Archive for November 2012 – Page 2

Austrian Economics for High School Students

Recently a friend asked for recommendations of books suitable for instructing high school students in  Austrian economics. He was already familiar with Henry Hazlitt’s classic Economics in One Lesson and David Gordon’s scintillating primer  An Introduction to Economic Reasoning. I recommended two additional books for his consideration.

1. Jim Cox, The Concise Guide to Economics. This book is very short, about 120 pages. But it comprises 37 chapters and covers all the basic principles of economics as well as numerous applications. It is plainly written and assumes no prior knowledge of economics. It has a definite Austrian orientation. One advantage of the book is that it fleshes out each short chapter with extensive references to other sources that the teacher may wish to assign or the lay reader may wish to follow up with. It could be used as the organizing text for the course with additional readings assigned. Or its chapters dealing with real-world applications could be assigned as supplementary readings.

2. Robert P. Murphy, Lessons for the Young Economist . This is much longer and more conventionally structured textbook, but also features a strong Austrian orientation. Remarkably it is not written in the dry and soporific style of a typical textbook. Murphy is a clever and entertaining writer with a passion for his subject. Although the book is written at a higher level than Cox’s book, it was vetted for tone and language by a history teacher, who used sample chapters in his junior high school class. Also unlike Cox’s book, Murphy’s book contains some simple graphs and tables, mainly supply and demand curves and schedules. The book covers all the main principles of economics and among its 23 chapters, there are 5 chapters of applications. One notable feature of the book is that it contains an extensive Glossary of technical terms comprising 25 pages. For a teacher who wants to present economics as an integrated science, I would recommend that he use this as his textbook with Cox’s or Hazlitt’s book as a supplement. There is also a teaching manual available for the book.

The four books could also be profitably read by anyone who wishes to familiarize himself with the basic principles of sound economics or wants a firm foundation in Austrian economics before tackling technically more sophisticated treatises like Human Action and Man, Economy, and State. The books are also suitable for use on the college-level to teach a one-semester introductory course at a community college or even at a four-year institution.

Austrian Business Cycle Theory on the CFA Exam

A friend informs me that the mainstream and prestigious CFA Institute now features Austrian economics in the study materials for the Level 1 CFA Exam. The section “Theories of the Business Cycle” includes several pages on Mises and Hayek (as well as Schumpeter), and they’re pretty good. “As a result of manipulating interest rates, the economy exhibits fluctuations that would not have happened otherwise. Therefore, Austrian economists advocate limited government intervention in the economy, lest the government cause a boom-and-bust cycle. The best thing to do in the recession phase is to allow the necessary market adjustment to take place as quickly as possible.” About 100,000 people take this exam each year, and now they are all being exposed to Austrian teaching.

A quick search of the CFA Institute website turns up several Austrian-friendly items, including a chapter from the 2011 book Boombustology that opens with a quote from Mises.

Heterogeneous Capital: 12 November, 2012: No-More-Armistices Day, Football As Opiate, the Hair’s Breadth Spectrum of “Serious” Opinion, and the Transatlantic Trail of Tears

Anthony Gregory has a good piece on Veterans/Armistice Day.

At the end of the Korean War, President Eisenhower signed a bill in 1954 that changed the name of the national holiday to Veteran’s Day. Perhaps it made no sense any more to honor an Armistice that had been overshadowed by World War II and the beginnings of the Cold War. Whereas after World War I, the United States brought its armed forces home, the war against Communism guaranteed that the United States would henceforth have little interest in armistice, in truce, in peace.

I think Gregory is spot on. The switch from Armistice Day to Veterans Day is very telling regarding post-WWII American foreign policy. While individual surviving soldiers retire and become veterans, the wars themsleves have become indefinite. The Cold War has thawed but still lingers. The War on Terror is just as indefinite. The Potomac Empire will accept no armistice until every soul on this planet lives either under its direct jurisdiction or under that of a client state.

Eric Peters provides a fantastic libertarian analysis of the American male’s ridiculous, life-devouring obsession with football.

“The average man has virtually no real control over his life in modern America. He must Submit and Obey at every turn, from the moment he awakes to the moment he lays his head down on the pillow at night. (…)

He must stew in silent, impotent fury as a cop half his age lectures him about “buckling up for safety” in front of his kids. Or as he submits to having his wife and kids get fondled by useless-eater (and probably pedophilic) blue-shirted poltroons at the airport. He must put up with being told what to do – and even worse, what not to do – by smarmy little busybodies, stretchpants-wearing fraus. From the PTA to the DMV to the HOA, he is hectored and hemmed in at every turn.

He probably can’t even paint his own damn house without first begging permission from the local Gertrud Schlotz-Klink… and if he doesn’t beg permission first, the old bag will just make a call. A lien or some other encumbrance will be put on his place. Or, the thug scrum will come. So, he surrenders. HeSubmits… and Obeys. He Does What He is Told. And along the way, he becomes something less than a man. At some gut level, he knows it, too. He feels emasculated – because he has been emasculated.

And the rage boils within him, silently, helplessly… .

But, release awaits. He can click on the TeeVee and feel – temporarily – empowered. He can bask in the reflected glory of “his” team. He imagines himself to be a part of the spectacle – a member of the community of men once more. If “we” win, he feels proud and strong. He will literally puff out his chest and strut. He feels as though something has been accomplished. By him personally.

Because a team of paid entertainers won a game – a child’s contest. (…)

Instead of discussing the things that matter and which actually affect his life, he talks about… “the game.” Endlessly. So do other ex-men. He – and they – know virtually nothing about the events of the day – much less of history, or of what the patterns of history suggest as regards the likely events of tomorrow.”

Robert Murphy, in making his case against voting, eloquently expresses a point that Tom Woods often stresses:

“No, we must realize the sickening truth that the “great debate” in our major media outlets is a sham. Here Noam Chomsky’s famous observation is quite apropos: “The smart way to keep people passive and obedient is to strictly limit the spectrum of acceptable opinion, but allow very lively debate within that spectrum.”

This is why our “serious” candidates—not kooks like that wacky Ron Paul—debate things like, “Should we pull our troops out of Afghanistan at a definite date in 2014, or should we give no timetable whatsoever? Regarding Iran, should we say we will use conventional bombers and our flying killer robots only, or are nuclear weapons also on the table? Of course we are going to have the federal government telling insurance companies they must cover pre-existing medical conditions, but how exactly are we going to say it? Of course we are going to have a central bank monopolizing the money and controlling banking, but in what quarter should it begin raising interest rates?” And so on.”
Before you watch Spielberg’s hagiography, be sure to read Thomas DiLorenzo’s piece on the vicious racism of Abraham Lincoln.
As president, Lincoln toiled endlessly with plans to “colonize” (i.e., deport) all of the black people out of America. This is what Bennett calls Lincoln’s “White Dream,” and more recent research of the very best caliber supports him. I refer to the book Colonization after Emancipation by Phillip Magness of American University and Sebastian Page of Oxford University that, using records from the American and British national archives, proves that until his dying day Lincoln was negotiating with Great Britain and other foreign governments to deport all of the soon-to-be-freed slaves out of the U.S.
Imagine the humanitarian nightmare that would have resulted from the forced migration of every black man, woman, and child. It would have been a transatlantic Trail of Tears.

The Austrian Tradition Has Come Full Circle

The Austrian tradition has returned in full force to the language of its birth with the establishment of the Ludwig von Mises Institut Deutschlandwith such heavy hitters on board as Hoppe, Hulsmann, Bagus, and Polleit. This is a historic occasion. Congratulations gentlemen!

Taking Government Money

Taking Government Money

Austrian influenced economist Mark Skousen recently turned 65 and faced a dilemma many us have or will soon take – should we take social security ‘benefits’?

The issue is part of a broader issue for libertarians, can use of government services, including money payments be morally justified? Walter Block, not only a top Austrian economist, but a leading figure in expanding and developing the ethics of liberty, provides strong argument in the affirmative.

In short from a post at LewRockwell.com Block argues:

This is because the state as thief simply has no right to this booty. Better that any non statist posses this wealth than the thieving state. Yes, of course, there will arise the question of whether and to whom and how these monies are to be returned to their rightful owners (for my analysis of these questions see here, and here; for my views on reparations see here, and here), but this complication cannot be allowed to get in the way of appreciating the primordial moral fact that the state has no legitimate claim to this wealth.

And thus for non-statists and non-members of the ruling class:

Indeed, it is a positive mitzvah for people of this sort to relieve the government of its stolen property.

Skousen, on his 65th birthday wrote:

I’ve thought long and hard about what to do on this day.

And

As an ardent supporter of self reliance and limited government, I also feel a little reluctant to accept Social Security payments when our government is so deeply in debt. While everyone can use a little extra cash, I don’t really need Social Security. I’ve worked hard, saved, and invested to build up my net worth. I’ve paid off my home mortgage, and I have both a company pension program and an individual retirement account. Like many wise Americans, I’ve followed the golden principles of “industry, thrift and prudence” advocated by Benjamin Franklin in “The Way of Wealth.”

Over the past year I’ve pondered two questions:

1. Should I sign up for Social Security?

2. What should I do with my monthly Social Security check?

He then asks, “Can Social Security payments be used for a good cause?”

His answer is based on what his uncle did, sign up for Social Security and invest the monthly government check into a good cause or a variety of good causes.

His recommendation, “I invite you to join me in this cause. Take the Social Security Pledge. If you are wealthy enough, use part or all of your Social Security proceeds to invest in your favorite causes.”

Following Walter Block, none should leave any funds for which we are eligible on the table for use by state; everyone eligible should free the funds from an entity with “no legitimate claim to this wealth.”

Given the importance and success of the Ludwig von Mises Institute over the last 30 years, I recommend that, if you can afford it, do as I did, and take Professor Skousen’s pledge and name the Institute as your number one beneficiary.

Put that in your pipe

Many marijuana issues were on ballots in yesterday’s election. Marijuana was legalized in Colorado and Washington. The city of Detroit passed a law decriminalizing marijuana possession. The state of Massachusetts passed a medical marijuana law. Several ballot measures involving marijuana were defeated, notably in Oregon and Arkansas.

When my book The Economics of Prohibition was published 20 years ago I was often asked my opinion if marijuana should be or would be legalized. My stock answer was that medical marijuana would start to be legalized in 10 years and that marijuana would be legalized in 20 years, probably during an economic crisis. My only prediction in print was that the reform process would begin after the turn of the century i.e. after the year 2000.

Green Shoots or Astroturf?

An excellent post by Shawn Rittenour, titled “Two Percent Economic Growth: Real or Apparent?”:

 The U.S. Bureau of Economic Analysis (BEA) has just announced that GDP grew at a rate of 2 percent during the last three months. Keynesians like Paul Krugman should be happy, and the so-called “market monetarists” like Scott Sumner should be happy. When we mistake GDP for the economy, a 2 percent quarterly growth rate looks like something to celebrate, at least compared to the previous quarter’s 1.3 percent increase. Alas, as Macbeth found out, not everything is as it seems.

This quarterly release demonstrates the danger of looking to aggregate macroeconomic statistics as a guide for how an economy performs. To better understand how the economy changed during the past quarter, we must (as is always the case) drill deeper into the numbers. It turns out that the deeper we go, the less rosy things appear.

The main reason GDP increased at a rate larger than forecast was a large increase in government spending.

Read the rest here.

FEMA, Moral Hazard, and Devolution

The Harvard Business Review on The Problem with FEMA No One Is Talking About: moral hazard. (H/T Peter Klein)

“For a minute, imagine that there was no FEMA and each geographic location was on its own, forced to use private insurance and state-level funds to rebuild after disasters. Such constraints would likely encourage less risk taking before a disaster.”

This argument for devolution is lost on Gary Johnson, who recently said:

“I think (disaster relief) may come under the basic notion of the government protecting us. There are these natural catastrophies that without the federal government, states aren’t as well equipped.”

Bizarrely enough, Mitt Romney, of all people, has evinced more understanding of the devolution argument than the Libertarian Party candidate for the United States Presidency.  When asked about abolishing FEMA, Romney said:

“Every time you have an occasion to take something from the federal government and send it back to the states, that’s the right direction. And if you can go even further, and send it back to the private sector, that’s even better.”

Also see FEMA Should Be Shut Down by Christopher Westley.

Fiscal Stimulus or Fiscal Depressant?

The “fiscal multiplier” is one of the basic building blocks of  Keynesian economics and the centerpiece of modern macroeconomic analysis of the effects of fiscal policy. Contrary to the impression given by Paul Krugman and other proponents of fiscal stimulus, however, there is no clear consensus among economists regarding the size of the multipliers that are used to estimate the amount of additional income created by an additional dollar of government spending (or tax cuts).

A remarkable example of the disagreement among economists regarding the size of the fiscal multiplier for government spending occurred in early 2009. In assessing the likely impact of President Obama’s $787 billion stimulus program on the U.S. economy, economist Robert Barro argued that the peacetime multiplier was essentially zero. That is, each additional dollar of government spending would displace or “crowd out” exactly one dollar’s worth of private consumption and investment, resulting in a negligible effect on employment.  In sharp contrast, Christina Romer, then Chair of President Obama’s Council of Economic Advisers, argued that a multiplier of 1.6 should be used in estimating the new jobs that would be created by the stimulus program. This sharp difference between Barro’s and Romer’s multiplier estimates translated into an enormous disparity of 3.7 million new jobs, the number which Romer notoriously claimed would be generated by the stimulus package by the end of 2010.

In an IMF Working Paper entitled How Big (Small?) Are Fiscal Multipliers? published in 2011, co-authors Ethan Ilzet, Enrique G. Mendoza and Carlos A. Vegh attempt to more precisely measure the size of fiscal multipliers. Ilzet et al. use a new and unique data set to statistically estimate government spending multipliers for countries sorted according to several “key characteristics” of the policy regime under which fiscal policy may be conducted. While most studies use annual data or quarterly data interpolated from annual data, Ilzet et al. use only data that have been originally collected on a quarterly basis. The study takes a sample of 44 countries comprising 20  high-income and 24 developing countries and covers a period from the first quarter of 1960  to the fourth quarter of 2007, although the extent of the coverage varies across countries.

The most significant findings of the study, especially as they relate to the key characteristics of the U.S. economy, are very interesting. The “impact”  multiplier for high-income countries is 0.37, which is to say that one added dollar of government spending is associated with only 37 cents of additional output in the quarter in which it is undertaken. But since fiscal stimulus packages are usually implemented over time, it is the “cumulative” or long-run multiplier that is more relevant because it accounts for the full effect of the fiscal expansion. For high income countries the cumulative multiplier is estimated at 0.80  over 20 quarters. Thus even in the long run, 20 cents of private output (consumption plus investment plus net exports) is crowded out by  each dollar of government spending that accrues to GDP.

When countries are sorted according to exchange rate regimes, the study finds that for countries with flexible exchange rates like the U.S., “the multiplier is negative and statistically significant on impact and statistically indistinguishable from zero in the long-run.” This essentially means that, in the long run, for every additional dollar of income created by government spending, one dollar of income created by private consumption, investment and net exports combined is destroyed. In contrast, for countries with fixed or “predetermined” exchange rates, the long-run multiplier is 1.5. The authors explain this difference by noting that monetary authorities operating under a fixed-exchange rate regime typically expand the money supply in order to prevent the appreciation of their currency that would result from the capital inflow induced by the higher interest rates associated with  the fiscal expansion (deficits). Under flexible exchange rates, the monetary authorities maintain the money supply unchanged and permit the exchange rate to appreciate which reduces net exports.  Thus the zero long-run multiplier estimated for this case reflects the fact that overall output does not change because the rise in government spending is exactly offset by the decline in net exports. The authors conclude that “differences in monetary accommodation are the main cause for differences in he magnitude of fiscal multipliers across exchange rate regimes.” In other words, absent inflationary monetary policy, fiscal stimulus is essentially ineffective.

Last and most important for the U.S. economy, the study sorts the sample into “country-episodes” where the total central government debt to GDP ratio has exceeded 60 percent for more than three consecutive years. This is the case for the U.S. from 2007 to the present. For the high-debt country-episodes the impact fiscal multiplier is close to zero and the long-run multiplier is -2.30. This means that $1.00 of additional government spending has no effect on impact but in the long run destroys $2.30 of total output in the economy.

The authors conclude, in part:

We have found that the effect of government consumption is very small on impact, with estimates clustered close to zero.  This supports the notion that fiscal policy (particularly on the expenditure side) may be rather slow in impacting economic activity, which raises questions as to the usefulness of discretionary fiscal policy for short-run stabilization purposes. . . . Further, fiscal stimulus may be counterproductive in highly-indebted countries; in countries with debt levels as low as 60 percent of GDP, government consumption shocks may have strong negative effects on output. . . . Moreover, fiscal stimuli are likely to become even weaker; and potentially yield even negative multipliers, in the near future, because of the high debt ratios observed in countries, particularly in the industrialized world.

Of course, the very concept of a fiscal multiplier is completely rejected by Austrian economists and it has been subject to detailed and devastating critiques in the works of  Henry Hazlitt, William Hutt, and Murray Rothbard. But the dawning realization among mainstream economists that government spending, at least in some circumstances, may actually destroy income and depress economic activity is a long overdue and highly welcome development.

From Neocon to Libertarian: Tom Woods on How Reading Rothbard Changed His Life

Woods is truly our movement’s best orator. His closing words at 18:51 are particularly stirring.

The Jerry Pogue Lecture, presented at the 2012 Mises Institute Supporters Summit: “The Truth About War: A Revisionist Approach”. Recorded at Callaway Gardens, Georgia, on 26 October 2012.