A Structure Is Only as Durable as Its Foundations

Almost two weeks ago I had the privilege of speaking at a supporters reception hosted by the Institute for Principle Studies (IPS). IPS is a research and educational organization analyzing public policy from a distinctly Christian world view. At the reception I briefly explained my conviction that our current economic problems are due in large part to ideologies and ethics built on faulty foundations. A building supported by a crumbling foundation will not have very long to stand. So it goes with economic society.

We see evidence of this from the mouths and pens of well-respected members of the economics profession. It was Ben Bernanke who, fearful of deflation in the middle of last decade, convinced then Fed chairman Alan Greenspan to pursue serious monetary inflation during the mid-2000s. Paul Krugman continually calls for ever greater government spending to get us out of our current economic banana. To do his part, current Fed chairman Bernanke has increased the monetary base by $1.4 trillion. Recently, Christina Romer argued that if you want to reduce the budget deficit, raising taxes would be less painful than lowering government spending, because the multiplier is smaller for taxes that it is for government spending.

The common ideology that drives all of the above is what Robert Higgs called vulgar Keynesianism. In a nut shell, this economic ideology asserts that the economy is driven by spending--especially consumer spending. Additionally, the economy is conceived as merely the sum total of various aggregate variables. The simple Keynesian system asserts that Aggregate Demand = C + I + G, where C is consumption spending, I is business investment in physical production, and G is government spending. In equilibrium, this aggregate demand is equal to output, or aggregate supply equals aggregate demand.

As Higgs notes, one of the major failings of this conception is that all spending is considered equal. $1 million spent on baseball tickets is economically equivalent to $1 million spent on desktop computers. $1 million in corporate subsidies is equivalent to $1 million spent on housing construction.

Another key part of vulgar Keynesian ideology is that the chief end of the state is to provide full employment. If there is a drop in consumption spending or business investment that is significant to push us to an equilibrium income too low to sustain full employment, the state should stand by ever ready to fix the problem. It should either increase government spending, or increase the money supply to lower interest rates, thereby increasing business investment. Both would raise incomes and therefore also increase consumer spending. Because spending is spending, there is no concern that the money is spent productively.

When weighed in the scales of sound economics and ethics, vulgar Keynesianism is found wanting. An important reason why is that this pernicious ideology dehumanizes economics. It fails to recognize that all economic phenomena is the result of actions by persons made in the image of God. Human beings are rational actors who therefore engage in purposeful behavior. They are not merely cogs in a machine.

Our contemporary policy makers act as if they think they are economic masters of the universe. It is as if Geithner can pull the spending lever in just the right way and Bernanke can raise the monetary thermostat to just the right level so that all things will be coming up roses and daffodils. The economy, however, is not a hydraulic machine made up of inanimate cogs and tubes. It is a vast network of voluntary exchange by people who have wills that are free to do what they want.

Economic policy prescriptions are truth claims. As such, they are only as good as the economic theory upon which they are founded. Because economics is the study of human action, economic theory is only as good as the conception of human action upon which it rests. Likewise, an understanding of human action will only be as good as one's understanding of the nature of man, which means that, ultimately, sound economic policy advocacy depends to a greater extent than most people realize on our philosophy and theology. If we get our anthropology wrong, our economics will be less than satisfactory, which will lead, at some level, to errors in economic policy. 

The Third Man

A few weeks ago some friends asked my wife and I over to enjoy the film The Third Man with them. We had a wonderful time revisiting this true gem of cinematic art. One of the great themes of the picture is the conflict between order and disorder or control versus confusion (or chaos). Much of the film is devoted to revealing the negative consequences of people trying either to control things they ought not or using the wrong means to bring order out of chaos.

One important way screenwriter Graham Greene and director Carol Reed communicate their theme is through the juxtaposition of the machinery of the state and the organization of Harry Lime, a criminal smuggler and racketeer. The most popular scene in the film is probably Holly Martin's meeting with Harry Lime in a Ferris Wheel car high above the ground.

Lime's racket involved diluting very valuable and rare penicillin with base materials, thereby making it more profitable but useless. Many child victims of meningitis ended up dead or having gone mad because of doctors giving them worthless liquid when they thought they were giving them penicillin. In defense of his criminal activity Lime adopts the position of state tyrants. Looking down at people from high above--the closest to the heavens Lime ever gets--he asks Martin,

Would you really feel any pity if one of those dots stopped moving forever? If I offered you £20,000 for every dot that stopped - would you really, old man, tell me to keep my money? Or would you calculate how many dots you could afford to spare?...Free of Income Tax, old man...

 Later in the conversation he does a neat bit of equivocation.

Nobody thinks in terms of human beings. Governments don't, so why should we? They talk about the people, and the Proletariat... I talk about the suckers and the mugs... It's the same thing. They have their five-year plan, and so have I.

It is hard to disagree with Lime's sentiment if one accepts the legitimacy of the totalitarian state.

One thing that can be easily missed, however, is that the entire dramatic conflict of the film is due to the institutional back drop of the picture. It is a society of government intervention and control. Vienna is introduced as a city divided into four sectors, each occupied by a different foreign government: American, British, Russian and the French. The city center, however, instead of representing the core of an urban civilization, is described as a modern day Babel:

But the center of the city, that's international, policed by an international patrol, one member of each of the four powers. Wonderful! What a hope they had. All strangers to the place and none of them could speak the same language. Except of course a smattering of German. Good fellows on the whole. Did their best, you know.

Did their best to maintain control and order perhaps, however it was precisely state controls that created the disorder and encouraged the moral confusion and corruption that serves as the dramatic impulse driving the film.

Government price ceilings and other controls on the post-war Viennese economy are what stimulated the rise of the black market casually mentioned in the film's introductory monologue. Price ceilings encourage corruption, because the law makes it illegal to sell certain goods at a price above the legal maximum. When the state fixes a price ceiling below the market price (and this is the only kind of price ceiling governments find it in their interest to mandate) it is certain that the quantity of the affected goods demanded will be greater than the quantity supplied. The resulting shortage causes frustrated buyers who are willing to pay the market price, but are prohibited from legally doing so.

This shortage opens the door for the emergence of the black market. Some more eager buyers who are willing to risk skirting the law seek out sellers who are willing to sell the effected goods under the table at a higher price. The high potential profits due to the price controls also encourage sellers to reduce the quality of their products so as to meet demand. Harry Lime did so by committing fraud of the most dangerous sort--selling useless liquid as penicillin.

One of the great truths in the film is that, when a society ignores the moral law that comes from above they attempt to fill the moral vacuum by becoming a law unto themselves. On the Ferris Wheel, Martin says to Lime, "You used to believe in God." Lime responds,

I still do believe in God, old man. I believe in God and Mercy and all that. The dead are happier dead. They don't miss much here...poor devils.

Lime takes upon himself the mantle of divine sovereignty, deciding who should live and who are "happier dead." A people who attempt to live lives above the divine moral law, ultimately fail to control themselves. The consequences can be very messy. Things are no less messy, indeed social chaos is magnified, when the state uses such disorder as an excuse to assume the role of God, attempting to create and maintain social order on its own terms for its own sake.

Social order is encouraged by voluntary exchange, which fosters social integration via the division of labor. Voluntary exchange, of course, requires a certain respect for private property and an element of trust. When the moral law is thwarted, by either private citizens or the state, bad things happen.

It's the Spending!

Yesterday, I commented on the assertion that the current deficit/debt problem is one of revenue, not spending. Jordan Ballor at the Acton Institute provides even more perspective on government spending versus revenue. The graph used to justify the claim is reproduced here:

I noted how the graph cannot carry the weight of the argument and that, in fact, we do have a spending problem. I also made reference to another, more important, truth illustrated by this graph and that goes a long way toward solving a puzzle oft repeated during the present debate over the government budget.

Sound economic theory teaches that taxation retards economic expansion because it reduces the ability and incentive for people to save and invest, thereby causing capital consumption over time. As workers have fewer captial goods with which to work, they become less productive, real incomes fall as does the standard of living. These facts, in addition to supply-side ideology, is what drives much rhetoric from conservatives who refuse to entertain tax cuts as a way to solve our deficit problems.

The negative relationship between taxes and economic progress, however, is inconvenient for those, like Paul Krugman and Robert Reich, who cherish the welfare state. They must say something to defend higher taxes on "the wealthy" with some semblance of economic validity. They have taken to appealing to recent economic history. They look at the Clinton administration's fiscal policies, which included a noticeable tax increase in 1993 and following economic expansion and compare that to the Bush tax cuts of the 2000s and the following economic stagnation and conclude that tax cuts do nothing for the economy, while tax increases can be, as Martha Stewart might say, a good thing. The facts as presented do seem to fly in the face of good economics. What gives?

A large part of the answer lies in something revealed by the chart above. The variable to keep your eye on when accounting for the state's drag on economic society is government spending, not merely taxes. Notice that government spending as a percentage of GDP fell throughout the Clinton administration and then began to increase sharply early in the Bush presidency and then again during the most recent recession.

How government spending is financed is less important macroeconomically speaking than the magnitude of government spending. If government spending is funded by borrowing instead of taxes, private savings are still squandered, capital is still consumed, productivity is still repressed, and society is still relatively impoverished. Even though tax revenues increased during the Clinton presidency, spending as a percentage of GDP fell. That helps account for the seeming paradox of economic expansion in the wake of tax increases. Likewise, even though tax revenues decreased during the Bush II administration, spending as a percentage of GDP increased dramatically, giving us a rather stagnate economy during the 2000s.

The above analysis gives us at least two practical lessons. The first is that government spending is the primary source of macroeconomic regression, not how such spending is financed. The second is a corollary to the first. The best thing we can do to usher in long term economic prosperity it not to focus on balancing the budget per se, but to indeed reduce spending. If we balance the budget by raising taxes, we merely trade one form of capital consumption with another. Like the Talking Heads, we will be on the road to nowhere.

Revenue Problem or Spending Problem?

Joe Weisenthal over at Business Insider would have us believe that the current fiscal problem is one of not enough revenue. In the commentary to yesterday's Chart of the Day, he draws on analysis of Menzie Chinn and tells us that:

While outlays as a percentage of GDP are near all-time highs, tax revenue + entitlement contributions is near an all-time low, and well below average.

If you believe that this gap needs to be shrunk, it's impossible to think it can be done on the cost-side at all.

He continues, by dismissing any suggestion that the government spends too much and asserting that any who think it does spend too much are led astray by ideology. "Of course, Weisenthal says, "any politician who says Washington has a spending problem, rather than a revenue problem, is speaking from a position of anti-tax ideology, rather than empirical data, so a rebuttal is probably pointless."

 

Weisenthal may be right that we cannot make up our fiscal shortfall by cutting so-called discretionary spending as our budget is presently constituted.His argument, however, merely assumes that we cannot bring spending down. It is as if government expenditures just go up on their own.  All of those little government programs just pass themselves into existence.

In reality, all government spending is discretionary. There is no divine or natural law of the universe that requires Social Security, Medicare, and Medicaid to continue into perpetuity in its present form. There is no reason, beyond that which is purely political, why we cannot cut the rest of the budget to the bone. The state has gotten itself into this predicament by convincing the masses that we can live off of other people indefinitely and that it is perfectly respectable to do so.

Indeed, as noted by Richard Ebeling,

Virtually all that is going on in Washington about the government’s debt is really smoke and mirrors because everyone there accepts the premises of the “entitlement” society. As a result, practically no one is willing to call for the real cuts in government spending that would bring about a reduction of the government’s “slice” of the national economic pie; and put the country on a real solution to the debt problem.

It does not have to be this way, however. Congressional deficit hawks should explain to the citizenry that we are where we are because we have purposely charted a course in which we are committed to spending more than we take in. The only way for us to stop this train is to drastically reduce the size and scope of government. The Republicans have little moral capital on this issue, however, because, as the graph illustrates, the course was begun while George W. Bush was in office and the Republicans gained power in Congress.

The chart also helps us make sense of something else that is very important for understanding the consequences of macroeconomic policy, but I will wait and discuss this tomorrow, Lord willing.

My Turn In Studio with Jeff Tucker

Jeff Tucker makes me sound better than I am in this delightfully fun interview. It was recorded in March during the Austrian Scholars Conference. Tucker is a master interviewer and we discuss, inter alia, the Austrian tradition at Grove City College, my book Foundations of Economics: A Christian View, and the economics of the arts.

More Evidence that Riches Do Not Satisfy

The following passage from Ecclesiastes was the text of the sermon at my parents church last Sunday. It provides more food for thought about what does and does not truly satisfy the longing of the human soul.

I said in my heart, “Come now, I will test you with pleasure; enjoy yourself.” But behold, this also was vanity. I said of laughter, “It is mad,” and of pleasure, “What use is it?” I searched with my heart how to cheer my body with wine—my heart still guiding me with wisdom—and how to lay hold on folly, till I might see what was good for the children of man to do under heaven during the few days of their life. I made great works. I built houses and planted vineyards for myself. I made myself gardens and parks, and planted in them all kinds of fruit trees. I made myself pools from which to water the forest of growing trees. I bought male and female slaves, and had slaves who were born in my house. I had also great possessions of herds and flocks, more than any who had been before me in Jerusalem. I also gathered for myself silver and gold and the treasure of kings and provinces. I got singers, both men and women, and many concubines, the delight of the children of man.

So I became great and surpassed all who were before me in Jerusalem. Also my wisdom remained with me. And whatever my eyes desired I did not keep from them. I kept my heart from no pleasure, for my heart found pleasure in all my toil, and this was my reward for all my toil. Then I considered all that my hands had done and the toil I had expended in doing it, and behold, all was vanity and a striving after wind, and there was nothing to be gained under the sun. (Ecclesiastes 2:1-11)

Friedrich von Wieser (1851 - 1926)

Friedrich von Wieser (1851-1926)

Eighty-five years ago today Austrian economist Friedrich von Wieser breathed his last. He was a second generation Austrian economist who assumed the chair of economics at the University of Vienna vacated by Carl Menger. Much important information about Wieser and his place in the Austrian economic tradition can be found in Guido Hulsmann's Mises: The Last Knight of Liberalism.

Wieser was born in Vienna of aristocratic parents, the son of a civil servant.  At age 17 he entered University of Vienna and studied law and government science. He studied under and became follower of Menger, graduating in 1872.

Wieser had a thorough knowledge of art and literature and was an accomplished piano player. He worked briefly for the government and then received a travel grant, traveling with Bohm-Bawerk to study economics at Heidelberg, Jena and Leipzig.

He was ranked lower than others on Menger’s list of followers, so had to wait longer to be placed in full professorship. Menger had known of Weiser’s writings on value for some time, but had great reservations about them so did not recommend them for publication. Menger did, however, urge him to submit his work to Univisity of Vienna to obtain his Habilitation, which he received in 1883.

Wieser was subsequently appointed professor of economics at the German University in Prague in 1884 and inherited Menger’s position at the University of Vienna in 1903. Wieser never debated or discussed views other than his own and was an extremely slow reader and thinker. He rarely quoted anyone, only broadly acknowledging his intellectual debt to Menger and Jevons in prefaces of early works.

His important economics works were On the Origin and Leading Laws of Economic Values (1884), Natural Value (1893). He became Minister of Commerce in 1917, but returned to teaching after WWI. Intellectually he moved from economics to sociology, publishing his Social Economics in 1914.

Wieser enriched the Mengerian tradition somewhat, but was more superficially Mengerian. It seems that he did not really understand the fundamental concept of subjectivism. His theory of imputation of factors prices and calculation are more Walrasian than Mengerian. So much so that many do not view him as a causal-realist Austrian in the Mengerian tradition.

Two important works help us to better understand the legacy of Wieser and his impact on the Austrian economic tradition. The first is Samuel Bostaph's, "Wieser on Economic Calculation Under Socialism." Bostaph explains what he does in this article as follows:

The purpose of this present article is to review and critique Wieser’s concepts of “natural value,” “imputation,” and the “simple economy,” and to show their departures from Mengerian thought. One of its main conclusions is that Wieser fails in his attempt to develop the legacy of Carl Menger to provide theoretical support for socialist or communist planning. That is, Wieser fails to show that economic calculation is theoretically possible under socialism.

Specifically, it will be argued that Wieser’s concept of “natural value”—a concept apparently derived from his attempt to understand and extend marginal utility theory beyond Carl Menger’s use of it in his own theories of value, exchange and price—is incoherent. It is also argued that, rather than being an improvement on Menger’s theory of imputation, Wieser’s approach is spurious and confuses imputation with a static theory of distribution. Further, it is shown that Wieser’s theory of the “simple economy” in Social Economics collapses into an attempt to outline a static allocation model of a “Robinson Crusoe” economy that fails because it includes the key errors of Natural Value.

In sum, the nullification of Wieser’s explanations of value, price, and exchange nullify his dependent arguments for the feasibility of economic calculation in a communist or socialist society and for state planning of production. In closing, I argue that Hayek’s acceptance, defense, and use of such obvious and fallacious departures from Mengerian thought may account for Hayek’s emphasis on the knowledge problem, rather than the calculation problem faced by socialism, in contrast to the position taken by Ludwig von Mises.

The second is Joseph Salerno's, "Friedrich von Wieser and Friedrich von Hayek: The General Equilibrium Tradition in Austrian Economics." The abstract of Salerno's article is as follows:

Bruce Caldwell has disputed a number of points in my earlier account of the development of the Austrian school of economics from Carl Menger to Ludwig von Mises and F.A. Hayek. The issues in contention regard Friedrich von Wieser’s intellectual affiliation with Hayek and his influence on the formation of Hayek’s economic thought; Wieser’s status as a general equilibrium theorist; and the reason for Hayek’s early flirtation with general equilibrium theory. In this article I argue that Hayek was a self-conscious adherent of the Wieserian tradition and remained so even after he received the Nobel Prize in 1974 and that he distinguished between this tradition and the Böhm-Bawerkian tradition followed by Ludwig von Mises. I also contend that Wieser used the construction of a general equilibrium economy subject to a single will as both a normative benchmark by which to appraise the performance of the real-world market economy and as an analytical tool to explain the formation of market prices. Finally, I argue that Hayek concerned himself with the problems of the Wieser-type general equilibrium economy beginning with his earliest writings as a professional economist, years before he began to focus on the theoretical problems of money and the business cycle.

Taxes and Their Consequences

Christopher Caldwell, senior editor of The Weekly Standard, writes in a recent op-ed in the Financial Times that Amazon.com's "tax-free landscape needs bulldozing." Discussing California's new law requiring retailers on-line to collect sales tax, he begins:

California governor Jerry Brown killed two birds with one stone last month when he signed a law that would require internet retailers to collect the state’s 7.25 per cent sales tax. He was raising needed revenue. And he was addressing a great injustice of the information age. State and federal legislators made a big mistake when they exempted e-commerce from taxes in the 1990s. They were giddy with the rhetoric of cyberanarchism and inspired by anti-tax yahoos convinced that raising revenue is an optional part of running a government. The kindest thing one can say about the policy is that it constituted an overgenerous subsidy to an infant industry.

Caldwell goes on to explain that before the new law, competitors such as Barnes and Noble and Borders, merely because they have brick and mortar stores located in California, had to charge sales tax while Amazon did not. "The tax exemption, not technology, is what distinguishes the company from its rivals." Forcing Amazon to charge sales tax, according to Caldwell, eliminates this injustice.

I understand his point about justice. It does not seem right that one retailer is exempt from sales tax while its other competitors are at an automatic cost disadvantage.

One thought that immediately came to mind as I read Caldwell's piece, however, was that there is more than one way to rectify the problem. Why not get rid of the sales tax for all of the retailers? Would not this also remove any injustice? Also why is it not unjust to tax consumers for California's immense welfare state? Surely robbing Peter to pay Paul is not the quintessence of justice.

Additionally, more taxes certainly are not helping the business environment in California. CNN reports that, due to high taxes, extensive regulation of business, and uncertain government fiscal stability, companies are leaving California. Perhaps a better solution from the perspective both of justice and economic prosperity would be for California to cut spending so it could eliminate the sales tax. Count me, I guess, as one of the anti-tax yahoos.

Grant on the Potential for a New Gold Standard

The always interesting James Grant was interviewed by the Wall Street Journal with most of the discussion focusing on Grant's view of the dollar (negative) and the potential for returning to a gold standard (hopeful). He also notes how today's financial system is rigged by our rules in favor of bankers:

Mr. Grant is also a critic—albeit with caveats—of today's great bankers, whom he says in one respect don't hold a candle to their gilded forebears. "When you take away the downside, you take away the virtue. You take away the moral foundation of markets. You always have envy but now the envy is a little better grounded in objective facts. Taxpayers get the downside. Modern-day Wall Street gets the upside."

Mark Brandly on the Political Economy of the Petroleum Industry

Another great interview on In Studio at the Ludwig von Mises Institute with Jeff Tucker. This time he interviews Mark Brandly who is a former oil man and current  professor of economics at Ferris State University in Big Rapids, Michigan. Brandly explains what's happening with gasoline prices, why petroleum prices are so high, and how our rulers in Washington, DC help create the problem. Enjoy this thought provoking and informative interview.



I have previously linked to the article referenced in the interview here.

Riches Do Not Satisfy

He who loves money will not be satisfied with money, nor he who loves wealth with his income; this also is vanity. When goods increase, they increase who eat them, and what advantage has their owner but to see them with his eyes?  (Ecclesiastes 5:10-11)

Riches do not profit in the day of wrath, but righteousness delivers from death.(Proverbs 11:4)

Put no trust in extortion; set no vain hopes on robbery; if riches increase, set not your heart on them. (Psalm 62:10)


These are some passages that came to mind when I read this story of "a relatively young"  banker who described himself as "desperately nervous about losing the money I have earned. I feel so focused on becoming wealthy that my life is becoming unmanageable and I am always looking at my bottom line."

While it is true that most people prefer prosperity to poverty, life to death, and flourishing to ossification, economic prosperity will not satisfy our most inward longing of the heart--to have peace with God.

As Jesus said, "Seek first the kingdom of God and his righteousness, and all these things will be added to you." (Matthew 6:33).

Default Hysteria

Failing to raise the debt limit by August 2 will push the U.S. Treasury into defaulting on their debt and this would be a catastrophe. So says Jamie Dimon, CEO of J.P. Morgan Chase & Co. The aptly titled Daily Beast tells us that only crackpots could be dismissive of the chaos caused by a default.

Not so fast, says Peter Klein. Citing a 1996 AER paper by William English, “Understanding the Costs of Sovereign Default: American State Debts in the 1840′s,” he notes that there is some historical precedent for sovereign states defaulting on their debts. When eight states and one territory defaulted in the early 1840s there were consequences in the form of higher bond rates for those countries, but not to "catastrophic" levels.

Amazingly, the earth did not crash into the sun, nor did the citizens of the delinquent states experience locusts, boils, or Nancy Grace. Bond yields of course rose in the repudiating, defaulting, and partially defaulting states, but not to “catastrophic” levels. There were complex restructuring deals and other transactions to try to mitigate harms.

A similar point is made by Robert Higgs, noting that the United States itself has defaulted before.

Has the U.S. government ever defaulted before? Yes, in 1933, by refusing to honor the gold clauses in its bonds, the Treasury engaged in a massive default. Ironically, for mainstream economists and economic historians, the government’s abandonment of the gold standard, along with its associated default on its gold obligations, is seen as the decisive government action that stopped the Great Contraction and set in motion a recovery from the Depression. (Don’t laugh: for some time, this interpretation has been the reigning view in academia.)

Higgs also reminds us of a point I made back in February. "It is customary for normal people, if they have taken on too much debt, to alleviate the problem by not borrowing anymore and by reducing spending until the debt is paid down."

Those in the media who predict catastrophe after a potential default do not explain just why there would be chaos and catastrophe. They merely assert.There are good reasons to believe, however, that while there are consequences for default, just as for any action, these costs may not be as bad as pro-debt opinion molders would have us believe.

By the way, a literature has developed reminding that default is not the Treasury Department's only option if the debt ceiling is not lifted. The government could sell off their assets to raise necessary funds.

Hulsmann on New Scholarship about Early Austrian Economics

Jeff Tucker has just posted this interview of Guido Hulsmann, author of Mises: The Last Knight of Liberalism, about new scholarship about the early development of the Austrian economic tradition in the book, The Austrian School of Economics: A History of its Ideas, Ambassadors, and Institutions.

Foundations of Economics Blog is One Year Old

Today marks the one-year anniversary for this blog. Despite my uneasiness with the idea of my spouting off on the passing scene on a regular basis, I decided to start a blog to add to the conversation about economic theory and policy in today's modern world. I hoped to introduce more people to my book, Foundations of Economics: A Christian View, as well as the type of analysis that is contained in my book.

I have written over 340 posts over the past year. The top 10 most popular are as follows:

Confusing GDP with the Economy

Capital in Proverbs

Responding to Economic Recession: Like Japan, Like the United States

Will Japan's Earthquake Be an Economic Boon?

Black Tuesday, Federal Reserve Edition

What Would Jesus Cut?

Wages Sticky Downward?

The Consequences of Money Printing (er, Quantitative Easing) 2

Inflation and Government Spending Do Not Provide Prosperity

Who's Afraid of the Big Bad Deflation?

As I have attempted to explain thus far, it is my firm conviction that, because economics is about human action, if our understanding of human nature is faulty, our economic analysis will be faulty as well. Additionally, because all economic policy involved not only economics, but also ethics, if we get our ethics wrong, we will get our economic policy as well. Therefore, in my book and on this blog I try to bring a Christian understanding of man and ethics to bear on economic theory and policy.

Bureaucracy Corrupts as Well

I've written recently about how the welfare state encourages corruption. It turns out that other manifestations of the bureaucratic state also manifest corruption. Recent disturbing stories about government school faculty and administration in Atlanta cheating in an effort to reach minimal standardized performance thresholds. At least 178 teachers, principles, and administrators in four schools my be guilty of "both helping students on the state's standardized test, the Criterion-Reference Competency Test, and correcting incorrect answers after students had turned the tests in."

Many blame evaluation criteria established by "No Child Left Behind." A recent report cites cheating that has taken place in New York City, Boston, Worcester, Massachusetts, Florida, and Pennsylvania. It turns out that corporate CEOs are not the only class of people in which deceit may be found. It is not only Wall Street fat cats who seek to take advantage of their position of state privilege to better their economic status. 

There have been an abundance of ideas suggested for how to improve "No Child Left Behind." The one never mentioned, however is to get rid of it along with government education. In terms of management, government enterprises must be ran bureaucratically. Such management is necessarily management by rule and policy. It asks for assessment tools such as those embodied by "No Child Left Behind." As Mises pointed out in his seminal work Bureaucracy:

Bureaucratic management is management bound to comply with detailed rules and regulations fixed by the authority of a superior body. The task of the bureaucrat is to perform what these rules and regulations order him to do. His discretion to act according to his own best conviction is seriously restricted by them.

Without profit and loss to act as an organizational guide, there is a reduced incentive for efficiency. Speaking of state bureaucratic management, Mises writes:

Public administration, the handling of the government apparatus of coercion and compulsion, must necessarily be formalistic and bureaucratic. No reform can remove the bureaucratic features of the government’s bureaus. It is useless to blame them for their slowness and slackness. It is vain to lament over the fact that the assiduity, carefulness, and painstaking work of the average bureau clerk are, as a rule, below those of the average worker in private business. (There are, after all, many civil servants whose enthusiastic fervor amounts to unselfish sacrifice.) In the absence of an unquestionable yardstick of success and failure it is almost impossible for the vast majority of men to find that incentive to utmost exertion that the money calculus of profit-seeking business easily provides. It is of no use to criticize the bureaucrat’s pedantic observance of rigid rules and regulations. Such rules are indispensable if public administration is not to slip out of the hands of the top executives and degenerate into the supremacy of subordinate clerks. These rules are, moreover, the only means of making the law supreme in the conduct of public affairs and of protecting the citizen against despotic arbitrariness.

In an environment in which monitoring shirking is difficult and costly, there a tremendous incentive for cheating found in the schools discussed above.

Macroeconomists Versus Economics

Last week two posts nicely illustrated the great divide between sound economics and reigning macroeconomic wisdom, such as it is. Speaking for the vulgar Keynesianism now in fashion was Christian Romer. On the other hand there was Joseph Salerno. In the lecture below, Salerno presents his reasons for why he thinks one of the silver linings behind the current economic mess is the death of macroeconomics.

More on the Ugly, Ugly, Ugly June Jobs Report

From Daily Ticker. Aaron Trask interviews Nariman Behravesh, chief economist at IHS, a global information company.

As noted by Daniel Gross in the accompanying article "Virtually every component of the household survey — the labor force participation rate, the number of people reporting themselves to be employed, the number of people *not* in the labor force — moved in the wrong direction last month."

Corporate Welfare Corrupts Too

II have posted a number of times on the corrupting influence of the welfare state. Lest one should think that I merely have a vendetta against the poor, I am just as eager to condemn corporate welfare also. As John Stossell has noted,

In America today, the biggest recipients of handouts are not poor people. They're corporations.

While oil comampanies continue to receive $4 billion a year in subsidies, Stossell notes that other energy sectors are getting into the act. The Obama administration desires to direct billions in additional subsidies toward the construction of wind farms half owned by General Electric, the CEO of which happens to be "super-close" to President Obama.

The TARP program, to take another example, has rightly been characterized as "welfare for bankers." Not suprisingly, where there is money and power involved, there is corruption. One senator who voted for TARP put in a call for one of the banks in his constituency to get the TARP money.

You can tell a Congressman from a statesman by whether they are willing to eliminate income subsidies altogether or only for those people who they do not like. As the facebook statement by MoveOn shown above indicates, while those on the left rail against corporate welfare, they are eager to provide money taken from other people to be spent on government education, state bureaucracy, subsidized contraception and abortion, and rebroadcasts of British entertainment masquerading as educational television.  At the same time, way too often those on the right champion the elimination of food stamp programs, while helping their friends in "big business.". In fact, all government welfare schemes regardless of who is getting the loot are coercive wealth transfers from the productive to the politically favored. As such they violate the Christian ethic of private property and, therefore, are to be condemned. The entire welfare state, not in part but the whole, should be eliminated.

Jobless Recovery?

Not only are there no jobs. There is no recovery. Such is the verdict, correct in my opinion, from Tim Kane at Growthology.

The concept of a jobless recovery has been redefined, both for America and for my family, with the new jobs report out this morning. For America, this is the first jobless recovery lacking not only jobs, but also a recovery. A freind the other day noted it was the 2 year anniversary since that recovery officially began.

Jeff Tucker has also alerted us to the fact that mainstream media may be catching on that the recovery was, as they say, only on paper.

Because a picture is worth a thousand words, give or take a few, Joe Weisenthal at Business Insider has compiled a set of graphs compiled from the June jobs report published by the Bureau of Labor Statistics. It is headlined by what he calls the new scariest jobs chart ever.

This in addition to the traditional graph they call the Scariest Jobs Chart Ever which is scarier than ever.

Together they paint a very dismal picture indeed.  I've said it before and I'll probably say it again, money cannot buy prosperity.

Inflation-fueled spending does not result in true economic prosperity in the form of more goods to satisfy our ends. It might encourage more spending, but not investment that reflects the wishes of society. Investors are encouraged to invest in industries that are too capital-intensive relative to the wishes of savers in society. Such malinvestment fuels investment bubbles.

For all the money the Federal Reserve has created and the government has spent we have merely prolonged the necessary readjustment process and capital accumulation process that could serve as a solid foundation for true economic prosperity.

Vulgar Keynesianism at the New York Times

Several months ago, Robert Higgs decried the rehabilitation of vulgar Keynesianism as a theoretical backdrop to economic policy debates in the wake of the economic crisis of 2008. The New York Times unsurprisingly has become a hotbed of such theorizing. Paul Krugman is ensconced there as an economic pontificator. He has been a champion of Keynes and his analytical framework for years.

Now we find Berkeley Professor and former chairperson of the President's Council of Economic Advisors, Christian Romer, getting into the act. Her recent essay on the Times' opinion pages "Raising Taxes vs. Cutting Spending" takes to task Washington politicians and some in the media for latching on to an article she co-wrote with her husband as exhibit A for why tax increases are harmful for the economy. The article appeared in the American Economic Review and argues that the negative economic consequences from tax increases are even greater than conventional Keynesian thought indicates. I have even commented on the paper before.

Romer's thesis is that if we want to get the deficit under control, of our options--raising taxes, cutting spending, or both--"sensible tax increases will probably do less damage to economic growth and productivity than cuts in government investment."

It turns out that while she agrees  tax increases are harmful in the short run, Romer thinks government spending cuts are even more harmful.The reason is a straightforward application of the Keynesian multpliier.  Romer argues

There is a basic reason why government spending changes probably have a larger short-term impact than tax changes. When a household’s tax bill rises by, say, $100, that household typically pays for part of that increase by reducing its savings. Its spending tends to fall by less than $100. But when the government cuts spending by $100, overall demand goes down by that full amount.

 The moral of the story, for Romer, is a logical consequence of the above analysis:

. . . if federal policy makers do decide to reduce the deficit immediately, reducing spending alone would probably be the most damaging to the recovery. Raising taxes for the wealthy would be least likely to reduce overall demand and raise unemployment.

The fallacy in Romer's analysis is that she thinks the key to growing the economy is spending. In her mind, like that of John T. Harvey, recessions are do to insufficient aggregate demand, so the solution is for the government to make up for a lack of demand. That was the rationale behind the fiscal stimulus plans of both Presidents Bush and Obama. Such reasoning is also why Romer now claims that cutting government spending is worse than raising taxes.Now that the state's fiscal house needs to be at least partially put in order, Romer advises that the least painful way of doing it is to raise taxes.

This view entirely mistakes consumption for productive activity. Spending is just that--spending. In order for spending to be helpful, it must be true investment on productive activities. The only assurance we have that investment is productive is if it passes the profit/loss test. Government spending can never do that, because the state is not subject to the budget constraint. They do not have to make a profit to maintain their operations.

Christiana Romer also makes the mistake of treating government spending as "investment." Governments consume, they do not invest and produce.Even if they are directing spending toward "infrastructure" we have no reason to assume that such infrastructure work is indeed productive, in the sense that it benefits society more than it costs. In this case, governments direct money to projects they want built, not necessarily what the people who make up society want.

The reason why raising taxes is worse than cutting spending is that, even though the budget might be balanced by raising taxes, it still leaves too many economic resources in the hands of government bureaucrats. As I have written before, government spending actually consumes wealth by directing scarce factors of production away from their most productive uses. The taxing, borrowing, and inflating the state has to do to fund all of this extra spending all produce negative economic consequences. Such is the nature of reality. There is no way to spend our way to prosperity.  The only thing the state has accomplished with its monetary and fiscal expansion is fewer goods available for higher prices.

The long-term solution, consequently, really is massive reducing the role of the state in our economy. Eliminating government programs and reducing business regulations. Such a policy would usher in true economic expansion as wise entrepreneurs would have the ability and incentive to invest capital paid for by real savings. Such economic progress results in more goods that can be purchased for lower prices.

Interview by the Polish-American Foundation

While at Acton University 2011, I was interviewed by a representative of the Polish-American Foundation for Economic Research and Education (PAFERE). He asked me questions about bureaucracy, money, macroeconomic models, and monetary theory and policy. You can read the interview on PAFERE's website, but it is naturally in Polish. They have kindly allowed me to post an English translation here:

As a libertarian who actually knows bureaucracy from the inside (because of your work at Bureau of Labor Statistics) would you say that such institutions (that collect statistics) are absolutely useless or maybe there is some reason for their existence?

I would say that in general they don’t really serve a helpful purpose. I think that in the best case scenario the statistics, by the time they’re collected, if you’re going do it right, have to be collected and then you have to review it to make sure that your statistics are fairly accurate. It’s a fairly extensive review process, but by the time they get published the data is already somewhat old. One point of justification they try to make  is that the businesses who participate in the surveys can benefit from this information but businesses always have to be forward looking and the data they give is always backward looking, so even from the practical standpoint I do not think it’s very helpful, although I’m not a businessman so maybe they do find it beneficial. However, I don’t see how it would be that helpful. The most pernicious thing these statistics do is give politicians the idea that somehow they can manage the economy, that they can use this data to guide them to see is this tax increase helping or hurting or is that government spending helping or hurting and I think it’s an excuse for them to try to control more the economy. I think that’s a disaster.

Do you think that there is some solution to get rid of such a huge bureaucracy? Is there some chance to do it from the inside? From the organizations?

I don’t think there is a chance from the inside. I think the vast majority of people in the bureaucracy are committed to it. The people that would be powerful enough to make those kind of decisions have to spend such a long time in the bureaucracy, essentially they are committed to it. The people that get in and see the problems and don’t like it can’t exist in that atmosphere for a very long time and so the people that understand the problems they tend to get out and do other things. The people that stay in long enough to reach a position high enough in the bureaucracy to actually do something positive, tend to buy into the ideology, the bureaucracy, so it’s very difficult.

I will change the subject to teaching economics. When it comes to macroeconomics – are mathematical models able to explain something?

I don’t think the mathematical models explain anything. They might maybe fun to play with. But frankly all the mathematical models can do at best is establish some statistical correlation between a couple of variables but that itself doesn’t explain how the economy works.

And then you have to find some theoretical explanation?

That’s exactly right, so I don’t think they [mathematical models] are really helpful in understanding the economy at all.

So maybe we should consider another way of providing explanations. Like praxeological

attitude?

Exactly, that’s the key. You have to have an understanding of how individual humans act and then how they come together in the market place and how different markets or intertwined and interconnected through the entire production structure. That’s what makes up the whole macroeconomy, but it’s the understanding of human action that allows us to understand the macroeconomics. It’s not the mathematical models based on arbitrary assumptions about this variable or that variable.

You were talking about money at one of the lectures at Acton University - What’s your opinion about the monetary policy? Is it necessary to have one or do you think market would provide appropriate monetary system?

I think a free society would be the best. Just like we don’t have to have a central soft drink provider or a central furniture provider we don’t have to have a central money maker. If we had a free society people would voluntarily decide amongst themselves and throughout society what good would be used as money and then there would be a market for producing that thing and the supply and demand for money would in some sense take care of itself. The human beings would take act so that supply would be balanced with demand just like for any other good. The best policy in some sense is no policy. We don’t need central banks. We don’t need any type of monetary authority trying to hit the so-called optimal money supply.

You’ve mentioned that you support the gold standard. Would it be in your opinion obligatory to have the gold standard or would it be a free market decision of people?

When I was talking about the gold standard I was sort of speaking historically--that historically free societies have adopted a gold standard. In reality I would be for the free market standard. Whatever commodity—it could be gold, could be silver, could who knows what. Whatever currency…

…or few currencies…

That’s right. It could very well be that in different locations different people use different commodities for their money. Whatever the market decides that is what would be used. And there is no reason for us to then necessarily say that: “Oh, wait a minute! No, you’re using the wrong thing, it has to be gold!” I wouldn’t be in favor of that.

Thank you.

You are welcome.

Salerno on His New Book, Monetary Economics, and Many Sundry Topics

Tom Woods has alerted us to this "wide-ranging and engaging interview" of Joseph Salerno by the Daily Bell. Woods rightly calls Salerno "the best living monetary economist in the Austrian tradition," which makes him simply the best living monetary economist.

Of particular note is Salerno's discussion of the nature of money and the money supply, his thoughts on private fractional reserve banking, his appreciation of the work of Hans Sennholz, and the various branches of Austrian economic scholars.

Salerno's latest book is an immense collection of his work in monetary economics, Money, Sound and Unsound. You can buy it at good book retailers everywhere or download it for free from the Ludwig von Mises Institute.

The Productive Activity of the Merchant Class

Jeff Tucker advises us to show some love to the merchant class. And rightfully so. He documents how merchants benefit us on a daily basis by making sure the goods that we want are where we want when we want at prices we find acceptable. He writes:

The class of people who have chosen the path of persuasion over coercion are deserving of our gratitude even when we don't buy from them. The merchant class is that which makes everything possible in our lives: our homes, our food, our medical care, our clothing, our air conditioning, our computers, our music listening — absolutely everything that makes daily life tolerable and joyful.

He reminds us that the decision to make this calling one's vocation is not easy. They often invest their own life savings and the risk of failure is high. To be successful, entrepreneurs need not only successfully forecast future consumer demand, but they also need to hire the right people, obtain the right capital goods,  and make just the right inventory decisions. Mistakes anywhere along the process can spell doom for the merchant.

Tucker's essay brought to mind a section from Francis Wayland's Elements of Political Economy, the first edition of which was published in 1837. In his chapter on exchange, Wayland explains how and why the merchant is a very productive participant in the division of labor.

The retail merchant carries on exchanges, between the inhabitants of the same country. He purchases of the manufacturer or the importer, in quantities too large for the means of the individual consumer, and sells again, in any quantities that the consumer may desire. This produces a great saving of time, and, of course, of expense to the whole community. Were the manufacturer obliged to leave his labor, to sell a yard of calico, the price of calico would be trebled. Were the importer obliged to open his hogsheads, to sell a pound of sugar, he must charge accordingly. And besides, as each importer and manufacturer is supposed to confine himself to one particular product, the purchaser would be obliged, frequently, to go great distances, and transact, with a great number of persons, business, which he may now be able to accomplish with a single individual. Everyone must thus perceive, that a consumer saves much time by purchasing his sugar, tea, coffee, pepper, salt, etc, at one shop, instead of going to the wholesale importers of these articles individually; specially, if, as is frequently the case, they lived some hundreds of miles asunder. So therefore, it is much more economical to buy needles, tape, cotton, calico and silk, at one shop, than to go to the several individuals, in different places, who have imported or made these articles in large quantities. In consequence of this advantage to the community, the retail dealer is able to charge a profit on all the articles which he sells, and at the same time to furnish them at a much lower price that at which the purchaser could procure them, in any other manner. The purchaser not only procures them cheaper, but he procures them of a better quality. It is the business of the retail dealer to understand the quality of every article in which he traffics, and it is for his interest to purchase it as cheaply, and of as good quality, as it can be purchased in the market; since it is on the goodness and cheapness of his articles, that his custom depends. Hence, the consumer is thus enabled to employ for his benefit, a skill vastly greater than his own; and at a much less cost, than that, at which he could accomplish the business himself. Hence we see, that the retail dealers are as necessary to the prosperity of a country, and to the cheapness of productions, as any other class of persons (pp. 175-77)

We Hold These Truths?

When I was a boy, my favorite holiday was Independence Day. I was very interested in the War for Independence. My favorite book was the How and Why Wonder Book of the American Revolution. My heroes were people like George Washington, Nathan Hale, Thomas Jefferson, and  Nathaniel Greene. I looked forward every year to the day celebrating the signing of the Declaration of Independence.

Somewhere over the years, my enthusiasm became dampened so that now, if I am exposed to any mainstream media celebrations of Independence Day, I usually am saddened. Sort of like Charlie Brown at the beginning Merry Christmas, Charlie Brown.



I like celebrating the Fourth of July by, say, gathering with friends, reading the declaration. and watching fireworks, but "I always end up feeling depressed." On Independence Day, Americans pay lip service to freedom, but everywhere they are in economic chains. Government spending is almost 40% of GDP. The government central money creating machine, the Federal Reserve, has maintained a record high monetary base as the money supply increased $665 billion from June 2010 until April 2011. That is a nearly 10% increase over less than a year.The 2010 Federal Register, the regulatory code of the United States had 82589 pages. Such data begs the question, what sort of independence are we celebrating? It cannot be independence from a controlling state.

Also frustrating are the ideologies that view the 4th of July being primarily about self-expression, being able to "do whatever you want," or egalitarianism. It is understandable why people think this way. After all the most famous phrase in the Declaration says, "All men are created equal." The passage in question reads, "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness." Clarence Carson Volume 2 of his A Basic History of the United States provides a brief, but valuable commentary on this section of the Declaration.

There are three kinds of equality which can be deduced from the context of the Declaration and the general beliefs of those who subscribed to it. In the context, the Declaration affirms, by indirection, that Americans are equals of Englishmen. . .

Second, the Declaration affirms that all men are entitled to certain unalienable rights, 'that among these are Life, Liberty, and the pursuit of Happiness.' This was a reiteration of the natural rights doctrine. It was, however, a variation on the usual way of stating the doctrine, which was, that men have a natural right to life, liberty, and property. Jefferson substituted "pursuit of happiness" for property. The usual way of saying it is more logical, even if there are no substantial differences in meaning. the right to life means, most basically, that no one has as right to take a life. The right to liberty means, most basically, the right to exercise of one's faculties (mind and limbs) without restraint by others. The right to property means the right to the fruits of one's labors. (These rights were understood to be conditioned, of course, by respect for the equal rights of others. For example, one may forfeit his right to life by taking the life of another.) The right to the 'pursuit of happiness,' on the other hand, tends to fuse liberty and property. It means something like this: the right to use one's own faculties for one's own ends or purposes. Happiness, it should be noted, did not then refer to some sort of subjective state of bliss, as we might nowadays suppose. It meant rather that satisfaction that arises from developing one's abilities and receiving the rewards from doing so.

The third kind of equality Carson identifies is the right of all the people in general, not a small portion of them, to revolt.

The fact that one of "the unalienable rights" asserted by the signers of the Declaration was essentially the right to property makes it clear that the principles of the Declaration of Independence are antithetical to the economic policy of our national government and the Federal Reserve.

As the Psalmist wrote, "It is better to take refuge in the Lord than to trust in princes (Ps. 118:9). Indeed we are explicitly told to "Put not your trust in princes,  in a son of man, in whom there is no salvation (Ps. 146:3).

Christianity and the Free Society Don't Mix?

What does Christianity have to do with a free society? Some say the answer is obvious: nothing. They may reason that the benefits of a free society are so apparent that any rational being would adopt such a society without the need to appeal to any sort of divine being. Others argue that Christianity is diametrically opposed to liberty.

While it is true that many non-believers embrace and promote the free society and many libertarians despise Christ. It does not follow, however, that Christianity and liberty have nothing to do with one another. I was asked to lecture on Christianity and Liberty by Grove City College's Student for Liberty. You can read a copy of my lecture by clicking here. It is a combination of a similar address I gave on campus about ten years ago and material from my recent article published in The Areopagus Journal on a Scriptural view of private property.

My thesis is as follows:

What I argue is not that liberty is a nice idea or is a notion that may be compatible with Christianity. Instead, a close study of God’s Word reveals that social institutions that promote liberty are positively mandated. However, a caveat is here necessary. I do not claim that liberty is man’s highest or chief end. We know that our chief end is to glorify God and enjoy Him forever. No, liberty is not our highest end, but, with Lord Acton, I would agree that liberty is our highest political end. This is so for at least two important reasons: 1) Liberty is also necessary for us to fulfill our mandate to have dominion over creation; and 2) Explicit commands in Scripture point us toward institutions that cultivate liberty.

How Could We Help the Poor without Government Welfare?

This is the second post in a very irregular series examining ways social problems can be solved without the state. One of the comments I received after my "What Would Jesus Cut?" column was that the people who need help simply would not be helped without state welfare.

It turns out that historically it just was not so. In Joshua Fulton's "Welfare before the Welfare State," he provides the valuable service of reminding us that people did minister to the poor before the State assumed responsibility curing poverty. They did so voluntarily, not through the compulsion of the tax code. Such history is important because we develop intellectual blind spots. We now have a generation growing up who have virtually no memory of poor neighbors being sustained by anything other than the state. The history we read in Fulton's piece helps us conceive of how free societies responded to various social problems and how we might try to do so again.

You Get More of Whatever You Subsidize

What is true for poverty, home buyers, and unemployment, is also true of ethanol. You get more of what you subsidize.

You can read about a good example of how government intervention directs resources away from people's most valued uses in today's Wall Street Journal. It reports that corn futures have taken a strong hit as USDA surveys reveal that during the first two weeks of this June farmers "planted 92.3 million acres of corn, the second most since World War II. . . ." This is the logical consequence of dramasticly (that is a combination of dramatic and drastically) higher corn prices throughout 2010 and the first half of 2011. These higher prices, in turn, are the logical consequence of subsidies to ethanol producers.

More farmland than would be in a free economy is now being directed toward the production of corn.This is farmland that cannot now be used to produce something that people would actually value more.