Bob Higgs provides a nice tribute to economic historian Robert Fogel, a leading economic historian and cliometrician.

In 1995 Higgs’s “Austrian Economics and the New Economic History” in Austrian Economics Newsletter vol. 15, no.1, (available here pages 2 and 3) offered a well thought out assessment of what cliometrics might offer “of value to the Austrian economist.” After stating, “At first glance one might well answer no”, he argues, “Upon closer inspection, one may revise this assessment. Austrain economists do sometimes write economic history… .”  Thus, “Austrians engaged in historical interpretation can sometimes benefit from some cliometric work.”

It is two pages well worth keeping accessible for any Austrian researcher “practicing their own disticntive style of interpretative economic history.”

It was advice I tried to keep in mind for my own research and teaching.

Reinhart-Rogoff Revisited

The recent release of GDP data continues to show a weak recovery which many who contribute here have attributed regime uncertainty and inappropriate policy. The Wall Street Journal (“A Jobs Fillip”) comes to a similar conclusion:

Left to its own devices, the U.S. economy will grow as individuals and businesses try to improve their lot and expand. The tragedy of the last four years is that Washington tried to supplant or interfere with those decisions with a wave of regulation, spending and taxation.

John B. Taylor also sees the slow recovery as caused by “ineffective policy interventions” in this comment on the data (“Another Take on Reinhart-Rogoff Controversy”) :

The updated charts below incorporate last Friday’s release of the first quarter GDP data. They continue to tell the story of a weak recovery which, in my view, is largely due to ineffective government policy interventions. There is, of course, an alternative view: that the recovery is weak because the recession and the financial crisis were severe.

This view takes the onus off bad policy as the cause of the slow recovery and bolsters the argument (erroneous in my view) that without stimulus things would have been worse. This alternative view is based on empirical work by Reinhart-Rogoff (This Time Is Different). Reinhart and Rogoff have been in the news recently because of errors in their empirical work on the impact on economic growth from large debt/GDP ratios (see here and here). This error has received lots of press lately, as Taylor points out, because the correction of the error provides data that can be used to “support more fiscal stimulus and less consolidation.”

Michael Bordo has provided strong evidence that Reinhart-Rogoff were also mistaken in their empirical research in This Time Is Different. U. S. data does not support the Reinhart-Rogoff conclusion that that slow recovery following a financial crisis is the norm. Despite the fact that “Bordo wrote about his findings (which are based on his joint research with Joe Haubrich of the Cleveland Fed) in a September 27, 2012 Wall Street Journal article, ‘Financial Recessions Don’t Lead to Weak Recoveries’”, this error has received minimal coverage in the press and the blogosphere especially compared to mountains of positive press of covering the exposure of errors in their work on debt and growth.

Bordo’s correction is, as Taylor speculates, largely ignored because it lends support to the bad policy–slow recovery causal link.

For those following Bitcoin, this interview with Gavin Andresen, the 46-year-old lead software developer for the Bitcoin project in today’s Wall Street Journal should be of interest.

Bitcoin vs. Ben Bernanke

“The chief scientist for the digital currency talks about its appeal—and pitfalls—in a world of fiat money.”

Highlights:

As for the upside, small online merchants would welcome a global payment standard. For this reason Bitcoin or a similar technology could threaten the power of not just central banks, but banks, period. Unlike online payment services that give people with credit cards easier ways to transact business, Bitcoin works best when avoiding the traditional financial system completely.

And

Politicians and their appointees are entirely cut out of Bitcoin’s monetary loop. This is a significant difference between Bitcoin and government-issued fiat currencies. Federal Reserve Bank of Dallas President Richard Fisher calls the U.S. dollar a “faith-based currency.” In other words, its value rests on the belief that the government will not print so many dollars that each one becomes nearly worthless.

And

This [deflation that is predicted to be a consequence of Bitcoin’s fixed nature ] is  portrayed as a recipe for economic disaster by those who like to inflate currencies to relieve the burden on borrowers, including spendthrift governments.

It’s true that deflations have sometimes accompanied economic disaster, but also economic triumphs. For example, in “Money, Markets & Sovereignty,” Benn Steil and Manuel Hinds describe the second phase of the Industrial Revolution in the U.S. between 1870 and 1896. Prices fell by 32% over the period, but real income soared 110% amid robust economic growth, expanded trade and enormous innovation in telecommunications and other industries.

The conclusion:

It’s almost time for Mr. Andresen to get back to work. He shares some useful advice about Bitcoin: “I tell people it’s still an experiment and only invest time or money you could afford to lose.” If only investors could as easily follow that advice with fiat currencies.

Joseph Salerno’s recent post on The Libertarian Case for Corporate Social Responsibility reminded me of a similar argument about a free market based ethic for business by Richard W. Wilcke in the Independent Review (2004).

While I served as dean of business at Metro State, we invited Richard in for a presentation of his thoughts on an anti-crony capitalism/anti-mercantilism business ethic. The lecture was well attended and well received by students with lots of good questions. Not so much so by business faculty.

For those interested here is the abstract and a link.

The Abstract:

Economist Milton Friedman drew the wrath of anti-market business ethicists for his controversial 1970 essay “The Social Responsibility of Business Is to Increase Its Profits.” Business leaders seeking an ethical standard consistent with the free market should look elsewhere, however, because Friedman’s essay seems to exculpate a practice antithetical to the free market—corporate lobbying for special government favors.

“An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis”

Bill McNabb, CEO of the Vanguard Group, in today’s WSJ op ed Uncertainty Is the Enemy of Recovery discusses Vanguard’s estimate that policy uncertainty has created a $261 billion drag on the U.S. economy.

While it is good to see policy uncertainty highlighted, the more relevant concept is Robert Higgs’s regime uncertainty as discussed in these Mises Dailies and Circle Bastiat posts:

In a comment on Reynolds and Cochran on the Slow Recovery, Marcus Nunes argued, “If there was a lesson in the R&R fracas is that you should take care with numbers, especially if you define “tipping points”. I think 15% is below what would account for the ‘core functions’ of government.” Nunes then referred the reader to ‘Keep it simple’. Nunes’s commentary is an interesting take on recent controversy over the coding error found in one of the Reinhart-Rogoff papers focusing on debt and growth.

‘Keep it simple’ is useful. It provides a summary of other evidence on the impact of the size of government on growth evidence. (John Taylor also focuses on size of government at Coding Errors, Austerity, and Exploding Debt.)

I agree whole heartedly with Nunes’s reflection on the R & R debate [For a summary of the details of this ‘debate’ see Mistakes by Greg Mankiw]. The focus should be on the source the size of government relative to the size of the economy not on the size of the debt or deficit, as Nunes succinctly point out:

I may be missing something vital, but what bothered me about the R&R ‘fall-out’ was that the original study was concerned with public debt/GDP levels. The major finding of the critics was that, contrary to the original study, no ‘tipping-point’ (after which growth is negatively affected) was found.

My take: Debt results from deficits. Deficits follow government spending (given revenues). So why not go to the ‘source’, i.e., government spending, and check if it has a measurable impact on growth.

While there may be a quibble on a ‘tipping point’, Nunes’s conclusion from the data provided is essentially consistent with my argument. His conclusion:

“So yes, “too much government can be bad for the economy´s health”!”

Dick’s comment reflects well my perspective on turning points:

It appears that Professor Cochran is closer with 10% than to consider 15%. Your averages tend to be on the high side because you are using more modern government spending levels. In a functioning economy there is little need for government because market driven production and processes are much more efficient with much higher quality.

Serious analysis would probably show that much less government is necessary to a properly function economy, even less than 10%.

For those interested in the Euro, Andreas Hoffmann (University of Leipzig), has some interesting commentary at ThinkMarkets, A blog of the NYU Colloquium on Market Institutions and Economic Processes, “The Euro: a Step Toward the Gold Standard?”

The he sipports and critiques argument about the Euro where, in a recent piece [“An Austrian Defense of the Euro” ?],

Jesus Huerta de Soto (2012) argues that the euro is a proxy for the gold standard. He draws several analogies between the euro and the classical gold standard (1880-1912). Like when “going on gold” European governments gave up monetary sovereignty by introducing the euro. Like the classical gold standard the common currency forces reforms upon countries that are in crisis because governments cannot manipulate the exchange rate and inflate away debt. Therefore, to limit state power and to encourage e.g. labor market reforms he views the euro as second best to the gold standard from a free market perspective. Therefore, we should defend it. He finds that it is a step toward the re-establishment of the classical gold standard.

Worth a read. The exchange between Andreas and O’Driscoll in the comments is interesting as well.

Philipp Bagus author of The Tragedy of the Euro has also commented extensively on the Euro. See especially “Is There No Escape from the Euro?” and “The Eurozone: A Moral-Hazard Morass”.

Earlier this month I chatted with with fellow economist Morgan Reynolds on his Reynolds Reveal . Issues ranged from slow recovery to debt and deficits and empirical work with a good theoretical foundation by Gwarnty, Lawson, and Holcombe  showing how government spending in excess 15% of GDP retards economic growth (see here). Vedder and Gallaway also address Government size and economic growth.

Reynolds summary of the hour :

Episode #009 – Reynolds Reveal – Reynolds discussed the industrial accident at Nuclear One near his home in Arkansas; the March employment/unemployment report released the previous Friday; and another Paul Krugman column in the NYT opposing ‘liquidation’ via recession and pushing more and more federal spending and money printing to gin up economic growth. Talk about repeated failure! Guest economist John Cochran of Metropolitan State University in Denver Colorado patiently discussed the many problems of the massive interventions which harm economic expansion. In particular, recent economic statistical studies show government spending consistently impairs economic growth when government’s share of GDP exceeds 18 percent. During the Clinton era federal spending was about 18 percent of GDP but currently is in the range of 23-24 percent. Cochran pointed out that the key problem is not so much deficit spending as total spending far in excess of optimal, although he believes optimal is even lower, probably in the range of ‘tithing,’ or about 10 percent of GDP.

A fun afternoon thanks to modern technology. Morgan was on Alabama gulf coast in a moter home enjoying spring weather and I was in the comfort of my own home in the Denver area talking and sipping a nice IPA while a blizzaed raged outside.

Nicolás Cachanosky, who recently completed his PhD at Suffolk University under Ben Powell (now at Texas Tech running the new Free Market Institute), has been hired by Metro State. Nicolás fills the position I vacated when I completed retirement from Metro following the Spring 2012 semester. Nicolás has just posted a new and potentially very important working paper “U. S. Monetary Policy’s Impact on Latin America’s Structure of Production (1960-2010)” which extends ABCT and capital-based macroeconomics in the international arena, especially as it applies to the ‘periphery’.

The abstract:

I study the effects of U.S. monetary policy on Latin America’s structure of production prior to two recent economic crises. I find that changes in the Federal Funds rate produced uneven effects across economic sectors. Those industries that are more capital intensive and relative long-term projects are more sensitive to changes in the Federal Funds rate than projects that are less capital intensive and relative short-term in duration. Therefore, periods of loose monetary policy resulted in a misallocation of resources that has been costly to correct during the bust. This result finds a particular pattern of economic distortion during an unsustainable boom.

The work provides evidence which supports concerns about the effect of Fed policy on Latin America expressed by Mary Anastasia O’Grady earlier this year in the Wall Street Journal (See part II of Thoughts on Capital-Based Macroeconomics).

Cachanosky’s paper complements earlier work by Andreas Hoffman, “Zero Interest Rate Policy and the Unintended Consequences on Emerging Markets.”

Currency wars and a race to the bottom by major central banks have major demonstrated negative unintended consequences around the world.

I look forward to all the great things Nicolás can achieve in Colorado especially as he has an opportunity to work with Alex Padilla who has already developed a very successful Exploring Economic Freedom.

The HAYEK LECTURE SERIES at Duke University will feature the 2012 Manhattan Institute’s 2012 Hayek Prize winner John B. Taylor. The lecture titled “Why We Still Need To Read Hayek” will be delivered Wednesday, April 10, 2013 12:00 noon in the Breedlove Room‐Perkins Library.

Taylor delivered a similarly titled lecture last year at the Manhattan Institute available here:

http://www.manhattan-institute.org/html/hayek2012.htm

HT to Walter Grinder.