Archive for December 2012

Austrian Economics in the Indian Journal of Economics and Business

The Indian Journal of Economics and Business recently published a revised version of my testimony to Congress in Vol 11, no. 3, December 2012 with the title “Fractional Reserve Banking and Central Banking As Sources of Economic Instability: The Sound Money Alternative.” An early version appeared as a Mises Daily.

Thanks to the Mises Institute for permission for use. I thank my friend, a founding editor of the journal, Kishore Kulkarni, for inviting me to submit a revised version for publication in this refereed outlet. The Journal has been receptive to Austrian contributions. In 2007 the Journal published an issue devoted to Austrian analysis, edited by Alex Padilla and myself, “Special Issue Symposium on Economic Development, Transition Economics, and Globalization: Austrian and Public Choice Perspectives” with contributions by Shenoy (perhaps her last refereed journal contributions), Block, Salerno, Powell, Leeson, Coyne, and Boettke among others. Block and Barnett (2008) published in the journal on a return to gold with no government gold and I with Glahe and Yetter (2004) had a paper in IJEB on ABCT applied to Japan and U.S.

For Austrian Scholars looking for an outlet to present in the eastern part of the world, you might consider the IJEB sponsored conference December 2013, the INTERNATIONAL CONFERENCE ON ECONOMIC AND BUSINESS ISSUES in Pune, India.

See the call for papers at: First Call for Papers for December 2013 Conference. Organized sessions are encouraged and welcome. Contact Dr. Kulkarni at

Today is Ronald Coase’s 102nd Birthday

Not only is he still alive but the Nobel Laurette is working on a new book and is starting a new journal. He recently published an article in the Harvard Business Review criticizing modern economics for not being realistic.

Here is Murray Rothbard’s comments on Coase’s lectures. Go to page 253.

Austrian School of Economics in India’s Economic Times

“Austrian School of economic thought gaining influence as nations tackle debt.” Mark Thornton, GP Manish, and Malavika Nair are quoted.


Who are these people? These men and women, separated by geographies, living disparate lives and practising different professions, have been sharing mails, exchanging notes, meeting whenever they can afford to and trying to put across their point to whoever cares to listen to them. Among other things, all of them are sold on the principles of small government, small taxes and free market. 2012 was a year when they made up jokes and sharpened jibes at bankrupt governments of rich countries as they tried to wriggle out of the mess by promising to print more and more money.

The Cliff: A Rothbarian Policy Alternative

Last Wednesday (Dec 26, 2012), I posted the following comment on The Amazingly Popular Bush Tax Cuts by Randall Holcombe:

No original expiration date, no current ‘crisis’ and no or little impact on policy and regime uncertainty attributed to this part of tax code which has hampered economic planning since the shift in Congress to Dems in 2006.

 Real Housewives of the Beltway: How the script for the fiscal cliff melodrama was written” in the Wall Street Journal (Sat. December 29, 2012) provides a more comprehensive discussion of how this on-going “melodrama was written.” The first item they mention is the one I highlighted above:

The first mistake goes back to the original compromises to pass the Bush tax cuts of 2001 and 2003. Those lower tax rates are expiring now because they weren’t made permanent then.

But for the Journal the primary culprit underpinning these continuing bad policy choices is the ‘vampire’ like Keynesian influence on “mostly Democrats but increasingly many Republican and conservative intellectuals─who think that growth derives from government spending … .” Though, as argued by Block and Barnett (“Involuntary Unemployment,” Dialogue, Vol. 1, 2008, pp. 10-22), “one would have thought that Keynesianism would have been stopped dead in its tracks by the phenomenon of stagflation.” Too bad the stake was never completely drive through the heart of teh vampire. Thus the vampire lives and as a result of this underlying fallacious view of how the economy operates, The Journal argues:

The third and biggest blunder is the Keynesian mantra of “timely, targeted and temporary” tax cuts and spending. We thought this had been buried by the Reagan years. But it made a comeback in 2008 with Nancy Pelosi and Harvard economist Larry Summers.

The economic theory is that Congress can, in its ever-present wisdom, calculate precisely the right amount and timing of temporary tax cuts and spending increases to stimulate the economy. But the tax cut must be temporary so as not to add to the “long-term” deficit. And the tax cut must be targeted, lest it benefit someone who makes more money than Ms. Pelosi and Mr. Summers like.

The result has been continuing bad fiscal policy, expansion of government (See Robert Higgs’s excellent discussion here), and an ever accommodative Fed with no permanent benefits (and few if any temporary benefits) but with significant costs both current and future.

Recovery and renewed economic growth depend on decreasing, not increasing government involvement in the economy. Per Rothbard (America’s Great Depression, p. 22)”

There is one thing the government can do positively, however: it can drastically lower its relative role in the economy, slashing its own expenditures and taxes, particularly taxes that interfere with saving and investment. Reducing its tax-spending level will automatically shift the societal saving-investment–consumption ratio in favor of saving and investment, thus greatly lowering the time required for returning to a prosperous economy. Reducing taxes that bear most heavily on savings and investment will further lower social time preferences. Furthermore, depression is a time of economic strain. Any reduction of taxes, or of any regulations interfering with the free market, will stimulate healthy economic activity; any increase in taxes or other intervention will depress the economy further.

In this environment, a truly Rothbardian policy would be a win-win policy for both the short and the long run.

Chances of such a policy – slim to none with 99.99999 … %  odds on none.

Given the actual problem is the spending, the size of the government relative to the economy, then the sad thing is that going over ‘cliff’ may actually cause less long run harm than any likely compromise.

Walter and Bill on Keynesianism

I love Walter Block and Bill Bennett.  In their paper, “Involuntary Unemployment” (Dialogue, Vol. 1, 2008, pp. 10-22), they write on the persistence of Keynesian theory despite its failures to explain real-world economic phenomenon:

Keynesianism has played a virulent role in the economics profession. Its central idea, that there could be an underemployment equilibrium, is a hard one, evidently, to jettison. Like a vampire, intellectually shooting this economic philosophy is not good enough: one must employ garlic, or a silver bullet, or some such, lest it arise from its “killing,” ghoul-like. Keynes (1936) has been “killed” over and over; yet it marches on, oblivious to its own death.

To wit, one would have thought that Keynesianism would have been stopped dead in its tracks by the phenomenon of stagflation. For, the Keynesian remedy for inflation was to reduce aggregate demand; for deflation, or depression, to increase. What, then, when not one but both of these phenomena present themselves at the same time? Any economic philosophy with but a modicum of respect would have vanished into the woodwork in the face of so obvious a rejection of its basic tenets. But not, of course, Keynesianism, which has a life of its own despite being blatantly contradicted by real world experience.

This refusal to contemplate an equilibrium situation at other than full employment stems from this “dead from the neck up, but not below,” phenomenon.

In a footnote, they add:  ”The authors of the present article are located in New Orleans, the vampire capital of the universe. We brook no disagreement with our claims in this regard. Although we usually eschew argument from authority, in this one case we stand ready to employ it.”

Read the full paper here.

No doubt building on the Keynesianism-as-vampire analogy, The Onion last year offered this spoof of a Paul Krugman column that captures the essence of the Block-Barnett argument.  What was (sadly) not a spoof was Guenter Reimann’s 1939 description of the German economy in his book The Vampire Economy, which readers of this blog know Keynes lauded in his introduction to the German-language edition of the General Theory.  In it, Reimann explained how the National Socialists manipulated German economic activity through its regulatory and tax regimes, inflation and its resulting price controls, and violations of property rights.  The Mises Institute offers a zero-price PDF download of Guenter’s remarkable book, as well as the ability to purchase a hard copy, here.

Sweden’s War on Cash Runs Into a Wall — and a Heroic Bank

The war on cash in Sweden may be stalling. The anti-cash movement has been  vigorously promoted by major Swedish commercial banks as well as the Riksbank, the Swedish central bank. In fact, for  three of the four major Swedish banks combined, 530 of their 780 office no longer accept or pay out cash. In the case of the Nordea Bank, 200 of its 300 branches are now cashless, and three-quarters of Swedbank’s branches no longer handle cash. As Peter Borsos, a spokesman for Swedbank, freely admits, his bank is working “actively to reduce the [amount] of cash in society.” The reasons for this push toward a cashless society, of course, have nothing to do with pumping up earnings from bank card fees or, more important, freeing fractional-reserve banks from the constraints of bank runs. No, according to Borsos, the reasons are the environment, cost, and security: ”We ourselves emit 700 tons of carbon dioxide by cash transport. It costs society 11 billion per year. And cash helps robberies everywhere.” Hans Jacobson, head of Nordea Bank, argues similarly: “Our mission is to make people understand the point of cards, cards are more secure than cash.”

Fortunately, it seems that the Swedish people are not falling for the anti-cash propaganda spewed by private bankers and Riksbank officials and are resisting the trend toward a cashless economy. It is reported that last year the value of cash transactions in Sweden were 99 billion krona  which represented only a marginal decrease from ten years ago. And small shops continue to do one-third to one-half of their business in cash. Furthermore a study of bank customers satisfaction released by  the Swedish Quality Index in October 2012, indicated that the satisfaction index was pulled down among customers of Swedbank, Nordea and SEB by their policy of eliminating cash transactions at their bank branches. Even more heartening is the fact that Handelsbanken, the largest bank in Sweden, is committed to serving consumers who demand cash. As Kai Jokitulppo, head of private services at Handelsbanken, puts it:

“As long as we know that our customers are asking for cash, it is important that we as a bank [are] providing it. . . . We see places where other banks are taking other decisions, we get customers from them and positive response.”

Fewer then 10 of Handelsbanken’s 461 branches currently do not handle cash and the bank’s goal is to have cash in every branch by the first quarter of 2013.

HT to Per Bylund.

Garrison on Housing Policy and ABCT

In ABCT and the Community Reinvestment Act (CRA), Peter Klein makes readers aware of new evidence, contra Krugman, that Federal housing policy, and especially the CRA, significantly contributed to the financial crisis.

Peter concludes, “Raghu Rajan [author of the new NBER paper Klein is highlighting] puts it in a very Austrian-sounding way” and then argues, “I’d reverse the order of emphasis — credit expansion first, housing policy second — but Rajan is right that government intervention gets the blame all around.” Klein is correct to reverse the emphasis.

Roger W. Garrison in Alchemy Leveraged: The Federal Reserve and Modern Finance  (pp. 445-446) as he often does, very clearly lays out this Austrian argument concerning the relationship between the interaction of central banking policy and housing policy in creating this most policy driven bubble/boom/bust cycle and crisis.

Putting housing policy in the right perspective, Garrison writes:

Unsound as these policies were, they were not the principal cause of the financial crisis. Again, Dowd and Hutchinson are right in identifying the expansion-prone Federal Reserve as the principal institutional cause. Had the Fed provided no fuel for the boom, federal housing policy, though perverse, would not have been unsustainable [emphasis mine]. The mortgage market would have had to compete with all other markets for the funds that savers provided. There would have been a continuing bias in favor of the mortgage market, and the ongoing rate of foreclosures would have been higher. House prices would have been higher (because houses and mortgage loans are complements), but they would not have been high and rising. Practitioners of modern finance would have paid due attention to the higher VaR, which would have reflected the expectation of an ongoing higher foreclosure rate.

Thus given Fed policy but without the housing policy there would still have been a boom and a bust with a bubble in some other interest rate sensitive sector.

In Garrison’s words:

… had the federal government not enacted legislation and created institutions that rigged mortgage markets so as to increase home ownership, credit expansion by the Fed would nonetheless have created an artificial boom, which inevitably would have ended in a bust.

In conclusion, Garrison adds:

The housing crisis in 2008 occurred because a credit expansion took place during a time when the federal government was pushing hard for increased home ownership for low-income families. We understandably identify these different cyclical episodes (the dot-com crisis, the housing crisis) with “what was going on at the time.” The common denominator, however, is the Fed’s propensity to expand credit.

Business cycles are complex but a critical factor in almost all cyclic, rather than shock driven macroeconomic crisis, is the Fed (or any central bank) feeding (turbo charging or piggy-backing on) whatever is going on elsewhere in the economy. Without the created credit and the associated lower (relative to the natural rate) interest rate accompanied by less risk adverse credit environment generated by monetary policy, distortions in the economy are more easily discovered and corrected before they can become unsustainable with economy wide repercussions.

ABCT and the Community Reinvestment Act

Austrian business cycle theory explains the general pattern of the boom-bust cycle — credit expansion, lowered interest rates, malinvestment, crash, liquidation — but the particulars differ in each historical case. (Austrians sometimes distinguish “typical” from “unique” features of each cycle.) To explain particular episodes, we appeal to specific technological, regulatory, political, legal, or other conditions. For example, in the 1990s, much of the malinvestment was channeled into the IT sector, where uncertainty driven by rapid technological change made entrepreneurs particularly susceptible to forecasting errors. In the 2000s, of course, malinvestment appeared largely in real estate, the result of government programs designed to relax underwriting standards and otherwise increase investment in particularly risky real-estate assets. In other words, ABCT tells us to look for malinvestment during the boom, but not where that malinvestment will show up.

Regarding the latter example, however, there has been a persistent dispute among mainstream economists about the role of government housing policy, particularly the Community Reinvestment Act which was used, in the 1990s, to make banks increase their lending to particular low-income neighborhoods. Paul Krugman asserts, for example, that the “Community Reinvestment Act of 1977 was irrelevant to the subprime boom.” Actually, no. A new NBER paper (gated) on the CRA is causing quite a stir. Authored by four economists from NYU, MIT, Northwestern, and Chicago, the paper is the first to use instrumental-variables regression to distinguish changes in bank lending caused by the CRA from changes that would likely have happened anyway. (The authors use the timing of loan decisions relative to the dates of CRA audits to identify the effect of the CRA on lending.) The results suggest that CRA enforcement did, contra Krugman, lead banks to make substantially riskier loans than otherwise. Raghu Rajan puts it in a very Austrian-sounding way:

The key then to understanding the recent crisis is to see why markets offered inordinate rewards for poor and risky decisions. Irrational exuberance played a part, but perhaps more important were the political forces distorting the markets. The tsunami of money directed by a US Congress, worried about growing income inequality, towards expanding low income housing, joined with the flood of foreign capital inflows to remove any discipline on home loans. And the willingness of the Fed to stay on hold until jobs came back, and indeed to infuse plentiful liquidity if ever the system got into trouble, eliminated any perceived cost to having an illiquid balance sheet.

I’d reverse the order of emphasis — credit expansion first, housing policy second — but Rajan is right that government intervention gets the blame all around.

Generous Georgians and Miserly Maineans

Neil deMause writes in Slate of “Georgia’s Hunger Games“:

“Fewer than 4,000 adults in the southern state receive welfare, even as poverty is soaring. How Georgia declared war on its poorest citizens—leaving them to fight for themselves.”

He compares Georgia unfavorably with other states, specifically California and Maine.

“In states like California and Maine, which have focused on getting their poor citizens into jobs programs, about two-thirds of those eligible still receive welfare. On the opposite end of the spectrum is Georgia, which over the past decade has set itself up as the poster child for the ongoing war on welfare. …the number receiving cash benefits has all but evaporated…”

He blames discrepancy on the red state/blue state divide, pointing to Georgia’s “all-Republican state government.” He bemoans:

“What this has created is a land that welfare forgot, where a collection of private charities struggle to fill the resulting holes. For the Atlanta Community Food Bank, that means sending out more than 3 million pounds of canned goods, bread, and other groceries each month to churches in and around Atlanta to help feed the state’s growing number of poor and near-poor.”

First of all, what is wrong with private charity stepping in to fill the gap? With the present economy as bad as it is, providing succor to the swelling ranks of the needy will inevitably be a “struggle”. What is wrong with that struggle being voluntarily borne by donors and competently administered by private charities instead of involuntarily borne by taxpayers and incompetently administered by bureaucrats?

Furthermore, it is interesting that, according to the Chronicle of Philanthropy’s ranking of the states according to charitable giving, 9 of the top 10 are deMause’s dreaded red states, and 8 of the bottom 10 are blue.

Georgia ranks way up at #8.

Maine, deMause’s “model state”, scrapes the bottom at #49.

And in terms of the median contribution of its residents, Maine is dead last.

But then, who can blame them? Surely they think they’ve fulfilled their role by funding Maine’s copious welfare rolls with their taxes. True, state welfare harms much more than it helps. But the point is, regardless of the results, they’ve already paid their part in their minds.

With this effect in mind, plus Obama’s repeated proposals to limit tax deductions for charitable giving (echoed recently by Cato Institute Fellow Daniel Mitchell), it is more apt to speak of a “war on charity” than a “war on welfare.”

I Want to Be a Consumer

If you enjoyed the video in Hark, I Hear a Christmas Fallacy,  you should enjoy this poem by Patrick Barrington, “I Want to be a Consumer,” originally published in Punch two years prior to the publication of Keynes’s General Theory (issue April 25, 1934) and reprinted in Hazlitt’s The Failure of the “New Economics”, pp. 133-134.

I Want to be a Consumer
“And what do you mean to be?”
The kind old Bishop said
As he took the boy on his ample knee
And patted his curly head.
“We should all of us choose a calling
To help Society’s plan;
Then what to you mean to be, my boy,
When you grow to be a man?”

“I want to be a Consumer,”
The bright-haired lad replied
As he gazed into the Bishop’s face
In innocence open-eyed.
“I’ve never had aims of a selfish sort,
For that, as I know, is wrong.
I want to be a Consumer, Sir,
And help the world along.”

“I want to be a Consumer
And work both night and day,
For that is the thing that’s needed most,
I’ve heard Economists say,
I won’t just be a Producer,
Like Bobby and James and John;
I want to be a Consumer, Sir,
And help the nation on.”

“But what do you want to be?”
The Bishop said again,
“For we all of us have to work,” said he,
“As must, I think, be plain.
Are you thinking of studying medicine
Or taking a Bar exam?”
“Why, no!” the bright-haired lad replied
As he helped himself to jam.

“I want to be a Consumer
And live in a useful way;
For that is the thing that is needed most,
I’ve heard Economists say.
There are too many people working
And too many things are made.
I want to be a Consumer, Sir,
And help to further trade.”

“I want to be a Consumer
And do my duty well;
For that is the thing that is needed most,
I’ve heard Economists tell.
I’ve made up my mind,” the lad was heard,
As he lit a cigar, to say;
“I want to be a Consumer, Sir,
And I want to begin today.”