Archive for January 2013

Evidence on Industrial Policy

Industrial policies (IPs) include such varying practices as production subsidies, export subsidies, and import protection, and are commonly used by countries to promote targeted sectors. However, such policies can have significant impacts on sectors other than those targeted by the IPs, particularly when the target sector produces goods that are key inputs to downstream sectors. Surprisingly, there has been little systematic analysis of how IPs in targeted sectors affect other sectors of the economy. Using a new hand-collected database of steel-sector IP use in major steel-producing countries from 1975 through 2000, this paper examines whether steel-sector IPs have a significant impact on the export competitiveness of the country’s other manufacturing sectors, particularly those that are significant downstream users of steel. I find that a one-standard-deviation increase in IP presence leads to a 3.6% decline in export competitiveness for an average downstream manufacturing sector. But this effect can be as high as 50% decline for sectors that use steel as an input most intensively. These general negative effects of IPs are primarily due to export subsidies and non-tariff barriers, particularly in less-developed countries.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at

What’s really key for the price formation of gold?

Gold Switzerland interviews Robert Blumen. It include an interesting discussion on China, socialist calculation, as well as the gold market.

Are Profits Evil?

The late philanthropist Jeremy S. Davis made possible this seminar on economics for high school students, featuring lectures by Robert P. Murphy and Peter G. Klein. Presented in Houston, Texas, on 25 January 2013.

The Social Functions of Property by Robert P. Murphy

Big Business: Friend or Foe by Peter G. Klein

Deflation in Japan?

The topic of deflation has risen to new heights in Japan because the new Prime Minister has promised to fight deflation and to set new minimum inflation targets for the Bank of Japan.
In this article Frank Shostak shows why Japan should not try to fight inflation. Instead they should fight their apoplithorsismosphobia.

Let the banks fail

So says the President of Iceland. He also said that the financial sector, even a successful one, is like a parasite on the economy drawing out vital resources for the innovative productive sectors.

Surrendering to the Boom Bacillus

Doing some research the other day, I came across a 1926 article from Harper’s Monthly on the Florida real estate boom and how the journalist covering the story eventually succumbed to the boom mentality.  (Sorry, there’s no link.)  Here’s a short excerpt (from Gertrude Mathews Shelby, “Florida Frenzy,” Harper’s Monthly, January 1926, p. 177):

…I then was offered by a reputable firm a great bargain in a [Fort Lauderdale] city lot for $1000, an unusually low price.  Well-located $3000 fifty-foot lots are rather scarce.  This bonanza turned out to be hole, a rockpit–and I reflected on the credulous millions who buy lots from plats without ever visiting the land!

But to set against this experience I had one of exactly the opposite sort which left me with a sharp sense of personal loss.  An unimportant-looking lot several blocks from the center of Fort Lauderdale (whose population is fifteen thousand) on Las Olas Boulevard had been offered me about a week before at $60,000.  I didn’t consider it.  It now resold for $75,000.

“It doesn’t matter what the price is, if your location is where the buying is lively,” I was told.  “You get in and get out on the binder, or earnest money.  If you had paid down $2500 you would have had thirty days after the abstract was satisfactorily completed and the title was approved before the first payment was due.  You turn around quickly and sell your purchase-contract for a lump sum, or advance the price per acre as much as the market dictates.  Arrange terms so that your resale will bring in sufficient cash to meet the first payment, to pay the usual commission, and if possible to double your outlay, or better.  In addition you will have paper profits which figure perhaps several hundred per cent–even a thousand–on the amount you put into the pot.  The next man assumes your obligation.  You ride on his money.  He passes the buck to somebody else if he can.”

“But what happens if I can’t resell?”

“”You’re out of luck unless you are prepared to dig up the required amount for your first payment.  You don’t get your binder back.  But it’s not so hazardous as it sounds, with the market in this condition.”

Imagine how I felt two weeks later when the same lot resold for $95,000.  By risking $2500 with faith that I could have made $35,000 clear, enough to live on for some years.  Terror of an insecure old age suddenly assumed exaggerated proportions.  Right then and there I surrendered to the boom bacillus.  I would gamble outright.  The illusion of investment vanished….

Only two years later and a year before Black Tuesday, Joseph Kennedy would liquidate much of his investment portfolio and warn that “only a fool holds out for the top dollar.”  He later invested in Florida real estate at depressed, post-boom prices.

Shelby’s story reminded me of the boom mentality that pervaded the country in the 2000s, especially Florida and especially again in my hometown of Naples, where so-called investors driven by the “greater fool theory” were day-trading houses at one point.  Lost in most of the popular writings from the 1920s is any understanding of the role played by an activist Fed in expanding credit, lowering interest rates below market rates by its control of the discount rate, inflating the dollar in an explicit strategy to allow the British pound to find its pre-war exchange rate, and the general reinterpretation of the Fed’s implied mandate in the Federal Reserve Act to increase the money supply to ensure funds flowed to “legitimate business,” whether or not the economic was experiencing a panic, and even if this resulted in the bubbling land boom in Florida.

As people tended not to make those connections in the past, so they don’t today, following several years of massive and unprecedented increases in bank reserves engineered by the Bernanke Fed and optimistic news reports that the housing market is recovering.  Are happy times and land booms are here again?  As Clarence Darrow once said: “History repeats itself, and that’s one of the things that’s wrong with history.”

Mencken on the Economists

Today is the 57th anniversary of  the death of H. L. Mencken, perhaps the greatest of American writers. Murray Rothbard called him the “joyous libertarian” (a term that describes Rothbard as well). Rothbard wrote that “American Kultur . . . was incapable of understanding H. L. Mencken. . . . It is difficult for Americans to understand a merger of high-spirited wit and devotion to principle; one is either a humorist, gently or acidly spoofing the foibles of one’s age, or else one is a serious and solemn thinker. That a man of ebullient wit can be, in a sense, all the more devoted to positive ideas and principles is understood by very few; almost always, he is set down as a pure cynic and nihilist.” Mencken was no nihilist, but a “serene and confident individualist, dedicated to competence and excellence and deeply devoted to liberty.”

To honor Mencken, I direct you to one of his  typically funny essays, “The Dismal Science,” about the economists of his day. A few excerpts:

One of [my poisons], following hard after theology, is political economy. What! Political economy, that dismal science? Well, why not? Its dismalness is largely a delusion, due to the fact that its chief ornaments, at least in our own day, are university professors. The professor must be an obscurantist or he is nothing; he has a special and unmatchable talent for dullness; his central aim is not to expose the truth clearly, but to exhibit his profundity, his esotericity—in brief, to stagger sophomores and other professors. The notion that German is a gnarled and unintelligible language arises out of the circumstance that it is so much written by professors. . . .

[There is no] inherent reason why even the most technical divisions of its subject should have gathered cobwebs with the passing of the years. Taxation, for example, is eternally lively; it concerns nine-tenths of us more directly than either smallpox or golf, and has just as much drama in it; moreover, it has been mellowed and made gay by as many gaudy, preposterous theories. As for foreign exchange, it is almost as romantic as young love, and quite as resistant to formulae. . . .

Political economy, in so far as it is a science at all, was not pumped up and embellished by any such academic clients and ticket-of-leave men. It was put on its legs by inquirers who were not only safe from all dousing in the campus pump, but who were also free from the mental timorousness and conformity which go inevitably with school-teaching—in brief, by men of the world, accustomed to its free air, its hospitality to originality and plain speaking.

The Negative Consequences of Near Zero Interest Rates

John B. Taylor is always worth the time to read when he comments on monetary policy.

Today’s WSJ critique of Fed policy, John Taylor: Fed Policy Is a Drag on the Economy, is no exception.

Some highlights:

While borrowers like near-zero interest rates, there is little incentive for lenders to extend credit at that rate.

“More broadly, the Fed’s excursion into fiscal policy and credit allocation raises questions about its institutional independence and accountability. This reduces public confidence in the central bank.” [This last may be the one good thing in the fed’s misguided policy response to the slow recovery.]

Jeffrey Rogers Hummel in the Independent Review, provides the details. See “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner.” Keep in mind this was written before the Fed began QE Infinity and its purchase of 75% plus of newly issued Federal debt.

At the very least, the policy creates a great deal of uncertainty.

The low rates also make it possible for banks to roll over rather than write off bad loans, locking up unproductive assets.

As such the response postpones necessary adjustments to malinvestments of the previous boom(s) also prolongong a return to prosperity and sustainable growth. .

For another interesting discussion on the adverse effect of low rates on recovery see part three in Steve H. Hanke’s GlobeAsia column “Rethinking Conventional Wisdom: A Monetary Tour d’Horizon for 2013

Here’s Another Reason Why The Government’s Budget Deficit Figures Are Phony Baloney

There is so much in the government’s official deficit figures  that is phony it is hard to say what is real.

But we should add at least $89 billion to the official deficit figure. To see why, we need a bit of background.

The US government deficit is supposed to be running at around $1.2 trillion. But the government gets there by using accounting methods that would put private business executives in jail for fraud. The real deficit by different estimates should be multiples higher. This is already widely known.

It is also increasingly understood that the Fed is covering the deficit by creating new money out of thin air and using it to buy the government’s bonds. What is not generally understood is that the Fed then posts “income” from the newly purchased bonds, uses some of it to cover its own expenses, which are not subject to Congressional oversight, and then remits the rest to the Treasury. The Treasury in turn can use this phony income to reduce the deficit.

Consider what has happened here. The government sells a bond to itself by selling it to the Fed. The Fed then “charges” the government interest. The interest is actually paid by borrowing more from the Fed, but nevertheless is booked as real Treasury income and used to “reduce” the deficit.

A Bloomberg article mentions in passing that the Fed sent $88.9 billion of this phony income to the Treasury in 2012. That is another $89 billion that should really be added to the deficit.

To put this $89 billion in perspective, it is much larger than the $62 billion per year in expected tax revenue from the new taxes on the rich ( those making over $400,000 a year) that were enacted in January with the “fiscal cliff” legislation.

Help Us Make “The Free Market” Even Better

Now in its 31st year, the Mises Institute’s monthly newsletter, The Free Market, is expanding into a longer, more diverse publication with more articles and interviews, plus Institute Alumni news, and the latest news from our Donors, Members, and Faculty.

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Over the past three decades, authors like Ron Paul, Walter Block, Tom Woods and Robert Higgs have written for the pages of The Free Market.  Through the 1980s and until his death, The Free Market was home to some of Murray Rothbard’s most entertaining and informative new articles, and many of them now appear in the compilation Making Economic Sense. You can be part of this tradition.

Please send submissions to editor Ryan McMaken at Articles should contain fewer than 1,000 words and should not have footnotes or endnotes. Short book and film reviews under 750 words are very welcome.

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