has the two ostensible goals of jump-starting the stalled automobile industry and combating global warming (or climate change, or whatever they're calling it these days) by replacing old, gas-guzzling smog machines with new, more fuel-efficient, cleaner cars.

This program seems very popular -- at least with automobile dealers, if we judge by the advertising. Here's the gist of how CARS (Car Allowance Rebate System) is supposed to work: owners of older vehicles can bring them to a dealership where they will be offered a refund of up to $4500 — supplied entirely by the government — towards the purchase of a new vehicle. The main catch is that the new vehicle must have a certain miles-per-gallon rating higher than the old vehicle, and the dealer must certifiably crush (yes, destroy) the old vehicle so that it can never pollute again.

Gee, I know you don't mean it Mr. Watts, but it sounds like you're saying they fixed it so that scum-sucking dirtbags like you can't cheat the system. Usually I don't allow talk like that on my blog, sir! Of course, there are many conditions and rules attached to the program, designed to prevent someone like me from buying a beat-up 1960s truck from the neighbor's farm for 100 bucks and installing a fuel pump, spark plugs, or whatever else necessary to get it running for an extra 50 or so, then driving it into town for a cool $4500 rebate on a brand new Dodge diesel. Chiefly, the clunker can't average more than 18 miles per gallon or be more than 25 years old (darn), and the person trading it in must show proof of registration and insurance for at least one year (double darn). The bribe — er, refund — then varies based on the improvement achieved in miles per gallon rating. For a complete rundown of the Byzantine rules, regulations, and restrictions, see the official website's FAQ.

Ever heard of unintended consequences, Mr. Watts? Sometimes you can shake things up just by shaking things up. Get the money flowin'. We'll see where it ends up goin'. I'm not saying I'm adopting the Cash for Clunkers program. I'm just saying people often seem to think that any action is better than inaction. Now, if "Cash for Clunkers" immediately brings to mind the broken-window fallacy, good on ya: you have a solid grasp of one of the most important lessons of economics. How could it possibly help overall material prosperity to overpay for used cars and then pay even more for people to destroy them, all the while also paying bureaucrats to ensure it is all done properly? The answer, of course, is it won't. There will be fewer "clunkers" available (with the really cheap ones disappearing first); there will be distortions in the used car and used car parts markets — it will be more difficult and more expensive to source used parts for the junker you want to work on — and there will be a whole new bureaucracy to manage the program, and so on.

The people that put Cash-for-Clunkers together probably figured they were compromising with you, knowing that you would never favor more direct support for "poor folks." Come to think of it, if you're trying to stimulate the economy it'll probably work better if you stimulate spending by people with some money, as opposed to people with no money. Unless you want to get the money from the people with most of it, and put that into circulation? To highlight just one instance of the outrageous economic distortion this silly program is sure to bring, consider the fact that most of the clunkers that qualify for the program are driven by relatively poor folks, people who are not very likely to be in a position to buy a new car even with the help of government refunds. I would venture to guess that these people rely on clunkers to a much greater extent than upper-middle-class suburbanites who can afford more reliable cars and who might own a clunker here or there as a spare, seldom-driven car. Yet these upper-income folks are far more likely to cash in on the artificial government refund value of clunkers, thus withholding their vehicles from the used car market and raising their prices. In the limit, clunker prices will climb as high as the potential refund value minus registration, insurance, and miscellaneous transaction costs, thus making basic transportation more expensive for the poorest elements of society.

"The harsh reality of market forces" is exactly why economic policy exists. That and, you know, "to promote the general welfare" and all that. It's a pretty sad case you make, that we should just grit our teeth and wait it out. If you were interested in focusing on relevant issues, rather than this trivia, we could have an intelligent discussion. As much as the cash-for-clunkers absurdity smacks of the broken-window fallacy, I see its deeper economic relevance as an example of rent-seeking behavior along the lines of the "Bootleggers and Baptists" model. It's no secret that the harsh reality of market forces has upset the auto industry. Yet many in that industry, especially new car dealers, are turning to politics for a quick and easy fix instead of gritting their teeth or throwing in the towel. Under the all-too-common rhetoric of stimulus, they're pleading to the politicians: "Please, concoct a scheme to bribe people into buying new car. Oh, and make sure you extract the bribe funds from someone else!"

Yeah, you probably think global warming is a farce too, huh. Yet even in politics, naked bribery and extortion are frowned upon. What's needed is a cover story. Enter the ubiquitous green lobby with their own plea: "Please, concoct a scheme to bribe people to 'go green' and replace those nasty polluters with earth-friendly eco-wagons." All you need now is an entrepreneurial politician[1] to package the deal, auto-industry and green-activist lobbyists to promote it, and even (gasp) economists, and smash! Another pane of economic — and moral — sense is shattered in the name of green stimulus.

To cast this in terms Bastiat might use, it's as if the glazier hired a street urchin to hurl bricks through shop windows by night, in the midst of a social crusade against the dangers of toxic, low-tech glass. The greed of those elements of the auto industry that endorse this plan, combined with the self-righteous conceit of the greens, makes for a politically potent combination. Disappointed car makers and greens alike, not satisfied with the economizing actions of individuals operating under free choice, are attempting to force the rest of us to re-economize along their preferred margins. This is green tyranny at its worst: waste, distortion, and violating liberty in the name of "saving the planet."

Mises Daily by Thomas J. DiLorenzo | Posted on 7/21/2009

2009-07-23T06:23:00.016-04:00

The Shameless, Blame-Shifting, Minneapolis Fed

Mmm, I took a look at that report. The thing that most struck me was... Well, here's how it opens:

The currect financial crisis has prompted these questions: Could the world economy enter a great depression like that of the 1930s? If so, what can governments do to avoid it?

Really??? Now they're gonna worry about the possibility of economic depression? What was their clue?

I recently received in the mail the 2008 Annual Report of the Federal Reserve Bank of Minneapolis. The title of the report is "The Current Economic Crisis: What Should We Learn from the Great Depressions of the 20th Century?" After reading the report, it is clear to me that either the Fed has learned almost nothing about 20th-century depressions or it is lying through its teeth in order to shift the blame for causing the current depression (or both).

"...either the Fed has learned almost nothing about 20th-century depressions or it is lying through its teeth...." Even if that's what you think, it doesn't have to be said nasty.

Relying heavily on another Minneapolis Fed publication, the article in the Annual Report authored by Gonzalo Fernández de Córdoba and Timothy J. Kehoe asserts that "bad government policies are responsible for causing great depressions." So far, so good. But then the next sentence informs us that "while different sorts of shocks can lead to ordinary business cycle downturns, overreaction by the government can prolong and deepen the downturn, turning it into a depression."

This is mainstream macroeconomic gobbledygook: downturns in the economy are caused by random "shocks," sort of like economic lightning bolts from the sky. The kinds of "shocks" that these authors mention include declining commodity and housing prices, increases in "world interest rates," and, in the case of Finland, "collapse in trade with the former Soviet Union." No mention at all is made of central-bank monetary policy as possibly introducing economic instability. In light of all the criticism the Fed has received for being the cause of the current crisis, it is [negligent of] intellectually bankrupt for these authors to not address this issue in even a single sentence.

Yeah, this is a fair assessment of the situation. I'd say the Fed does not adequately understand the problem. For if they do, then why did they let it get to this point? See my post The Western Peril for additional comment. Having ignored the role of central banks in generating boom-and-bust cycles, the "lesson" the Minneapolis Fed economists claim to have learned from their study of past depressions is that the "cure" is even more central bank inflation. "[G]overnments need to focus on providing liquidity," they solemnly intone. Following Alan Greenspan, they blame the current depression in the United States on a new version of "the yellow peril": impoverished Asians who have a penchant for saving a large percentage of their income. "Over the past decade, lending by China and other countries in East Asia … has kept world interest rates low." This is what fueled the real-estate boom, they say, ignoring altogether the role of Fed policy, as well as the policy of every arm of the federal government that is involved in housing (from HUD to Congress to the Fed itself) to force mortgage lenders to make bad loans to unqualified borrowers to achieve its goal of "making housing more affordable." (In reality, worldwide savings rates during the 2001–2008 period were actually lower than they were during the previous 15-year period.)

Again, why the nasty? Having totally absolved the Fed of all responsibility in creating the housing boom and bust, the Minneapolis Fed claims merely that "falling housing prices" are what caused all that "systemic risk," which they say needs to be more heavily regulated by — you guessed it — the Fed. It is the public that is ignorant of the causes of "systemic risk," they say, when in reality it is Fed bureaucrats like the authors of this report who are the truly ignorant ones. Either that, or they are lying to protect their jobs. This alleged lack of understanding by everyone in the world, with the exception of Fed central planners, "calls for reform and, perhaps, new regulations," they say, and "central banks … should lend to banks to maintain liquidity." That is, they supposedly need to inflate more and create more bubbles.

Fed economists — like mainstream macroeconomics in general — are intellectually bankrupt and clueless at best or dishonest propagandists at worst.

Mises Daily by Robert P. Murphy | Posted on 7/20/2009

2009-07-20T20:30:00.072-04:00

Where's the Economics?

CNBC Hates Saving

I realize it must be difficult to maintain a constant barrage of "just breaking" financial news stories, but CNBC really puts out some doozies. Take for example a recent article titled, "Higher Savings Rate Is Great, But What About the Economy?" When the title itself is nonsense — why would high savings be great if they destroyed the economy? — you know the article will be chock full of entertaining assertions and faulty logic.

I have to say that when a writer goes so far out of his way to find "nonsense" in a title, you know he is approaching his work with a pre-determined opinion.

The article opens with the news hook:

Households pushed their savings rate to the highest level in more than 15 years in May as a big boost in incomes from the government's stimulus program was devoted more to bolstering nest eggs than increased spending.

[LABEL] A gentleman would not abuse the First Lady this way. With apologies to Michelle Obama, let me say that The Fed's fault? I thought you would be big on individual responsibility! for the first time in 15 years, I am proud to be an American. Most people in this country were living beyond their means from 2002 to 2006, in part because of an unsustainable housing boom set in motion through easy credit from the Fed.

Living below our means is the solution for people who are waiting for a better solution. Now that the bubble has burst, the obvious solution is for most people in this country to live below their means for several years. As all the data indicate, that is precisely what Americans in their private lives are choosing to do. Freedom works; market prices guide people to make the necessary adjustments after a big surprise.

A "big surprise" ?? That's an understatement. Now... Bob Murphy says "Freedom works." He is suggesting here that coping with economic depression is a good thing maybe? There is always misunderstanding when people confuse politics ("freedom") with economics. Milton Friedman did it all the time, too.

Of course, CNBC and the government can't leave well enough alone:

The higher savings rate is healthy in the long term, economists said. But without vigorous consumer spending, the government may have to do more to revive the economy, possibly through further tax breaks and spending.

By now, we have all been desensitized to talk such as the above, but even so, let's go through it slowly and reflect on its vacuity. First, if "higher savings is healthy in the long term," then government deficit spending must be harmful in the long term!

No. This is absolutely not so. Government is not a business, not an individual. Government is the entity that issues money and is responsible for the standard, for the dollar as a standard of value. In this role, there are different rules. The rules of the private sector do not apply. Murphy's view is simplistic. Government deficits are not necessarily harmful... My view? Excessive debt is harmful, no matter whose it is.

In terms of total savings, the government's increased debt counterbalances the private sector's increased thrift.

Murphy says the Keynesian notion that spending leads to prosperity is "crude." Take it to its logical extremes: spending everything on the one hand, and spending nothing on the other. In the economy where there is no spending, there is no economy. Period. In the economy where everyone is spending, every business has many customers. Call me crude, but prosperity is associated with spending. Behind all of the sophisticated models and diagrams, the basic intuition of Keynesianism is that spending leads to prosperity. This is such a crude, layperson view, that it is shocking to find it still so resilient in academia. Perhaps the only thing even cruder would be the theory that printing up dollar bills leads to prosperity. I hate to break it to you folks, but I've just described the two leading schools of thought on the matter.

Robert Murphy says, if you're not Austrian you're a liar. This is Austrian economics? It's not a matter of whether investors are adults. It's a matter of economics: cascading bank failures, snowballing business failures, and the like. In contrast to the Keynesian and Chicago School (at least when they're discussing depressions), the Austrians recognize that we don't need to "lie" to the market economy. If investors have poured trillions of dollars into mortgage-backed securities that were riskier than originally thought, those investors need to own up to the consequences. They're adults, they can handle the news.

It's not clear to me that encouraging economic depression is the "correct" approach. Murphy is offering us Dark Age economics. If the government had minded its own business after the housing bubble popped, then interest rates (particularly for certain corporations) would have shot up, and "aggregate demand" may have fallen sharply. But those reactions would be the correct direction for the economy to take.

Robert Murphy's explanation of the phenomenon he describes here is: Of course it happens. Where's the economics? Yes, if households spend less today on consumption, in order to bolster their savings, then the downside is … less consumption today. Nobody denies that. Of course, the benefit is a better-funded retirement, or the ability to send the kids to college. So if households across the country are opting for less consumption today in order to have more wealth in the future, why are the politicians (and CNBC) trying to thwart their plans?

The paradox of thrift ...states that if everyone saves more money during times of recession, then aggregate demand will fall and will in turn lower total savings.... The paradox is, narrowly speaking, that total savings may fall even when individual savings (as a percentage of income) rises.... (from Wikipedia, the free encyclopedia)

If you go to the market to buy some strawberries, you will be able to buy as many as you wish at the posted price, subject only to the dealer's stock. To you, the price is fixed, the quantity variable. But suppose everyone suddenly got a yen for strawberries. For the community at large, the total amount of strawberries available at a given time is a fixed amount. A sudden increase in the quantity demanded at the initial price could be met only by a rise in price sufficient to reduce the quantity demanded to the amount available. For the community at large, the quantity is fixed, the price variable -- just the opposite of what is true for the individual." (from Money Mischief by Milton Friedman)

The paradox of thrift and the fable of the strawberries are two versions of the same story, told by Keynes and his nemesis Milton Friedman. Robert Murphy says, "c'mon, that's crazy." I say, Murphy, where's the economics? The sophisticated Keynesian will come up with a story about the "paradox of thrift," in which we all try to save more and end up broke. But c'mon, that's crazy. For one thing, countries with high rates of savings also have high rates of economic growth. Far from impoverishing a country, higher savings leads to higher investment.

Higher savings leads to higher investment by definition, because economists define savings and investment as equal. But this does not mean that every dollar saved is put to work as investment. Inventories accumulate, for example, and this counts as investment. If we save every dollar of our income, we buy nothing and inventories pile up until we are laid off. But savings and investment are still equal. Go figure.

Beyond that, the Keynesian call for "stimulus" spending is absurd on the face of it. It's true that there is a large coordination problem, when consumers suddenly cut back on their normal spending behavior. Businesses need to adjust to the new realities, and try to guess where people will be spending their dollars in the future.

A one-shot injection? One tiny little shot? What are you saying, Bob? The stimulus is too small? Don't be ridiculous. It's not one shot. The money will be dribbling out for years. Much too slowly to be called a stimulus. But why would the government be any help in this process? How in the world does a one-shot $787 billion injection of spending on purely political projects do anything to help the private sector reconfigure itself to the new economic fundamentals after the housing bubble has popped?

Let's grab another quote from the article:

Economists are hoping that improved spending will help support a rebound in economic activity.
Nigel Gault, chief U.S. economist at IHS Global Insight, forecast that consumers would remain cautious going forward but that even dampened increases in spending should be enough to jump-start economic growth.
"We do expect spending to creep slowly higher in the second half of the year as the labor market deterioration becomes less severe," he said in a research note.

Where's the economics? I really don't understand all the pussyfooting here. If it were really as simple as consumers "spending," why doesn't the government just levy a 95% tax on dividends and capital gains? Better yet, why not give the electric chair to anyone who saves more than 2% of his income?

Where's the economics? I'm being serious. The federal government kills people to get its way all the time, so why should it be different when it comes to saving the entire global economy? If the American consumer is too dense to realize that it's in his own interest to blow his whole paycheck at the mall, then why not use some good old-fashioned coercion? That's what we do when it comes to drugs and the draft.

Where's the economics? Oh wait, I just realized the source of the inconsistency. The reason the government doesn't force you to spend all of your money, is that you would reap the short-term benefits. Much better for the politicians to "borrow" money from you and spend it themselves on their favored projects.

It is a very basic mistake to assume that increases in consumer spending cause the economy to grow. The Keynesian equation, GDP = C + I + G + (X-M), is an accounting tautology. Total output (measured in dollars) must be equal to the summation of consumption, investment, government expenditures, and net exports.

The existence of money available to invest does not assure that investment will occur. For investment to occur, the investor must think it worthwhile. Probably, he needs to anticipate a decent profit. Whatever venture he is considering, the investor must think the business will have customers enough to create a worthy profit. But even though the equation is true, it does not follow that an increase in C on the right hand side, will necessarily mean an increase in GDP on the left hand side. Another way to balance the equation would be for something else on the right hand side to go down (like investment!).

In a recent blog post, Tyler Cowen gave the best illustration of this fallacy that I have ever read. In response to a reader asking which sector would drive the economic recovery, Tyler wrote,

Where's the economics, Tyler? Sounds like you're saying you have no idea how to restore health to out economy. Zip code?

[W]hen the word "drive" is used, we are smuggling in a causal category. There is no guarantee that any particular decomposition of the national income [identifies] the relevant causal components for what will "drive" recovery. How would it sound if you aggregated national income by zip code or county (or household) and asked where the boost to drive recovery would come from? Such an approach might not be on the right conceptual track.

It's understandable that the politicians would get up there and propose that we lend them a few trillion dollars to hand out to their friends. But why do sober economists lend their voice to the madness, and why do financial reporters continue to quote them? Let's just hope it's all an honest mistake.

Murphy, you need to disentangle the politics from your economics. Then perhaps you will see why sober economists "lend their voice to the madness."

Mises Daily by Morgan Reynolds | Posted on 7/17/2009

2009-07-20T05:00:00.057-04:00

A History of Labor Unions from Colonial Times to 2009

Let me say first: I love the title. Back when I started doing economics I used to go to the library and grab Historical Statistics of the United States, Colonial Times to 1970 This title reminds me of that one. Anyway, the more data, the better.

Second: I'm gonna handle this post a little differently. When I printed out the Mises Daily post for 7-17-09 I got 19 pages! So instead of pasting the whole thing in here, I'll just paste in excerpts. Here's the source article. At left is the Table of Contents for the article, just to give you a feel for the size and scope of it.

Introduction
Colonial Times
City of Brotherly Love?
Union Tactics
The Law
1850–1900
20th Century
World War I
1920s
1930s
World War II
Post–World War II
More on Union Membership
Public-Sector Unions
Employer or Employee Opposition?
An Economic Conclusion
References
Chronology
Notes

Part of the original article has been omitted

I never liked history until my study of economics drew me to it. By then it was too late for me ever to know very much. But I have run across the notion before, that "freedom of movement across occupations" -- something I personally take for granted -- was once a big deal, new and different. Some unions were secret societies with secret oaths, and unionists engaged in intimidation, threats, vandalism, and violence, especially against uncooperative workers denounced as subhuman "scabs" and "blacklegs." Private property, freedom of contract, competition, and freedom of movement across occupations (slavery and indentured servitude aside) were celebrated concepts, while government-granted monopolies and cartels were not popular at the founding of the American Republic.

Part of the original has been omitted

But it was such a good title! America was an open society, a frontier society, farm-dominated, sprawling, and free, and wages often were double those paid in England because labor was so scarce here. Although no reliable statistics are available, union membership probably remained below one percent of the work force most years from colonial times to the 1870s.

The "shock absorbers" thing is economics (thankfully), not history. It is a realistic assessment of the way our economy works: Supply and Demand in action. If a union declared and lost a strike, it usually collapsed and disappeared. Most unions failed during business downturns as jobs, union membership, and revenue declined. While wage rates fell elsewhere in response to depressed business conditions, unions stubbornly insisted on maintaining wage rates ("wage rigidity"), intensifying their own failure. As nonunion labor became less expensive (more "affordable") and induced more hiring, production costs fell, thereby reducing unemployment. Such wage-price flexibility shortened business downturns by expanding output and employment, thereby acting as "shock absorbers" in the economy.

Part has been omitted

45 years or more ago, my Mom (a Registered Nurse at the time) said the medical schools were limiting the number of students they accepted, to keep the number of doctors down and the income of doctors up. Trade unions in the early Republic sought monopoly control over the local supply of labor with the "closed shop," an arrangement requiring employers to hire union members only. Selective admission to apprenticeships restricted membership, thereby artificially limiting the supply of skilled labor for hire and placing upward pressure on wage rates.

Part has been omitted

The stronger a union is, the more it acts like a private state, secure in its power and with little overt need to use violence.

Part omitted

In 1842, Massachusetts Supreme Judicial Court Chief Justice Lemuel Shaw, in the influential decision of Commonwealth v. Hunt, ruled the bootmakers' union a lawful association with a lawful right to organize and collectively withhold labor ("strike"). The courts did not go so far as to authorize threats and violence by unions....

Omissions

During the Great Depression, Congress delivered an amazing sequence of six major pieces of labor legislation favored by unionists.... This avalanche of legislation to entrench unions was hastened by the prevailing doctrine of 1920s business leaders, that "high and rising wages were necessary to a full flow of purchasing power and, therefore, to good business," which was followed by its corollary, that "'reducing the income of labor is not a remedy for business depression, it is a direct and contributory cause.'" This ignorant blather reverses the true line of causation: high wages are an effect of high productivity and prosperity, not a cause of them.

Omissions

Davis-Bacon: This bill passed in 1931 following a sharp decline in construction activity at the beginning of the Great Depression. Construction expenditures went from $11 billion annually to $3 billion, with over half of the reduced activity financed by government.

Omissions

Norris-LaGuardia Anti-Injunction Act: Signed by President Herbert Hoover on March 23, 1932.... The number of strikes suddenly doubled between 1932 and 1933 to 1,695 and then continued climbing to a 1930s peak of 4,740 in 1937. This outburst of strikes occurred during a period of deep depression and massive unemployment, while previous business downturns had always diminished strike activity and caused many unions to disappear.

Omissions

NIRA: The National Industrial Recovery Act was among the many Roosevelt interventions to boost prices and wage rates on the mistaken theory that falling wages and prices were causing the depression rather than being market-driven adjustments to re-coordinate the economy and restore production and employment.

Omissions

National Labor Relations Act (NLRA): ...My favorite section (602A) in Landrum-Griffin, although intended to rein in union officials' abuse of members' rights, highlights the immunities the state grants to unions:

It shall be unlawful to carry on picketing on or about the premises of any employer for the purpose of, or as part of any conspiracy or in furtherance of any plan or purpose for, the personal profit or enrichment of any individual (except a bona fide increase in wages or other employee benefits) by taking or obtaining any money or other thing of value from such employer against his will or without his consent.

The exclusion in parentheses is quite astounding. Such open exceptions (privileges and immunities) for labor unions are necessary in legislation if the object of national labor law since the 1930s is to be promoted and achieved. Namely, this involves an organized labor movement freed from the regular constraints of civilization to extract money from employers against their will with the proviso that the loot be mostly paid to union members in wages and benefits.

Omissions

The Fair Labor Standards Act: Passed in Congress in 1938, this act set a national minimum wage rate of 25 cents per hour. It applied to an estimated 43% of employees in private, nonagricultural work and gradually grew to cover nearly 90%. State minimum wage laws cover most remaining employees. Effective July 24, 2008, the federal minimum was $6.55 per hour and becomes $7.25 per hour effective July 24, 2009....

Omissions

In 1940, Congress passed the first peacetime draft compelling conscripts to serve in the military, a prelude to the command economy of World War II.[16] Of the 16 million who served in the armed forces during the war, 10 million were draftees, and a depression labor glut turned into a wartime shortage. Government policy shifted from promoting artificially high prices for labor services to keeping prices artificially low during wartime.

Omissions

Wartime proved prosperous for unions. WWII government labor boards operated, on net, to advance unionization, cementing in place the union gains originally created by the WWI and New Deal interventions. Between 1933 and 1945 the unionized fraction of the civilian labor force rose fourfold from 5.7% to 22.4%. That proportion eroded but remained above 20% during the 1950s.

Since 1960, however, a sharp decline in union density has set in all Western countries. According to OECD data, estimated union density in the United States was 30.9% in 1960, 22.3% in 1980, 12.8% in 2000 and 11.6% in 2007. While the overall rate of decline has recently slowed, the decline in private sector union membership has been partially concealed by union growth in the public sector.

Between 2000 and 2008, for example, BLS data show a decline in unionization among privately employed wage and salary workers from 9.2 million to 8.3 million, and an erosion in union density from 9.0% to 7.6%. Private-sector membership peaked at 17 million in 1970, so in total membership has fallen by over half since 1970. Membership among government-employed wage and salary workers grew modestly from 7.1 million to 7.8 million since 2000, with a stable density of 36.9% in 2000 and 36.8% in 2008.

Correlation versus causality? Union density in the private sector now is not much higher than it was in the early 1900s despite massive federal intervention on behalf of unionism since World War I. The wage-boosting success of private-sector unions has gone hand in hand with their decline in membership (nothing fails like success), as the silent, steady forces of the competitive marketplace continually undermine government-sanctioned labor cartels.

Omission to the end

All in all, a lot of history on a topic related to economics. But almost no economics.

Mises Daily by Pia Varma | Posted on 7/16/2009

2009-07-18T23:27:00.033-04:00

From the Runways of Austria ...

This article from Mises Daily is a "compare-and-contrast" of Austrian and Keynesian economics. That's what I've been looking for. However, this article is couched in terms of a fashion show with runways, designers, fashion styles, and more. In my comments here I will attempt to filter out the Pia Varma filler and get to the meat of the matter. Wish me luck.

This article compares Austrian and Keynesian economics [LABEL] It's Economics Week here in Austria and I am reporting on the hottest brands burning up the runways of political thought. All the big names have come out for this star-studded event: the always confused Friedrich Nietzsche, the minimalist and objective Ayn Rand, and the German bohemian-hippie Karl Marx have all graced us with their presence. However, the two haute couture lines creating the most buzz are "Laissez-Faire," by Ludwig von Mises, and "Après Moi le Déluge" by British export, John Keynes.

Pia Varma says Keynes manipulates markets, while von Mises does not. [LABEL] Perhaps I misunderstand. Keynes lost out in the 1970s to Supply Side Economics and Rational Expectations and the Laffer Curve and a whole host of disparate theories which the old Keynesians referred to as "disarray." Keynes' name was not uttered again until President Obama set forth his emergency economic recovery plan in the first months of 2009 Here, however, Keynes is held to have been "competing" with Laissez-faire "for years." For years these two competing brands have been catfighting it out for dominance in the fiercely competitive international scene. Although both lines will turn heads, they couldn't be less alike. Mises's Laissez-Faire has, as usual, turned out beautifully — it is classic, simple, elegant, and understated. No contradictions. No delusions. No trying-too-hard-to-make-this-work, Betsey Johnson–style market manipulations. Just clean lines and universal truths. With Laissez-Faire, less is always more.

Keynes manipulates markets... Keynes, on the other hand, puts his loud, garish mark on everything he touches. [LABEL] ...but market manipulation doesn't work (according to the Pia Varma article) In typical razzle-dazzle style, Déluge will be the talk of the town all season, only to be regretted, discarded, and replaced with the newer, hotter, and edgier trends of next season. With every line overcompensating for the mistakes of the past, the prima donna is shameless in his denial of failure. When Keynes was asked recently about Mises's "Laissez-Faire" line, the diva quipped, "It is better to be roughly right than precisely wrong."

Keynes is wrong, but popular. Young, naive, overly intellectual, and cocky, Keynes has, over the years, managed to produce nothing but overly complicated intellectual litter [LABEL] that is ripe for racks of sample sales; Déluge is fodder for the herds of wannabes desperate to fit in. The standard fair for Keynes is akin to stripes, patterns, and polka dots, leaving the wearer in a position similar to the titular character in "The Emperor's New Clothes" — perhaps not à poil, but similarly risible!

Austrian economics = Laissez-Faire economics [LABEL] In contrast, Mises has always been a realist, maintaining discipline and control, giving his styles a timeless touch. Mises sets a high standard. He doesn't just see this season or next season: the ideas in Laissez-Faire are not tied to any short-term trend or fad [LABEL] Pia Varma says Keynes is popular. But I think she's wrong. I just don't see it. — they are meant to be worn for decades to come. Unlike Keynes, Mises will never force an unflattering — although popular — style into his line. He knows and sticks with what works.

Sounds like Austrians manage money the old fashioned way: the gold standard (or something similar) and/or a tight money policy. Keynes is said to support cheap money (low interest rates) and inflation ("diluting the value"). I'm not sure what specific criticism of Keynes is implied by the "gray market" statement. When it comes to a label's reputation, these designers have taken wildly different tacks. While Mises has maintained his label's currency by backing it with strong brand assets, using quality fabrics, and controlling supply, Keynes has chosen an alternate plan. He has insisted on making sure every young Hollywood starlet is clad in his styles. He doesn't care that his Chinese manufacturers are sweat shops using the cheapest fabric available. And he has no idea that they are diluting the value by throwing even cheaper knockoffs to the black market. Let's not even start with the gray market! The man doesn't understand business at all.

Keynesian policy is variable ("trendy"), a 'quick-fix' ("want it now"), and "inappropriate." Keynesian policies don't fit together coherently ("clashing choices"). On a personal level, Keynes is "arrogant." Just who are these two men designing for? Let me sketch you an outline. John Keynes designs for those who want what's trendy and want it now — whether it works for their body type or not. Inappropriate for almost every occasion? They'll take it! Keynes doesn't care, so why should they? After all, the man did arrogantly state in a post-show press conference that "in the long run, we're all dead!" Keynes's designs are based entirely around the instant gratification, quick-fix culture that is currently in vogue. His frequent centerpiece is a psychedelic mini-skirt of a feel-good program, which will be lauded by the sycophantic press as being ahead of its time. His overly inflated ego fed once more, Keynes will continue to put out more disastrous, clashing choices.

Austrians know that Laissez-Faire works. And Laissez-Faire? Mises designs with longevity in mind. He approaches his line with maturity and responsibility. Despite the recent assertions by French critic Nicolas Sarkozy that "Laissez-Faire is finished," it has continued to remain a firebrand, [LABEL] reserved for the strong and the self-assured. Mises's designs are for those who know what they want, and what works and what doesn't. [LABEL] You can do business in Laissez-Faire. You can be successful in Laissez-Faire. You can prosper in Laissez-Faire.

'Lack of concern for consequences' refers to 'unintended consequences' probably, or maybe to the typical Democratic misunderstanding of economic principles (something I can see for myself). 'Moral high horse' I think refers to Democratic or liberal ideals as Republicans or conservatives see them (but this is not economics). 'Maxing out their credit cards' refers to the excessive debt we have today: incorrectly attributed to Keynes. Not so with Keynes. [LABEL] Keynes is popular with the crowd who plays at life. His styles are immature and perfectly suited for socialites who gossip, fight, envy, get jealous, and steal each other's boyfriends. The ones who stir up drama and entangle themselves in things that aren't any of their business. His line exudes a certain lack of responsibility or concern for consequences. He designs for the spoiled beauty queens who walk around on a moral high horse wanting to save the world but spend their days shopping and maxing out their credit cards — and then calling their parents to bail them out.

Depression, no money, and lots of debt -- I think this is a summary of the Austrian Business Cycle Theory (ABCT). I'm still lookin' into it. I can't look at his cheap easy-evening looks without picturing partying till dawn, breaking windows à la Britney Spears (as Bastiat rolls in his grave!), collapsing, and waking up in a state of depression with no money and a heck of a lot of debt. I cringe at the image of evenings spent taking advantage of well-meaning, hard-working businessmen who buy the drinks because it's the chivalrous thing to do — and of evenings spent being taken advantage of by not-so-nice men who are looking for some quick favors. Morality … thats all relative!

Keynesianism is seen as "a failed government policy." (As I noted above, it failed in the 1970s and was abandoned. Since then we've been trying to balance the budget: not the Keynesian thing to do!) It is always painful for me to sit through a Keynes show. The Iron Lady of high economics herself, Margaret Thatcher, sat next to me concurring that "nothing is more obstinate than a fashionable consensus." The designs are great in theory on a 5'10"-size-2 model, but I cannot help but think of the countless women who will spend entire evenings sucking in the stomach of market realities, constantly tugging and pulling at the skirt of human nature, and trying desperately to walk in the broken heel of a failed government policy. It all adds up to one giant, unfashionable moral hazard that is certain to land anyone on People Magazine's Worst Economics List!

I apologize if I have hurt Mr. Keynes's feelings. I know I have been a tad bit harsh, but someone had to rip his metaphorical clothing to shreds. Darling, this is the cutthroat world of economics where you must leave your emotions at the door.

I applaud Ludwig von Mises for a wonderfully inspiring show. For me, he has been the highlight of the week. His designs are not about himself or even about the outfit, but rather are meant to emphasize the unique personality of the person wearing it. Mises designs for the individual, not the masses. He knows that simplicity, conservatism, restraint, and freedom within parameters are what make his brand so consistent, so powerful. Mises understands that these are pearls of wisdom and gems of truth: the large, high-waisted, oversized belt of tight fiscal and monetary policy.

Mises is also acutely aware that it is only within the strict laws of good economic style that a person's free spirit and brilliance may truly shine through.

Mises Daily by Joseph Keckeissen | Posted on 7/15/2009

2009-07-18T20:01:00.012-04:00

Why the Crisis Hasn't Ended

Why hasn't the crisis ended as yet? It should have been all over with and forgotten by the first of last February. If so, the whole troubled world would have already issued a huge sigh of relief.

[LABEL]

There would be no more impatient dilly-dallying on the part of investors, waiting for the government to decide who are going to be the recipients of the new trillion in handouts, and causing daily upsurges and downfalls in the unsettled Dow.

Assets would have fallen to their normal worth, the present discounted value of their future returns. No need to wrestle with mark-to-market account. No need for Sarbanes and Company to meddle and make newer and stiffer regulations. No need for new super controls.

Mr. Geithner wouldn't be stressed to invent new ways to cajole folks to contribute to the buyout of overvalued securitized junk. Nor would there be the least excuse for more G20s to be needled into bastardizing their overbloated monetary systems. Mr. Bernanke would have stopped acting the role of Santa Claus, distributing the government-invented moonshine to the denuded former greats of Wall Street.

The corpses of the erstwhile automobile empires would have breathed their last, their good assets now transferred to the hands of newer more responsible entrepreneurs. The prior executives would be moving over to Cheapside and brushing off their overalls, perhaps in line to join a new remodeled UAW, in search for some job where they couldn't mess things up any more.

The bankruptcy courts would be finishing up their exequies for the deceased former titans of the packaged debentures. The tombstones of the new economic cemetery would display the once great names of Fannie and Freddie, of Citi, of AIG, of Merrill Lynch, along with the hapless Lehman Brothers, interred several months before. And so many more financial cadavers would have been laid to rest, their memory duly to be forgotten, as perpetrators of a fake capitalism now buried and forgotten. Perhaps the cemetery could be economically located in an enlarged churchyard at Trinity Church at the head of Wall Street, to occupy the now excess real estate in the area and be a perpetual reminder that treason in the capitalist world will always be avenged.

Washington would finally be silenced, even if the Fed were not yet duly junked in the process, and the Treasury's overbearance would be bridled as the rest of the uneconomic trash was being flushed out of the system.

The Case Shiller indices would have completed their downfall to a level that future homeowners could devote the traditional 30 percent of their money incomes towards purchasing their long-wanted love nests. New families would be rushing in to fill the vacant home sites.

True capitalism would be alive again; employment would be rising up to normal. The waiting lines would no longer be for unemployment checks, but rather to be first to enroll in the new jobs daily being created. The new savings of the American people, shocked by the catastrophe, would now offset the strangling of the market rate of interest on the part of the monetary gymnasts, and would reflect the new flow of healthy capital ready to be invested in solid new ventures. The Dow would be healthily aglow with daily increments. All the bubbles would have burst away.

Happy days would be here again! We'd once again be rolling in prosperity!

But why hasn't this happened?

Why is the world still in acute misery, even expecting the worst yet to come?

All that would have been necessary to halt the continuation of the present freefall would have been that on January 20th last, precisely at noon, the newly inaugurated president would have announced to the American people (even before the triumphant parade and the orgies that followed) that his program was NO, but NO. If he had said,

The inflationary monster TARP is out. No more bloating up the money supply and the budget with inflationary inanities. No more bailouts. No more rescues. No more trillions. Those who have received any bit of largesse will promptly return their ill-gotten loot to the Treasury. The bankruptcy courts are now authorized to get on with their interments at once. Nobody is too big not to be interred.

[LABEL]

With this no-but-no on the part of the new president, the market would have immediately stood up to perform its traditional job. All bloated prices would have immediately crash-dived down to some normal sustainable level. All talk of newer regulatory agencies would end. Instead of a great inaugural parade, we would have witnessed the opening of a new capitalist cemetery, the funeral cortege bearing the titles of the fallen titans of yesteryear.

By the first of February, at the latest, everything would have been again on the upsurge. The second spring of capitalism would be in bloom all over the landscape and President Obama would proudly be presiding over the greatest boom ever in American economic history.

But, unfortunately, sad to state, the new president never understood the warnings of Ludwig Von Mises, who told us again and again that the market is the only institution that makes and rectifies prices, that money must not be multiplied, and that the interest rate is naturally and untouchably sacred.

On that fateful inauguration day, Obama said YES but YES to all the imbecilities being proposed, by President Bush before him, by the Reids and Pelosis in the Congress, by Paulson, Bernanke, and Geithner, by the great Nobels and the government-adulating economists. Long live Maynard Keynes and the national economic medical corps that will monetize and fiscalize us to perdition. It was the market that was laid to rest in favor of all the new boondoggling experiments that have all but brought America to ruin.

This is a prediction we should watch: "Perhaps by year's end, an ordinary egg will cost one hundred or so debased dollars."

We have to bemoan the fact that the new exponential influx of fake money will make prices surge to an unprecedented infinitum. They will soar; perhaps by year's end, an ordinary egg will cost one hundred or so debased dollars.

We should rue that day, the 20th of January, when the switch to prosperity could have been turned on, the light of freedom would have again begun to shine, and the economy rerouted upwards. But instead, we applauded the death knell of both liberty and prosperity and issued in a new chaos, far greater than that of the Roosevelt era, one that might last for untold years and years to come. We have rejected the enrichments of a healthy capitalism in favor of an impoverishing government-run fascism. We have resurrected another great depression — and made America the crisis leader of the world, instead of, what it once was, the beacon for world prosperity.

Mises Daily by Jeffrey A. Tucker | Posted on 7/14/2009

2009-07-18T11:16:00.018-04:00

Stop Signs and Liberty

[LABEL]

And then one day the stop sign was gone.

It was the very stop sign one block from my house that was oddly stationed at a low-traffic, 3-way intersection, tempting every driver to slow down but not come to a complete stop.

Jeff Tucker is apparently something of a slow learner.

How the city cleaned up on that one! I have personally coughed up in excess of $1,000 for tickets there, once time receiving two tickets in as many days. This sign was even the reason that I spent a day in jail for failing to fork over when the judge said I should.

I'm not alone: 93% of the drivers failed to come to a complete stop. Even so, I'm routinely lectured that my job as a citizen is to do precisely as I'm told. I've learned to habitually stop completely, even when the place looks like a ghost town with no cars anywhere in view.

Then one day the stop sign vanished.

What happened here? Did the cops finally get all the citizens trained to stop and thereby dissipate their opportunity for rents? Was there just no more money to be made from the disobedient?

Do I get a refund? How about compensation for the day I spent in jail? What about everyone else?

The local government must have extracted tens of thousands of dollars before good sense overcame our overlords and they decided to relent to reality. But no, there will not be compensation. The law changed its mind, and we are supposed to just deal with it. Now I must rehabituate myself to breaking — I mean keeping — the law.

One day, I'm jailed for failing to stop. Presumably, I could now get a ticket for stopping, since surely there is a law against suddenly stopping on a public road for no reason other than some vague memory than one had to in the past.

What is evil one day is mandatory the next.

Now, I know what some readers are thinking: here we go with the libertarian wacko complaining about the "coercion" of stop signs. For decades, conservatives have been poking fun, caricaturing libertarians as people who rail against stop signs and thereby reveal their personal problem with authority—even such obviously justified authority as government stop signs.

Don't we understand that these keep us safe, and so surely we should be willing to give up just a bit of license to speed around with abandon in the interest of the common good?

Even now, a quick google of "libertarians" and "stop signs" reveals many people on the Left and the Right who think it is just stupidly hilarious that libertarians talk about these issues.

As a matter of fact, the management of the roads is a hugely important issue, given that tens of thousands of people die on government roads every year. Private ownership would in fact lead to greater liability for the road owner — and also more rational rules of the road. The private road would be devoted to serving the customers, not looting them at the point of a gun. And not only are private roads viable; there is a long history and a present practice to draw on.

Oh sorry. This sentence is about free enterprise.

Walter Block's new book on road privatization makes the case that this is not an issue to ignore but one to solve through free enterprise.

In some ways, then, it is true that the stop sign — as with every regulation by the state — embodies all that is wrong with the public sector. The rules are made to benefit the state. You are on the hot seat if any policeman says that you have done wrong. The pretense of a fair trial is a complete farce, as you have to tangle with judges who hate you, waste several days of work, and throw yourself on the mercy of the court. Once you are entangled in the web, you can't really get out.

For the record: I think the "central planners," or what I call the "government," would be more compatible with, uh, the peripheral plannees like Jeffrey Tucker and myself, if they didn't have to pinch every penny along the way. Likewise, we -- the peripheral folk -- would be more comfortable with our government if the economy was in better shape. Just my gut feeling on the matter.

And who makes the rules? The central planners make the rules, and the public be damned. The rules are there to serve the state, not us, and the stop sign that is oddly placed in order to extract revenue makes the point very well.

[LABEL]

When you are stopped, you become aware that the imbalance between the citizens and the state couldn't be more obvious. Deliver an insult and you are arrested. Try to run and you are gunned down. Fail to pay and you end up in the slammer. And maybe the cop will find something else about your life to be suspicious of. Whatever they want to know, you must tell them.

Government is not reason; it is force. What was the actual social rationale for that stop sign in the first place? You dare not ask, for then you are questioning the elites who are in charge of your life. And why was it removed? It's not for you to question why; it is for you to do or die. It was there and now it is gone. All "law-abiding citizens" must change with the arbitrary dictate of the traffic masters.

Now, I'm not saying that we don't need rules in society. But the question of who makes the rules and on what basis becomes supremely important. Will the rule making flow from the matrix of voluntary exchange based on the ethic of serving others through private enterprise? Or will the rules be made and enforced by people wearing guns and bulletproof vests with a license to shock or kill based on minor annoyances?

Something as seemingly innocuous as a stop sign can become the occasion for the use of terrible violence and terrible oppression. And think about it: we are talking about local government that is especially sensitive to public opinion. If we see corruption here, what about at the national level, where the citizens are nothing but an abstraction?

So, no, I have no problem with making the stop sign a symbol of the fight. It shows that even the least objectionable aspects of the state can mask despotism and that we should think hard — very hard — before ever ceding control of even the smallest parts of life to the state.

Ultimately, the state is in control or we are.

There is nothing in between.

Mises Daily by Robert P. Murphy | Posted on 7/13/2009

2009-07-16T20:45:00.058-04:00

Mish Should Ditch His Deflation Fears

We who are advocates of sound, free-market money need to get our story straight. Are we predicting hyperinflation or massive deflation? Personally, I am much more worried about the former problem. Using a recent article by Mish, I hope to show that no one has made a convincing case for falling prices.

Mish's Argument for Deflation

"Mish" is a very popular blogger on financial and economic affairs. [LABEL] His nickname is a melding of the first two letters of his two real names, Mike Shedlock. [LABEL] (My own friends called me "Romu" for a brief spell, but it didn't catch on.) For some time Mish has been criticizing those warning about impending inflation, and in a recent post he summed up his position quite well.

Mish was responding to Gary North, who had written, "The Federal Reserve can re-ignite monetary inflation at any time by charging banks a fee to keep excess reserves with the FED."

Mish took issue with North's claim:

Oh, no! Gary North's hypothesis is most interesting!

Gary's hypothesis … is just that, a hypothesis, and I believe a very poor one at that.

Bernanke's idea to pay interest on reserves will slowly recapitalize banks over time. [LABEL] This is why he desperately wanted to do so. To suggest he is about to charge interest on deposits is [LABEL] silly.

The key fact now is there are not enough credit worthy customers for banks to want to lend, or for that matter willing borrowers looking to expand debt. [LABEL] Thus, if banks had to pay interest on reserves, rather than causing mass inflation, the Fed would cause mass panic.

As I see it, the decision to start paying interest on bank reserves was a stroke of pure genius. It gives the Fed another tool it can use to keep reserves where the Fed wants 'em. I humbly submit that we have no idea what Bernanke is going to do next. [LABEL] Well, okay, we have some idea; Bernanke obviously isn't going to call for the abolition of the Fed. But beyond that, it's anybody's guess. There are many economists who think Bernanke's decision to start paying interest on reserves was a horrible blunder. [LABEL] In any event, Mish is simply assuming that the Fed officials don't want to "cause mass panic," when an open-minded reading of history makes me wonder.

[LABEL] Let's not get bogged down on the issue of Fed payment of interest. Here is the crux of Mish's approach to inflation:

[Some] inflationists look at consumers prices, some look at commodity prices, still others look at the price of gold as a measure of inflation. Of those watching money supply, some concentrate on Base Money supply as Gary North does, others M2, M3, MZM, or even Austrian Money Supply as a measure of inflation…

Every one of them is wrong.

We have a credit based economy and anyone watching money supply and not watching credit is simply wrong. [LABEL] This is a statement of fact, not idle conjecture. Only those watching and expecting the collapse in credit and understanding the role of gold got things correct. This is a very small group of people.

A most important question.

Is Credit Part of the Money Supply?

No. Not "virtual" money. Although every writer has his or her own nuances, I think it's safe to generalize and say that the people calling for a "debt deflation" are assuming that the availability of credit acts as "virtual money," and causes prices to be higher than they otherwise would be. [LABEL] Some writers in this camp seem to think that we should just lump someone's credit line in with his bank balance and currency on hand, in order to come up with how much "purchasing power" he has at his command.

Keep in mind that Bob Murphy's economy "where physical gold serves as the commodity money" is only for simplicity's sake. No one is making any assumptions about the need or benefit of trying to get back on the gold standard. Right? [LABEL] Strictly speaking, that isn't correct. For simplicity, picture an economy that has no credit system, and where physical gold serves as the commodity money. We start out in an initial equilibrium where the public collectively holds, say, 100 million ounces of gold as cash holdings. Prices of goods and services are quoted in weights of gold, and this vector of prices determines the "purchasing power" of an ounce of gold. Because we're in equilibrium, everyone is happy holding his portion of the 100 million ounces.

Now suppose in this scenario, a budding entrepreneur gets the bright idea to form [LABEL] Rothbard Express, the first-ever credit card company. That is, Rothbard hands out plastic cards with his logo on them, and merchants agree to accept payment with use of such a card, rather than with actual gold coins. What will be the effect on prices?

At first blush, it seems as if the new business will push up prices. After all, people can now chase goods with not only 100 million ounces of gold, but also with the sum total of their credit lines as extended by Rothbard. In the new equilibrium, wouldn't prices be higher because of the extra spending?

Spending affects prices. (See the last line above.) The Q of M only affects spending. Yes, excessive use of credit would push prices up.

Actually, it's not at all obvious that the new credit card system would push up prices, because credit cards don't create new money. When Jim swipes his Rothbard card to buy a suit at a price of one gold ounce, the merchant still gets paid in gold. [LABEL] What happens is that Rothbard Express makes a short-term loan of one ounce of gold to Jim, who then spends it on the suit.

Hold on there! Murphy wants to reject the notion that credit-in-use has inflation as one of its consequences. But I thought the Austrians attribute the whole business cycle to cycles of credit use! Eh -- maybe I'm wrong about that. Or maybe it's Murphy that's confused.

The merchant gets paid in gold later. Time is money. The use of credit lets us spend future money now, thus increasing the quantity of money.

After the transaction clears, the tailor has one additional ounce of gold, Rothbard Express has one fewer ounce of gold, and Jim has the same amount of gold. On top of that, Jim's outstanding debt to Rothbard Express has increased by one ounce of gold, while on Rothbard Express's books, the claim on Jim has increased by one ounce of gold.

Breaking the economy down to a single transaction, adding one ounce of credit-card spending to 100 million ounces of gold is indeed insignificant. In our economy, however, the comparable number is more like 3500 million ounces of credit in use, 35 times the quantity of M1 money.

Breaking down the credit transaction into its components, it's not obvious why there should be upward pressure on prices. Yes, Jim can buy a suit that he otherwise could not have afforded; this makes suit prices higher (today) than they would otherwise be. [LABEL] But in order to finance Jim, Rothbard the entrepreneur may have deferred a purchase of a computer that he otherwise would have made, making computer prices lower today. In general, there is no reason to suppose the net effect would be rising prices.

Supply and Demand for Money

Rothbard has not increased the quantity of gold. But he has increased the quantity of the medium of exchange. So yes, he has increased the quantity of money.

Rather than staring at an individual credit transaction, maybe we'll gain more insight from looking at the big picture. The new company Rothbard Express hasn't increased the physical supply of gold; the community still has 100 million ounces, just as before. So the question boils down to this: do people want to hold the same amount of purchasing power in their cash holdings, as before?

The ambiguous phrase 'holding money' cannot refer to M1, because nobody can hold on to it. The phrase must refer to (M2-M1) or money in savings.

Again, at first the answer seems to favor (price) inflation. Because each consumer now carries around a plastic card giving him the ability to command (say) up to three ounces of gold on the spot, he's probably going to reduce the amount of physical cash he carries on him, or that he leaves in a checking account. The size of his stockpile for "emergencies" can safely be reduced, since he now has an extra cushion due to his credit line from Rothbard Express.

If this pattern held for everyone in the community, then the result would clearly be rising prices. No matter what, the total cash holdings of the community must equal 100 million ounces. If everybody wants to cut back on his cash holdings, the only way to accomplish this is through rising prices. To put it crudely, if everyone wants to hold half as much cash, then a doubling of prices will restore equilibrium.

Who would not want to double that three weeks to six, and then double it again? We want to hold money, but cannot.

Recall that it's not the actual weight of gold that people care about, but rather its purchasing power. For example someone might put "three weeks of groceries" in gold in the house safe. When food prices go up, this objective requires more physical gold.

However, we can't yet conclude that the introduction of credit cards will lead to lower desired cash holdings, and hence to higher prices. [LABEL] This is because Rothbard the credit card entrepreneur must greatly increase his cash holdings. [LABEL] In order for merchants to let customers buy their wares at par using a credit card, Rothbard must build up an impeccable record of settlement of charges. In order to do that, he naturally must accumulate a large stockpile of physical gold before he starts issuing plastic cards.

My guess is that, on balance, the expansion of Rothbard's cash holdings would only partially offset the reduction of the rest of the community's cash holdings. In other words, I think the overall market demand to hold cash would fall. (Rothbard's demand increases, but the rest of the community's demand decreases by a greater amount.) With falling demand and a fixed supply, the "price" of gold would go down, meaning its purchasing power would drop. That's just another way of saying that prices of goods and services, quoted in ounces of gold, would rise. In other words, Bob Murphy's guess is Yes, the use of credit cards would push prices up.

If we are down to using credit only for true emergencies, then economic activity is down significantly. That's bound to be deflationary

[LABEL] Having made that concession, I still don't see why the bursting of the housing bubble will lead to mass price deflation. If American households are trying to pay down their credit card debts, that's not the same thing as taking away their option to charge a true "emergency" purchase, which most households can still do. It's true, households did in fact expand their cash holdings in 2008 [LABEL] , but I think their actions were more attributable to the general uncertainty of the future, than to the tightening of credit standards.

This is absurd! $500 less consumption is $500 less consumption, regardless of what the next guy (banker or restauranteur) does with the money.

If a household spends $500 a month less on dining out, in order to pay down credit card balances, that is not automatically $500 less in "total spending" in the economy. We have to inquire further to see what the credit card company does with the $500 extra in monthly payments it now receives. The mere fact that (some) households are trying to pay down debts doesn't guarantee price deflation.

Stocks and Bonds Have Prices, Too

The Fed adds money to circulation by printing it and buying things. We add money to circulation by borrowing it and buying things. We take money out of circulation by repaying debt. (We could fight inflation this way, but we don't.)

As the considerations above should indicate, it is not self-evident that a bursting credit bubble will lead to price deflation. But perhaps I have left out a crucial piece of the analysis. Maybe in the real world, credit card companies act as quasi fractional-reserve bankers, because merchants do not insist on immediate payment in actual money. Just as bank runs (in a fractional-reserve system) could collapse the money supply and hence prices back in the early 1930s, maybe in today's economy a widespread "pulling out of credit" could have similar effects.

Velocity is a sham. Anyway, Murphy has it backwards. Velocity doesn't drive anything. It is simply a number based on events. And by the way, it is true that velocity is down. There's no suppose about it.

Murphy's observation of simultaneous inflation and deflation is brilliant.

This seems to be the deflationist argument, but I have never seen it spelled out carefully. It might be right, but no one has yet convinced me. In any event, I offer the following observation: Suppose it's true that "velocity" will fall (a favorite deflationist claim), meaning that the average dollar bill turns over fewer times per year and so can support a lower level of prices. Still, what if the specific prices that take the brunt of the fall, are associated with corporate stock and US Treasury bonds? It's entirely possible that "general US prices" fall according to some measure, while the prices of milk, eggs, and gasoline rise.

Whatever happens to the absolute levels of various prices, certainly the relative prices of hard commodities and staples will rise, compared to the prices of mortgage-backed securities and commercial paper issued by a coal-based utility company. Even if the "debt deflation" scenario is generally right, the absolute effect could be swamped by the relative effects, meaning that retirees on fixed dollar incomes could still get wiped out when their standard monthly expenses rise. The deflationists like Mish might be right, but they need to make a much stronger case.

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2009-07-16T20:39:00.000-04:00

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Thing One

2009-07-16T12:15:00.001-04:00

I got tired of hearing about Austrian economics and not knowing anything about it. So I subscribed to the Mises Daily. Here's a list of activity to date:

July 9, 2009 - Confirm subscription
July 10, 2009 - Welcome
July 13, 2009 - Mish should... (I liked this one!)
July 14, 2009 - Stop signs... (Junk. I trashed it.)
July 15, 2009 - Why the crisis...
July 16, 2009 - From Austria...

Today (16 July) I decided to review a month's worth of these Mises Dailies. I'll parse the lot of 'em here on the couch. It'll be a lot of work but if I can do it, maybe I'll learn something about that Austrian economic stuff.

So anyway, here we are, and if I can keep up the pace, there will be quite a few posts here in a short period of time. I don't expect to get it all right the first time through. I'll be in and out, recategorizing the Mises-Daily posts line-by-line, word-by-word if I have to.

Perhaps by the end I'll decide the Austrians are right. We'll see.