Archive for December 2012 – Page 2

French Welfare Trap

It is a nice classroom example of how welfare keeps people in poverty.

Deck the Halls with Macro Follies

Deck the Halls with Macro Follies

For the holiday from our friends at EconStories.

Evidence of Infamy

Two revisionist must-reads for this “Day of Infamy” (the anniversary of the attack on Pearl Harbor): How U.S. Economic Warfare Provoked Japan’s Attack on Pearl Harbor by Robert Higgs and Pearl Harbor: Roosevelt Knew by Justin Raimondo.  Some conservative and libertarian-ish fans of our Facebook page have recoiled in horror at the evidence and arguments presented in these pieces.

Professor Higgs reflects:

“That so many Americans react with shock and anger when they encounter evidence about FDR’s various efforts to bring the USA into World War II tells me that they have personally identified with the state. Hence, they react to anyone’s indictment of the state as if it were a personal attack on them. They will seek any possible way to defend the state and its leaders, regardless of plain evidence of those leaders’ complicity or responsibility. Professional historians for the most part long ago accepted that FDR wanted to get the USA into the war, but they do not blame him for doing so. On the contrary, they praise him for his far-sighted understanding that this country “needed to” enter or “should have” entered the war, given what a wonderful project it was. The great majority of Americans, they believe, were at the time too pig-headed and parochial to recognize what should be done for the good of the country and the world.”

Against Scientism

Hayek defined “scientism” or the “scientistic prejudice” as”slavish imitation of the method and language of Science” when applied to the social sciences, history, management, etc. Scientism represents “a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed, and as such is “not an unprejudiced but a very prejudiced approach which, before it has considered its subject, claims to know what is the most appropriate way of investigating it.” (Hayek’s Economica essays on scientism were collected in his 1952 Counter-Revolution of Science and reprinted in volume 13 of the Collected Works.)

Austin L. Hughes has a thoughtful essay on scientism in the current issue of the New Atlantis (HT: Barry Arrington). Hughes thinks “the reach of scientism exceeds its grasp.” The essay is worth a careful read — he misses Hayek but discusses Popper and other important critics. One focus is the “institutional” definition of science, defined with the trite phrase “science is what scientists do.” Here’s Hughes:

The fundamental problem raised by the identification of “good science” with “institutional science” is that it assumes the practitioners of science to be inherently exempt, at least in the long term, from the corrupting influences that affect all other human practices and institutions. Ladyman, Ross, and Spurrett explicitly state that most human institutions, including “governments, political parties, churches, firms, NGOs, ethnic associations, families … are hardly epistemically reliable at all.” However, “our grounding assumption is that the specific institutional processes of science have inductively established peculiar epistemic reliability.” This assumption is at best naïve and at worst dangerous. If any human institution is held to be exempt from the petty, self-serving, and corrupting motivations that plague us all, the result will almost inevitably be the creation of a priestly caste demanding adulation and required to answer to no one but itself.

A Golden Path to Sound Money

Yesterday  Barron and Bloom in “A Golden Path” ( responded to my Mises Daily article “Fool’s Gold Standards”.

Their expansion was very useful. I don’t think we are as far apart as they seem to think.

They just have more confidence that the dots will fall in place more spontaneously than I do.
Joe Salerno and Ron Paul are a good guide to needed caveats and reforms that would have to accompany Barron-Bloom for the proposal to be successful.
I still think my conclusions holds up:

Barron and Bloom’s proposal, while attractive in the short run, is (if not accompanied by Paul’s suggested reforms in the United States and elsewhere) most likely a step in the wrong direction Advocates of sound money should be heartened by the interest currently being generated for monetary reform. Discussion should be guided with a few things in mind:

  1. Gerald P. O’Driscoll Jr.’sconcerns about abolishing central banks,
  2. Salerno’s gold standard: true or false, and
  3. Paul’s caveat that

Others are thinking about it [monetary reform], but some of them would like to internationalize something different than the dollar reserve standard. They would like to have another fiat currency and a pretend alliance with gold — and they want to move control over a new global currency into the IMF and the World Bank. I think that would be a disaster. (emphasis added)

Let’s hope Lipsky’soptimism concerning a gold commission becomes a reality where a “well-conceived and well-staffed gold commission” (preferably one dominated by Austrian-influenced economists) actually sorts out the issues in favor of competition in currency and an evolution toward a gold-coin standard à la the outline provided by Paul. [footnotes omitted]

Roads and Bridges to Nowhere

Numerous studies have found that government spending multipliers have a very low value. Indeed one recent study found that in a country with characteristics like the U.S., it was significantly negative. Yet Keynesian economists are more desperate than ever to show that government spending can be effective in promoting economic recovery. Last week the Federal Reserve Bank of San Francisco released a summary of an NBER working paper written by two of its economists. One article in the financial media called attention to the release under the screaming headline  “STUDY: Every $1 Of Infrastructure Spending Boosts the Economy by $2.”

The paper in question purports to demonstrate that Federal government spending on infrastructure projects has a much higher “multiplier” effect on real income than previously thought. According to the authors of the paper, Fed economists Sylvain Leduc and Daniel Wilson:

We find that unanticipated increases in highway spending have positive but temporary effects on GSP, both in the short and medium run. . . . We also assess how much bang each additional buck of highway spending creates by calculating the multiplier, that is, the magnitude of the effect of each dollar of infrastructure spending on economic activity. We find that the multiplier is at least two. In other words, for each dollar of federal highway grants received by a state, that state’s GSP [Gross State Product] rises by at least two dollars. . . . Over a 10-year horizon, our results imply an average highway grants multiplier of about two.

Needless to say the study has numerous flaws. It narrowly focuses on highway spending funded by Federal grants. Actually, its focus is even more narrow because the spending variable is “unanticipated” increases in highway spending, not highway spending itself. The authors seek to capture spending “shocks,” defined as “unanticipated events that affect economic activity,” because only spending that is not anticipated and adjusted to in advance can reveal the full impact of spending on the economy. And indeed LeDuc and Wilson assure us that they carefully construct a “variable” according to the latest methodology for capturing errors in forecasting each state’s future highway grants. This statistical construction is supposed to be a proxy for changes in volatile and subjective expectations about the political, economic, and financial variables that affect actual highway outlays. Forgive my deep skepticism, but I don’t think so.

Furthermore, the study uses Gross State Product (GSP), or the total value added by production in each state. But GSP is a notoriously unreliable statistic, even more so than GDP. Each state is a small open economy with completely open borders with respect to the movements of goods and factors (capital and labor) to and from other states. It is therefore virtually impossible to accurately calculate the value of a state’s exports and imports or to ascertain the income earned by its resident workers and investors in other states.

Most important, the study is disingenuous, because it uses a “New Keynesian model” that combines the traditional pure aggregate-demand effect with a supply-side productivity effect supposed to occur after the new highways have been completed and are put to use as “public capital” by the private sector to increase the output of goods and services. In fact if we inspect the graphs displaying the results of the study carefully, we find that the short-run or impact effect of increased spending yields an average multiplier of between 1.5 and 3 in the first two years and then becomes negative in years 3 to 5 yielding an overall pure aggregate demand multiplier of around zero or less after 5 years. It is then that, according to LeDuc and Wilson’s findings, the productivity effect of the newly completed roads kicks in causing the multiplier to become high in years 6 to 8.  This productivity effect of the enlarged capital stock is large enough to more than offset the zero or negative spending multiplier and yield a New Keynesian hybrid spending/productivity multiplier of about 2 over a ten-year horizon.

Even if we accept that the productivity effects of spending can be captured 6 or 8 years down the road, this study hardly demonstrates the Keynesian doctrine that government spending per se raises income and promotes economic recovery. Rather it illustrates yet again the venerable Austrian insights that capital goods take “time to build” and increase productivity. The question then becomes whether “public capital” constructed willy-nilly by government officials for political purposes and without recourse to economic calculation is more productive than the private capital investment it crowded out and that would have been undertaken by entrepreneurs risking their own wealth and guided by profits and losses. I do not believe the answer to this question is in doubt.