Archive for May 2013

George Selgin Defends Deflation–and Quantitative Easing

In an interview on CNBC’s European Closing Bell show, George Selgin presents an eloquent and compelling defense of deflation that is caused by increasing productivity in the economy. He refers to this as “good deflation.” Indeed, Selgin argues that such deflation is “desirable,” because any attempt by the Fed to offset it by monetary expansion will create asset bubbles.

Unfortunately, in the same interview, Selgin defends the first round of quantitative easing undertaken by the Fed in 2008 on the Keynesian grounds of the necessity of offsetting a fall in total spending or “aggregate demand.” In Selgin’s words:

Back in 2008 a case existed for quantitative easing because there really was a shrinkage of demand and the Fed needed to do something about it. . . . It [quantitative easing] is sometimes flawed and sometimes not depending on whether it is in response to falling demand that needs to be revived, where it can play a role in reviving it under the right circumstances. . . .

Furthermore, Selgin correctly points out that arguments for the Fed targeting a stable price level or an inflation rate of two percent “aren’t founded on anything really sound.” And yet Selgin goes on to call on the Fed to target a constant level of total spending or “nominal GDP” in order to achieve his own preferred rate of price change for the economy. “According to my theory,” says Selgin, “a healthy rate of deflation is one that looks like productivity growth.” But why is this rate of change in overall prices any less arbitrary than, for example, the 2.5 percent increase in prices that Bernanke prefers? Why must changes in overall prices reflecting the public’s changing relative valuations of cash holdings vis-a-vis consumer and producer goods be eternally suppressed by the Fed, particularly falling prices resulting from an increase in the demand for cash?

In fact Selgin expresses a profound solidarity with Keynesian macroeconomists like Bernanke when he states in his interview that a shrinkage in the demand for goods is undesirable and must be avoided, whether by quantitative easing or by mandating that the Fed target a constant level of nominal GDP in the long run. Like Bernanke et al. it seems that Selgin has not learned the first principle of business cycles, which was originally discovered by the classical economists and elaborated into a full theory by Mises, Hayek, and later Austrian economists. The classical economist David Ricardo gave this principle concise and elegant expression:

Men err in their productions, there is no deficiency of demand.

Those Threatening “Customers”

dmvI spent a lovely morning at the local office of the Department of Motor Vehicles. These are uniformly horrible places with long waits, surly employees, and arcane rules and procedures, and it’s not unusual for “customers” to get angry as well as frustrated.

I noticed this sign posted on the counter: “We reserve the right to refuse service to anyone because of irrational or threatening behavior.” It’s obvious why you might see such a sign at a DMV office. But what’s remarkable is that you never, ever see anything like this at a commercial enterprise. To be sure, customer service varies from store to store. But customers are, after all, customers, and it’s in the merchant’s interest to treat customers well. With government provision of goods and services, of course, the reverse is true: the “customers” have no choice where to go, and from the supplier’s point of view, each customer adds to its cost. As Mises noted in Bureaucracy, in government enterprises, “[t]he criterion of good management is not the approval of the customers resulting in an excess of revenue over costs but the strict obedience to a set of bureaucratic rules. The supreme rule of management is subservience to such rules.” For the DMV, all that matters is making sure people wanting license plates or drivers licenses have filled out the proper forms, brought the proper documentation, waited in the proper lines, and behaved in the proper manner. Do the rules make sense? Do they increase the satisfaction of the customer? Who cares! They’re not “customers” anyway.

Sign of the Times

A new book by Portuguese economist João Ferreira do Amaral entitled Why We Should Leave the Euro is outselling Fifty Shades of Grey there. This makes sense given that both books center on painful relationships in which one party is being spanked and that are apparently difficult to dissolve. (h/t Bill Easterly)

Reading Hayek on the Road to Famine

Yang Jisheng, a Chinese journalist, is the author of the 2012 book Tombstone, a meticulously researched and definitive history of the Great Chinese Famine engineered by Mao Zedong from 1958 to 1962, during which 36 million Chinese perished from starvation.

In an interview with the Wall StreetJournal Mr Yang now reveals that he was greatly influenced by Friedrich A. Hayek’s classic work The Road to Serfdom , a heavily redacted version of which was translated into Chinese in 1997. Indeed Hayek had presciently written in this book, “In a country where the sole employer is the state, opposition means death by slow starvation.” Not only did Hayek’s book provide Mr. Yang with an explanation of the tragic events of his youth, it also explains the current Chinese system, which he maintains, has been completely misunderstood. The Wall Street Journal summarized Mr. Yang’s position as follows:

“China’s economy is not what [Party leaders] claim as the ‘socialist-market economy,’ ” he says. “It’s a ‘power-market’ economy.”

What does that mean?

“It means the market is controlled by the power. . . . For example, the land: Any permit to enter any sector, to do any business has to be approved by the government. Even local government, down to the county level. So every county operates like an enterprise, a company. The party secretary of the county is the CEO, the president.”

Put another way, the conventional notion that the modern Chinese system combines political authoritarianism with economic liberalism is mistaken: A more accurate description of the recipe is dictatorship and cronyism, with the results showing up in rampant corruption, environmental degradation and wide inequalities between the politically well-connected and everyone else. “There are two major forms of hatred” in China today, Mr. Yang explains. “Hatred toward the rich; hatred toward the powerful, the officials.” As often as not they are one and the same.

Hmmm, a market economy controlled by power, heavy regulations on new entrepreneurial ventures, arbitrary exercise of political power, economic cronyism, rampant corruption, the close correlation of wealth and political power? Sounds like another so-called market economy we are all familiar with.

Krugman Accused of Uncivil Behavior

“The gloves are off in the roiling academic dispute over the merits of austerity and the dangers of debt.”

In the latest round, Harvard economists Kenneth Rogoff and Carmen Reinhart accused Princeton economist and New York Times columnist Paul Krugman of “spectacularly uncivil behavior” and the inaccurate allegation that they refused to share data supporting their work linking heavy debt levels to subsequent slow economic growth.”

China Review

Here is a book review from the Wall Street Journal that gives a good picture of the past and present of China.

The Last Knight in Russia


May 24th, 2013 will remain in the annals of the Circle Bastiat as an infamous day of self-promotion. There is indeed a second publication which yours truly is most happy to announce: the Russian edition of the Last Knight of Liberalism: Последний рыцарь либерализма: Биография Людвига фон Мизеса (Chelyabinsk: Социум, 2013), 893 pp. Translated by Alexander Kuryaev, Tatiana Danilova, Elena Vasilyeva, Marina Oborina, Yuri Nurmeev, Vasily Koshkin, and Natalia Avtonomova.

My Bielorussian doctoral student, Olga Peniaz, sent me the picture of the book-cover, which seems to be identical with the Amercian edition except for the Cyrillic letters. How truly astonishing that the first translation of this book (and possibly the only one ever) has been made for those very people who arguably suffered most under the ideas of statism and socialism, which the great Ludwig von Mises opposed so fiercely during all his life. My special thanks go to the wonderful persons who have made this edition possible, especially to the sponsors, and to the translator team coordinated by Alexander Kuryaev, who also made a book presentation on May 18th (watch the video as from about 1h30). God bless you, and I hope to meet you all in person one day.

Political Economy of Finance


Yours truly is happy to announce a new book publication : Krise der Inflationskultur (Munich: Finanzbuch-Verlag, 2013), 320 pp.

The strongest criticisms of fiat money and central banking have been based on monetary considerations and on the theory of capital. By contrast, the repercussions of an inflationary monetary system on financial markets and on the use of wealth has been somewhat neglected. The present essay on the political economy of finance fills this gap. The central thesis is that, in a fiat money system, financial markets tend to turn into engines of destruction; they absorb excessive amounts of savings, facilitate the consumption of savings, and reinforce a culture of inflation that saps and undermines the economic foundations of civilisation.


Read More→

Six Stages of the Libertarian Movement

Speech (transcript) by Murray Rothbard: The Six Stages of the Libertarian Movement.

Mises U on

The Mises Institute and Mises Univeristy are mentioned and pictured in this column asking Will Think Tanks Become The Universities of The Future?

New Austrian Journal

The Journal of Prices & Markets, published by the Ludwig von Mises Institute of Canada, is a journal that seeks to improve the understanding of the role of markets in the economy. Submissions should seek to shed light on contemporary issues while being grounded in a praxeological reasoning. Prices & Markets welcomes submissions from a variety of fields such as politics, sociology, and psychology, where ever they can bring relevance to economic and financial questions.

Austrian Banking

Here is a good short article which explains the Austrian approach to banking and how all groups across the political/ideological spectrum can agree.

Thomas Sowell on Why the Intelligencia Pay No Price for Being Wrong

Thomas Sowell recently sat down with Peter Robinson to discuss his latest book, Intellectuals and Race. Here’s a short excerpt:

Robinson: …[N]ow you’re saying that multiculturalists [who argue for] bringing kids into [academic] institutions for which they’re ill-qualified — you take bright, hard-working, otherwise perfectly well-qualified students and put them in the wrong institution and you set them back in life.
Sowell: Yes.
R: And they’re culpable as well. They had ought to know better.
S: Yes.
R: Intellectuals and Race, quote: “The Intelligencia pay no price for being wrong.”
S: I think that’s the secret of their influence.
R: How’s that?
S: Well, if you come up with a lot of wrong ideas and pay a price for it, you’re forced to think about it and to change your ways or else get eliminated. But there is no such test. The only test for most intellectuals is whether other intellectuals go along with them. And if they all have a wrong idea, then it becomes invincible.
R: Tom, you’re coming pretty close to saying that intellectuals aren’t very smart.
S: [Laughs.] They are very smart in very limited areas. And they don’t realize [it]. That’s the problem.

Although Sowell’s book isn’t explicitly about epistemology, it does deal with critiques Austrians have long made to understand why false ideas persist. For instance, Keynesian ideas persist among intellectuals in large part because so many intellectuals accept them uncritically. Indeed, to point out the failures of massive Keynesian stimulus since 2008 is the intellectual equivalent today of pointing out the emperor is not wearing any clothes. In both cases, too many careers and incomes depend on ignoring what is actually quite obvious. Mises pointed this out in Human Action (Scholar’s Edition, p. 868) as well when he noted that “[t]ax-supported universities are under the sway of the party in power. The authorities try to appoint only professors who are ready to advance ideas of which they themselves approve.”

The result is a herd mentality that affects the tenor and quality of much discourse in higher education today, whether it is about race, economics, the environment, marriage and the family, or “good citizenship.” The irony is that the Keynesian notion of animal spirits is actually strongest within the marketplace of ideas where, at present, state-supported research institutions exert the most influence.

For more, see Mises’ Epistemological Problems in Economics and Hayek’s Counter-Revolution of Science. For a personal account of these issues, also see Bill Anderson’s short article, “Austrian Economics and the ‘Market Test’: A Comment of Laband and Tollison”.

Was Marx Right?

Not very  often, but  occasionally he hit on something of importance.

For example, he said in the Communist Manifesto  that: “The cheap prices of its commodities are the heavy artillery with which [ the profit system]…compels all nations, on pain of extinction, to adopt the  [ profit]… mode of production.” President Obama evidently missed that passage, since he claimed in a debate with Mitt Romney that the government could provide health services more cheaply because it did not have to earn a profit. The truth, as even Marx understood, is that  the search for profit  drives prices down.

One of the few things Keynes got right was his dismissal of Marx. He told his student Michael Straight: ” Marxism was even lower than social credit as an economic concept. It was complicated hocus-pocus.” [ Skidelsky, vol 2, p 523] Curiously, Marx had already said much the same about Keynesianism, even before Keynes was born. His scorn for Keynesianism was of course possible because there wasn’t anything particularly new about what Keynes said.

Here is the passage from Capital [ P. 827-29] in which Marx seems to be anticipating the Keynesian  system:

“The only part of the so-called national wealth that actually enters into the collective possessions of modern people is– their national debt. Hence,…the modern doctrine that a nation becomes richer the more deeply it is in debt. Public debt becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of blasphemy against the Holy Ghost….

As with the stroke of the enchanter’s wand…, [ the public debt] endows barren money with the power of breeding and thus turns it into capital.”… [But] modern fiscal policy…contains within itself the germ of automatic progression. Overtaxation is not an accident, but rather a principle.”

It would be fitting punishment for Marx and Keynes to have to debate each other face to face forever  in some gloomy spot beyond the River Styx.


Fed Bank President Targets Unemployment Targeters

The Fed has committed itself to maintaining its zero interest rate policy as well as quantitative easing for as long as the unemployment rate remains above 6.5 percent (and inflation rate below 2.5 percent). James Bullard, the President of the Federal Reserve Bank of St. Louis, heroically dissents from this policy of unemployment targeting, which is basically a reversion to the crude and discredited Old Keynesian doctrine. In a speech last month entitled “Some Unpleasant Implications for Unemployment Targeters”, Bullard, himself a New Keynesian inflation targeter, stated:

Attempts to address the various labor market inefficiencies solely with monetary policy do not work very well because improvements on one dimension are simultaneously detriments on other dimensions. . . . monetary policy alone cannot effectively address multiple labor market inefficiencies, and so one must turn to more direct labor market policies to address those problems.

Unfortunately, President Bullard did not articulate those “more direct labor market policies,” but they would include: the repeal of minimum-wage legislation, which destroys jobs for the unskilled; the repeal of the National Labor Relations Act, which coerces employers into collective bargaining and privileges union “insiders” against non-union “outsiders” causing unemployment or lower wage rates among the latter; and the phasing out of unemployment “insurance,” which encourages unemployed workers to spend an excessive amount of time in “searching” for jobs.

The full PowerPoint presentation of Bullard’s speech can be found here.

David Stockman Seminar in NYC

The Mises Institute will be hosting the David Stockman Seminar in New York City on Tuesday May 21. Lew Rockwell, Judge Andrew Napolitano, and myself will be in attendance. Mr. Stockman will be talking about his hard-hitting new book on crony capitalism, The Great Deformation.

The Great Deformation is an indispensable book, packed with insights and careful historical analysis. The massive bailouts injected into the economy by the Bush Administration in response to the 2008 crisis were not needed to stave off a collapse of the monetary system. To the contrary, Stockman shows, they were a triumph of “crony capitalism”. This nefarious system, based on massive government debt, has deep roots in twentieth-century economic history. Stockman offers one of the best discussions I have ever read of Roosevelt’s New Deal, and the vital role of Richard Nixon on our road to financial ruin receives much needed stress. Neither Keynes nor Milton Friedman fares very well here, and readers will learn why the policies of both of them have led to disaster. The Great Deformation is a magnificent defense of a free economy and sound money.

William H. Peterson

There is now a Wikipedia entry on William H. Peterson available here. Dr. Peterson was a student of Ludwig von Mises, a prominent business economist, and a great man.

Paul’s World

wayneLine of the day, from Michael Kinsley: “Krugman sometimes writes as if, right or wrong, his view is the courageous one, held by folks willing to stand up to the plutocrats and their lackies. But his message to all classes is: party on.”

I also like the way Luigi Zingales put it in 2009:

Keynesianism has conquered the hearts and minds of politicians and ordinary people alike because it provides a theoretical justification for irresponsible behavior. Medical science has established that one or two glasses of wine per day are good for your long-term health, but no doctor would recommend a recovering alcoholic to follow this prescription. Unfortunately, Keynesian economists do exactly this. They tell politicians, who are addicted to spending our money, that government expenditures are good. And they tell consumers, who are affected by severe spending problems, that consuming is good, while saving is bad. In medicine, such behaviour would get you expelled from the medical profession; in economics, it gives you a job in Washington.

See also my comments here.

Bring on the Helicopter Money–and Gut the Fed

You would not think that there would be any worthwhile ideas in an article entitled “Bring on the ‘Helicopter’ Money.” Written by hedge-fund manager Daniel Arbess in today’s Wall Street Journal, the article contains a very good idea buried among many bad ones.

Arbess argues that quantitative easing is failing because there is a lack of demand for credit, so that Fed policy is “pushing on a string,” as it were. In addition, Arbess contends, fiscal policy is acting as a “headwind” to the economic recovery because of higher payroll taxes and rising health care costs.

To combat such “monetary impotence” and “fiscal paralysis,” Arbess recommends a “helicopter drop of money” directly into the economy. In technical terms this is today called “overt monetary finance,” which means that the Fed would bypass the banking system and credit markets in creating money and send the new money directly to the Treasury where Congress would decide on how to use it. Since it is illegal for the Fed to purchase debt directly from the Treasury, this procedure would be considered “a direct equity investment” in the Treasury. Sure this policy poses the obvious risks of inflation in the hands of an undisciplined Congress, but Arbess believes that these risks are “manageable” and that this mechanism offers “an optimum combination of fiscal and monetary stimulus without increasing private or public debt.” Thus, Arbess’s main concern seems to be to expand government spending without further bloating Federal deficits and the national debt.

Of course these are all very bad ideas and are based on the crude and destructive Keynesian notion that money and spending–more paper tickets or their electronic substitutes changing hands–will lead to the creation of more real goods and jobs. But the Fed has created $2.3 trillion (M2) since 2008. What makes Mr. Arbess think that creating dollars through a different channel will alter the result? Furthermore, what is retarding the economic recovery is not the Federal budget deficit or the size of the national debt per se. It is rather the amount of resources that the Federal government is prying from the hands of productive entrepreneurs, investors and laborers, and siphoning out of the private economy into wasteful subsidies to domestic special interests, the financing of unnecessary wars, the feeding of an insatiable and gigantic military machine, and the payment of the salaries of the unproductive politicians and bureaucrats who oversee it all. This is the true burden dragging down the economy and is measured by precisely total government spending that Mr. Arbess so desperately seeks to increase. It matters very little whether such spending is financed by taxes or by deficits funded by debt issuance and money creation.

The one good idea in the article is overt monetary finance, but for different reasons than Mr. Arbess gives. Arbess sees this measure as only a temporary “crisis-fighting tool” that will be stowed away as soon as the economy recovers. But as a permanent policy, it would be a wonderful device for wresting control of monetary policy from un-elected, secretive, and pseudo-scientific Fed bureaucrats and placing it under a Congress subject to popular scrutiny and elections. Of course this would not be an ideal system, which would be a hard money consisting of a market supplied commodity like gold. But it would have a number of significant advantages over the present Fed-dominated system. First, as just noted, money creation by Congress would be far more transparent and understandable to the public than the arcane procedures by which the Fed expands the money supply. Second, the injection of new money directly into the economy via government purchases of goods and services would avoid the continual and systematic distortion of financial markets and the interest rate currently caused by Fed open market operations. This process of “simple inflation” as Mises called it would, therefore, certainly produce rising prices but would not generate business cycles of recurring booms and busts. Finally, the Fed could no longer operate as a bailer-outer of last resort, surreptitiously bailing out gigantic domestic and foreign financial institutions in the absence of discussion and consent by Congress and the knowledge of the public.

For a more detailed discussion of the pros and cons of placing the Fed directly under Congressional control see my article The Flipside of the Trillion Dollar Coin.

A Keynesian Monetary Politburo Member Speaks

The president of the Minneapolis Fed, one Narayana Kocherlakota, decided to devote the entire 2012 Annual Report to not one but two interviews with . . . . . . . . himself.   The interviews are a celebration of economic stupidity.  A few excerpts:

“Quantitative easing has the impact of pushing down on longer-tern interest rates.  And that should be directly stimulative to the economy because by pushing down on market interest rates, people are led to think, ‘Hmm, maybe I shouldn’t be buying those assets that are paying such a low yield.  I should spend money instead.’”    No need to save, invest, or work and produce; just spend, spend, spend, like a nation of spoiled rich kids.

“We’d like to push it [interest rates] down further and can’t.  That should be a signal to the fiscal authority to be more interventionist in the economy” with a “future consumption tax” to “encourage current spending.”