Forbes columnist Ralph Benko offers interesting speculation on this question.
Forbes columnist Ralph Benko offers interesting speculation on this question.
The so-called “peer review process” is supposed to be the unimpeachable guarantee that publications in academic journals have been chosen in accordance with the highest standards of scientific integrity and quality. The number of papers that an academic publishes in peer-reviewed journals and the number of times his or her articles are cited in other peer-reviewed articles are the main factors determining whether or not he or she is promoted and awarded tenure. Recently there occurred a particularly egregious abuse of the process.
The Journal of Vibration and Control (JVC) is a respected scientific journal in the highly technical field of acoustics and a part of the reputable SAGE Group of academic publications. JVC has recently retracted 60 published articles after uncovering the operation of a “peer review ring” among its authors and reviewers (“referees”) Although is is not exactly clear how the scam worked, it appears to have been run by Peter Chen of the National Pingtung University of Education (NPUE) in Taiwan and probably involved other scientists at NPUE. As best as can be determined, the ring posted up to 130 fabricated names and fake email addresses on an online reviewing system called SAGE Track. These bogus identities were used by the members of the ring to write favorable reviews of one another’s submissions and send them to Ali H. Nayfeh, the Editor-in-Chief of JVC. In at least one instance, it is believed, Peter Chen reviewed one of his own papers under an alias.
In May NPUE informed SAGE and JVC that Peter Chen had resigned from its faculty in February. In the same month JVC announced that Nayfeh had “retired” as editor of the journal. Nayfeh had initiated investigation of the ring in 2013. A full report on the incident including the titles of all the retracted articles can be found here.
This incident should not be surprising, however. Knowledge that the peer review process is gravely flawed and easily abused is well known. Richard Smith, the former editor of the respected British Medical Journal (BMJ), the Journal of the Royal Society of Medicine, characterized the “classic” peer review system as follows:
The editor looks at the title of the paper and sends it to two friends whom the editor thinks know something about the subject. If both advise publication the editor sends it to the printers. If both advise against publication the editor rejects the paper. If the reviewers disagree the editor sends it to a third reviewer and does whatever he or she advises. This pastiche—which is not far from systems I have seen used—is little better than tossing a coin,
But one would think that peer review would at least be useful for detecting fraud and major error. Not so, says Smith:
Peer review might also be useful for detecting errors or fraud. At the BMJ we did several studies where we inserted major errors into papers that we then sent to many reviewers. Nobody ever spotted all of the errors. Some reviewers did not spot any, and most reviewers spotted only about a quarter. Peer review sometimes picks up fraud by chance, but generally it is not a reliable method for detecting fraud because it works on trust.
Now if this is the case in a “hard science” like medical research whose experimental results can, at least in principle be checked, imagine the situation in an social science like economics where controlled experiments are impossible and most “researchers” have strong ideological predispositions. Smith concludes that, despite its many defects, the peer review process
is likely to remain central to science and journals because there is no obvious alternative, and scientists and editors have a continuing belief in peer review. How odd that science should be rooted in belief.
Certainly we should rethink the public funding of an institution that depends so heavily on such a defective process for discovering scientific truth.
Even the New York Times believes that there may be a bubble a-brewin’. As NYT columnist Neil Irwin writes:
Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.
Signs of an incipient bubble abound. The Art Deco office tower in Manhattan, assessed at $466 million by an industry publication three month earlier, sold for $585 million in May. Spain, which suffered a debt crisis two years ago, recently sold bonds a the lowest interest rates since 1789. In the largest junk bond deal in history, a French television company just borrowed $11 billion dollars at 4.875%. Based on the S&P stock index, investments in American stocks average a return of 5.5 cents on the dollar, down from 7.4 cents just two years ago, while investments in Manhattan office buildings yield a rental return net of expenses of 4.4 percent, lower than the rate of return at the height of the last bubble in 2007.
In the meantime, ex-Fed Chair Ben Bernanke, now comfortably ensconced at the left-leaning Brookings Institution, has confided that he has changed his mind in assigning blame for the last bubble to a “global savings glut.” In a recent interview, Bernanke explained:
I may have made a mistake in trying to assign a name. A glut means more than is wanted. But it doesn’t necessarily arise because people want to save more. It can be because they invest less. It’s entirely possible that if you look at the world, you have slow-growing advanced economies, China cutting back on capital investments, that the rate of return is just going to be low.
So once again Bernanke stands ready to blame market failure–this time, the failure to generate sufficient investment opportunities–for the devastating financial crisis that looms just ahead and whose actual cause is the Fed’s policy of recklessly expanding money and credit.
In recent years, national governments, especially in developed countries, have aggressively intensified their war on cash. I have written a number of articles and blog posts (here, here, here, and here) charting the progress of this war and demonstrating that it is in fact a despotic attack by the ruling elites on the personal privacy and liberties of their citizens. Now, international organizations, tax-exempt billion-dollar foundations, and crony capitalist businesses and banks have banded together in an unholy alliance with national governments and their central banks in the drive toward a “cashless society.” Initiated and funded by the left-leaning Ford Foundation in 2012, the alliance calls itself “The Better Than Cash Alliance.” Even more ludicrous and misleading than its name is the statement of purpose that appears on its website according to which it “ provides expertise in the transition to digital payments to achieve the goals of empowering people and growing emerging economies.”
In addition to the powerful Ford Foundation, the Alliance involves the following “partners”: the U.S. Agency for International Development (USAID); the Bill and Melinda Gates Foundation; and (surprise, surprise!) the failed and bailed -out Citi as well as credit card companies Mastercard and Visa. The United Nations is also involved, with the UN Capital Development Fund serving as the alliance’s secretariat. Among other UN agencies participating are the World Food Program and the United Nations Development Program. Other alliance members include several government agencies in developing countries and a number of private aid agencies such as Catholic Relief Services.
One of the key initiatives promoted by the Alliance is to induce governments of developing countries to deliver welfare electronically. Thus according to the Alliance’s website, “When using cash, shifting humanitarian aid and emergency relief to electronic payments creates lasting benefits for people, communities and economies and is more transparent and efficient.” Currently featured on the Alliance’s website is a blog entry entitled “Is Cash the Enemy of Financial Inclusion” as well as a webinar recording ”E-payments Deliver 15% Greater Costs Efficiencies in Kenya – Is This The Future of Food Assistance? plan ” This initiative seems to be making headway in the developing world. In 2012 Nigeria began phasing in a plan to go completely cashless. On July 1, 2014 the final phase of the plan was implemented. According to one report, this plan–
seeking to slash the amount of physical currency in circulation —went into effect in another 30 states. Under the scheme, cash withdrawals from banks for individuals and businesses are being severely limited. Huge fees to use cash are also going into effect.
Separately, the Nigerian central bank and commercial banks are also rolling out a massive new scheme to gather biometric data on customers. ‘We have launched the Bank Verification Number today, the timetable suggests that within 18 months, every customer would have been registered,’ said central bank boss Lamido Sanusi while unveiling the biometric registration plot. ‘This is a day that we would remember for many reasons, not for where we are but where we are likely to get from here. Nobody can steal this identity except he or she steals my fingers.’
Biometric tracking and data gathering by governments and its crony banks share the same objective as the war on cash: the abolition of financial and personal privacy.
“War Is Bad for the Economy.” Of course, this is no surprise to those familiar with basic economics–but it may come as a surprise to Tyler Cowen and Paul Krugman, NYT columnists and “public intellectuals,” who have argued (here and here) that “major wars” promote economic stability and prosperity.
Forbes’ columnist John Tamny executes an inspired and wonderfully savage critique of GMU economist Tyler Cowen’s dotty blog post touting the positive effects of war on economic growth. Tamny takes his cue from Henry Hazlitt and writes in plain and muscular language. Here is a juicy sampler that should whet your appetite for the full meal:
[T]o clarify Cowen’s views to readers, he writes that “the very possibility of war focuses the attention of governments on getting some basic decisions right – whether investing in science or simply liberalizing the economy.” His first example is laughable, and his second easily disprovable.
Government spending on science presumes that politicians can better allocate capital than can private actors operating under market discipline. To believe what Cowen is offering up, the lack of a war threat today is depriving Harry Reid, Mitch McConnell, Nancy Pelosi and John Boehner of the opportunity to expertly invest the money of others in the killing machines of the future; the knowledge gained from those investments eventually migrating to commercial ideas that would boost growth. You can’t make this up. Cowen is serious.
As for the notion that countries somehow need the threat of war to achieve great scientific advances, or better yet, liberalize their economies, apparently Switzerland, Hong Kong, and New Zealand (among many others) didn’t get Cowen’s comical memo. With all three, no credible voice in modern times has argued that either faced war or imminent attack that would have “focused” the attention of their politicians on the way to economy-boosting liberalization, or, if Cowen is to be believed, political advancement of “technological invention” and greater “internal social order” supposedly needed for major expansion.
Indeed, what all three remind us, and it’s something seemingly lost on Cowen, is that economic growth is really very simple. We all have myriad wants and needs, our production is our demand, so when governments remove the barriers to production, the individuals who comprise any economy tend to thrive. Thinking about the U.S. economy with the latter in mind, our economy is presently limp not because we lack some national, war-mongering purpose (apparently Cowen forgot all the national initiatives of the 20th century that robbed the world of well over 100 million people), but precisely because our political class has violated the four basics (taxes, regulation, trade, and money) to economic growth.
In the past week there has been a hugely entertaining brouhaha on Peter Boettke’s Facebook page concerning the most fruitful approach to promoting libertarian social change. It seems to have been precipitated by an irritated Boettke hectoring youthful libertarian activists for adopting a populist “flattened structure of production” model of propagating libertarian ideas while ignoring Boettke’s preferred IHS model of an elitist, top-down “intellectual structure of production.” In the populist model, broadly libertarian ideas are directly absorbed by people in all professions and walks of life and directly “messaged” to their peers. In the IHS-elitist model the only libertarian ideas worthy of dissemination are those that are created and approved by scholars, invariably academics, at the pinnacle of the intellectual “pyramid of social change” and then carefully prepared for public consumption by the” lower-stage” intellectuals in libertarian-leaning think tanks, libertarian media “communicators,” and designated top-level activists or “actuators.” The blueprint for this IHS model is commonly attributed to Friedrich A. Hayek, who purportedly developed it in his 1945 article, “The Intellectuals and Socialism.” As Boettke’s argues:
Hayek is pretty crystal clear in that essay in his desire to inspire a new generation of philosophical thinkers to explore the foundations of a free society…. If you have doubts let’s go to the text. Second-hand dealers are a by-product of philosophical thinkers and policy results when the climate of opinion shifts. Re-read the text carefully PLEASE.
Now my purpose is not to adjudicate between the claims of these competing positions. I wish only to correct some of the profound distortions of Hayek’s views embodied in the Boettke-IHS position. Boettke exhorts his young opponents to re-read Hayek’s article carefully. But when one does so, it is clear that Boettke has gotten Hayek’s position exactly reversed. The intellectuals, who Hayek refers to as the “secondhand dealers in ideas” are not a “by-product” of the scholars, experts, and scientists who originate and refine ideas. To the contrary, according to Hayek, the intellectuals are an independent and powerful class, who create or suppress the popular reputations of the scholars by “exercising their censorship function” in choosing which new ideas to present to the public. Read More→
The fearless protectors of consumers at the Federal Trade Commission finally approved the takeover of men’s clothier Jos. A. Bank by Men’s Wearhouse last week. According to the terms of the agreement concluded way back on March 11, Men’s Wearhouse will pay $65.00 per share and a total of $1.8 billion for its smaller rival. The merger will result in the fourth largest men’s apparel retailer in the U.S. with combined annual sales of $3.5 billion and 1,700 stores nationwide. The combined company will retain the two separate brands and store chains. On the date the agreement was concluded, the stock prices of both companies rose, Men’s Wearhouse’s by 4.7% and Jos. A. Bank’s by 3.9%. Bank’s stock price rose 56 % from October 2013, when merger talks began, to the date of the merger agreement. The company is expected to realize $100-$150 million of cost savings annually over the next three years. This merger was a clear win-win for stockholders and consumers from the get-go
It was evidently not so clear to the FTC, however, which began its expedited “quick look” investigation of the agreement almost immediately and elicited testimony from executives from both companies in the first two weeks of April. In closing its investigation and permitting the merger to proceed more than two months later on May 30, the FTC bureaucrats issued the following statement:
Despite limited competition from the Internet, the transaction is not likely to harm consumers because of significant competition from other sources. As in all transactions, FTC staff examined which product markets were likely to be affected and what the competitive landscape looks like in those markets. There were two such markets in this matter: (1) the retail sale of men’s suits and (2) tuxedo rentals. With respect to men’s suits, there are numerous competitors that sell suits across the range of prices of the suits the merging parties offer, including Macy’s, Kohl’s, JC Penney’s, Nordstrom, and Brooks Brothers, among others. The two firms also have different product assortments that reflect their different customer bases. Men’s Wearhouse, which sells branded and private-label suits, has a younger, trendier customer set, while Jos. A. Bank, which sells private-label suits only, has an older, more traditional customer base.
With respect to tuxedo rentals, Jos. A. Bank has been a small player in the market since its entry in 2010. Further, the parties compete with numerous local and regional tuxedo rental firms. Although both parties have a national footprint, the information we obtained showed that having a national presence is not a distinguishing or important factor for most customers. Instead, price of the rental, quality of the tuxedo, and customer service typically drive customers’ choices. Finally, evidence gathered during the investigation indicates that entry into the tuxedo rental market is fairly easy and inexpensive.
Well, to this I say, “Thank you Captain Obvious.” As a casual shopper at these and other men’s retailers and an infrequent renter of tuxedos, I could have told them all this in, oh, maybe 15 minutes. What is not so obvious is why taxpayers need a bunch of highly paid government economists and lawyers to tell us this at all.
Our money-printer-in-chief, Janet Yellen, gave the commencement address at NYU’s graduation ceremony in Yankee Stadium. She advised the 8,000 assembled graduates that it is ”an unfortunate myth” that “something called ‘ability’” has much to do with success. (Ability being an innate characteristic, it would of course have been politically incorrect for her to have said otherwise.) Rather Yellen touted “grit,” perseverance, and passion for one’s work as the most important job skills.
Highlighting the importance of perseverance, Yellen stated:
Yankee Stadium is a natural venue for another lesson: You can’t succeed all the time. Even Ruth, Gehrig, and DiMaggio failed most of the time when they stepped to the plate. Finding the right path in life, more often than not, involves some missteps. My Federal Reserve colleagues and I experienced this as we struggled to address a financial crisis that threatened the global economy.
Now it is true that Ruth, Gehrig and DiMaggio were only successful in about one-third of their career at bats. But in its 100-year history the Fed has never succeeded in attaining its stated goal of providing sound money to the U.S. economy and abolishing business cycles. Its missteps have been legion and legendary, and committed in every decade of its existence. It orchestrated massive price inflation during and immediately after World War 1 and the Great Inflation of the 1970s (which began in the mid-1960s). During World War 2, the massive expansion of the money supply that it engineered in conjunction with draconian price controls caused the phenomenon of “repressed inflation” that featured a shortage of goods and coercive government rationing, not to mention the explosion of prices immediately after the war. The asset bubbles that it created in the 1920s, 1980s, 1990s and 2000s all culminated in financial crises and recessions/depressions of greater or lesser length and intensity. Its attempt to “reflate” the economy and prevent prices and wages from adjusting to market conditions after the Great Crash of 1929 was one of the factors that caused an agonizing prolongation of the Great Depression. Currently, we are confronted with signs of incipient bubbles in stocks and real estate as a result of the Bernanke/Yellen regime of quantitative easing and zero interest rate targeting.
Yes, Yellen and her predecessors have shown remarkable perseverance. But they have all persevered in a fool’s errand, which no one has the “ability” to accomplish: trying to centrally plan the supply and value of money. This is why the Fed will continue to bat exactly .000 until its total failure is at last widely recognized and it is dismantled.
A very interesting post on the bionic mosquito blog elaborates the insights of Hans Hoppe and myself into a persuasive argument that the only reason that modern fractional-reserve demand deposits are accepted as money today is because of the federal deposit insurance guarantee backed up by the Fed as the monopoly money issuer and bailer-outer-of-last-resort.
As Jeff Deist pointed out in an earlier post, in a national referendum over the weekend, the Swiss heroically and overwhelmingly rejected what would have been the world’s highest minimum wage. Switzerland currently has no minimum wage. The result was hardly unexpected, however, because the “Decent Wage” initiative was staunchly opposed by big business and government, as well as by farmers, small business owners, and employer groups.
A less publicized initiative that received a heart-warming rejection in the referendum, although by a much smaller margin, was the Swiss federal government’s plan to purchase 22 Gripen E fighter jets at a cost of $3.5 billion from Saab, the Swedish defense firm. The deal had been in the works for 6 1/2 years and was thought to be a done deal — at least according to the markets. Saab AB fell the most in 10 months, declining by 7 percent to an intraday low this morning before recovering to a 3.7 percent decline at midday in Sweden. The Swiss public ignored the government’s heavy lobbying in favor of the initiative, which sought to stoke fears of a “security gap” in the defense of its air space. The mechanical and electrical engineering trade group, Swissmem, also gravely warned that rejection of the initiative would cause a prospective loss of 2 billion francs for the ”Swiss economy,” i.e., the crony capitalist firms that compose the trade group and had already negotiated 500 contracts with Saab.
Perhaps part of the reason that the Swiss were unmoved by this government-business hysteria was because of an incident that occurred in February, when French and Italian air forces forced the landing of a highjacked Ethiopian Airlines Enterprise plane in Geneva. The French and Italian jets were needed, you see, because the Swiss air force does not operate outside of business hours.
Although I am not a proponent of democracy — or for that matter government — of any kind, occasional national referendums in the U.S. would certainly throw a good and well deserved scare into our own political and crony capitalist elites, and may even rein in their depredations on citizens’ lives and property.
Working for the Volker Fund during the 1950s and early 1960s provided Murray Rothbard with the opportunity to read and write reviews and memos on hundreds of books on the social sciences, especially economic theory and political economy. Happily this amazing treasure trove of Rothbardiana is available in the Rothbard archives housed at the Mises Institute.
While employed by the Volker Fund, Rothbard was also hard at work researching and writing his great treatise on economic theory, Man, Economy, and State. Rothbard thus was not only reading widely but also thinking deeply about economic theory and method, as he sought to deduce new theorems to advance the mainline Austrian theoretical tradition originated by Carl Menger. This tradition included not only native Austrians like Bohm-Bawerk, Mises, and Hayek but Anglo-American economists such as Philip Wicksteed, Edwin Cannan, Lionel Robbins, William Hutt, John Bates Clark, Frank A. Fetter, and Herbert Davenport.
In 1960, the 34-year old Rothbard read an economic textbook by Clark Lee Allen, James M. Buchanan, and Marshall R. Colberg. In a memo to Ivan R. Bierly of the Volker Fund, Rothbard wrote: “The more I read of the general, all-around works of the ‘Chicago School’ of economics, the less I am impressed.” Regarding the Allen, Buchanan, and Colberg book in particular, Rothbard commented, “I was impressed neither by the technical economic analysis nor by the more politico-economic sections.” Read More→
Regarding the nasty GDP report for last quarter, a Bloomberg reporter commented, “American consumers were a lone bright spot as households spent more to heat their homes and access health care.” In other words, if it were not for greater hardships that befell consumers, namely an unusually colder winter and a greater scarcity of health care, the U.S. economy would not have performed as well as it did in the first quarter of 2014. According to this topsy turvy Keynesian logic, it would have been better for the U.S. economy if the winter had been even more severe and health care even more expensive, stimulating U.S. consumers to spend more trying to stay warm and remain healthy. This is Bastiat’s broken window fallacy on steroids and it is inherent in modern macroeconomics, which holds that spending, especially consumer spending, keeps the economy from plunging into recession.
This year Tax Freedom Day falls on April 22, three days later than last year. By that date, Americans will have earned sufficient income to pay the $3.0 trillion and $1.5 trillion they will be forced to pay this year in federal and state taxes, respectively. The total of $4.5 exceeds the amount they will spend this year on food, clothing, and shelter. So the total costs of Wall Street bank bailouts, military bases in 130 foreign countries, maintaining 1 percent of the U.S. adult population in prison cages, most for nonviolent crimes, drones to kill foreign and U.S. citizens, subsidies to large agribusiness corporations, militarized and trigger-happy police forces, and all the other important “public goods” the government supplies now costs us more than the basic necessities for sustaining human life. When government borrowing, which entails future taxation, is included the Tax Freedom Day is pushed back 15 days to May 6. In 1900, prior to the enactment of the federal income tax laws in 1913, U.S. citizens paid 6 percent of their income in taxes and Tax Freedom Day was January 22.
Pete Boettke has an interesting post arguing that Rothbard’s interpretation of Mises’s method although currently more popular is inferior to that of Fritz Machlup, a student of Mises’s in Vienna who later became a prominent member of the U.S. economics profession. Boettke also argues that the Rothbard’s interpretation will eventually be displaced by the operation of a putative “market for ideas.” For those who are interested, there follows my response.
Pete’s post raises some provocative questions, most of which go unanswered. I will restrict myself to comments on the following passage:
“Let me be clear about something, Rothbard’s reading is a plausible one. If it wasn’t at all plausible, it could not have been a contender and it could not have persisted as long as it has in the contestation of ideas. But that contestation isn’t a smooth a process of intellectual progress as we might like to believe due to institutional impediments and intellectual path dependencies, etc. Still, the market for ideas is not wildly inefficient either — it is just a process that has a lot of slack in the system. But being a plausible reading doesn’t mean it is a correct reading, let alone the most productive reading for contemporary scholars. Machlup’s reading of Mises might actually be more correct, it also might be more productive.”
This is a very strong claim yet Pete does not provide any argument in support of it. I raise two points in challenging his claim.
First, the sole purpose of reasoning about method is to employ the protocol deduced in actually formulating a system of economic theory that is applicable to analyzing real-world phenomena. Methodological discussions are empty rhetoric unless they refer to the fruits of scientific investigation achieved by using the prescribed method. In short, the proof of the pudding is in the eating—and Pete does not supply the pudding.
Now, as far as I know, no one has thought to develop a system of economic theory based on a Machlupian reading of Mises’s method. If I am wrong and someone—perhaps Pete himself—has done so, then I would ask Pete to point to an application of this system to interpreting some significant real-world event such as the recent monetary chaos in Euroland, the housing bubble, the financial crisis, the Great Recession, the recent Argentine currency “devaluation,” etc. There are plenty of explanations of these events based on the Rothbardian reading of Mises. In the absence of an existing Mises-Machlupian theoretical system and a record of its analytical results, comparing Machlup’s reading of Mises with Rothbard’s is pointless or at least irrelevant to scientific discourse.
Second, in claiming “the market for ideas is not wildly inefficient either — it is just a process that has a lot of slack in the system,“ it behooves Pete to give us some idea of how long it takes for his metaphorical “market for ideas” to equilibrate. For example, it has been over 50 years since Rothbard unveiled the theoretical system based on his reading of Mises in Man, Economy, and State. Since that time, the Misesian-Rothbardian system has been “productive” of hundreds of applications–both by Rothbard and his followers–of its theorems to analyzing and interpreting historical reality. So the question then becomes: When does Pete anticipate that the market for ideas will begin to correct this massive disequilibrium and the analyses and interpretations of economic reality begin to pour forth from the yet to be developed Misesian-Machlupian system.
It is true that Machlup did very interesting and important work in competition and monopoly theory and in economic semantics and some brilliant work in business cycle theory and international monetary economics. And, indeed, some of this work did mark a significant departure from mainstream economics. But at the end of the day, Machlup was very comfortable with neoclassical price theory, the core of theoretical economics. In fact, Machlup wrote the famous appendix to C. E. Ferguson’s Microeconomic Theory, a leading graduate-advanced undergraduate micro textbook in the 1960s and early 1970s. Machlup’s 29-page appendix was “A Comprehensive Examination in Microeconomic Theory for Graduate Students.” So Pete needs to answer the questions why Machlup never developed his own reading of Mises into a distinct theoretical system and when he expects Machlup’s followers to do so as part of the corrective process in the market for ideas.
The ball is in your court, Coach.:)
Well, it’s official. Figures released by the Fed last week indicate that the total net worth of U.S. households has set an all time record in 2013 in terms of both nominal and constant dollars. In 2013 alone , total net worth climbed by $10 trillion from $70.86 to $80.66 trillion, the largest annual increase in household wealth in U.S history. More to the point, in 4Q 2013 household wealth adjusted for inflation — i.e., the constant-dollar value of financial assets plus the value of residential real estate net of all debt owned by U.S households–shattered the old record set in 1Q 2007 at the height of Greenspan’s bubble economy.
In the past year this asset bubble has been led by the skyrocketing stock market which has set record highs. Over 2013, the value of household-owned corporate equities increased by 34% to a record $14 trillion and mutual fund shares increased by 27% to a record $7 trillion. Even housing prices rose by 11.6%, adding another $2.3 trillion to household wealth. This artificial wealth bubble has been induced by the Fed’s policy of flooding financial markets with money while maintaining interest rates at super-low levels. It has failed abysmally to stimulate consumer spending, job creation, and economic growth via the “wealth effect” beloved by Greenspan and Bernanke. Ironically, what Fed policy under Bernanke has done is to put the U.S. economy in the improbable position where another financial crisis appears likely to occur without first producing even the illusion of prosperity and economic growth among the average American.
Meanwhile Janet Yellen denies to all and sundry that there are bubble-like conditions developing in asset markets. The world’s super-rich do not appear to be listening, however. Last week it was reported that the 167,669 ultra-high net worth individuals (UNHWI), a category covering those people who have accumulated over $30 million in net assets excluding their principal residence, experienced an increase in their combined net worth to $20.1 trillion in 2013, up from $19.5 trillion in 2012. In 2013, the UHNWI, most of whom are from Asia or the Middle East, were busy plowing their wealth into global commercial real estate. They spent a combined $11.2 billion on hotels, office buildings, warehouses, and shops, up from $7 billion in 2012. The average price of an office property rose from $63.9 million in 2012 to $162.7 million in 2013. The latter price is more than double the price of an office property at the height of the bubble in 2007. Unlike our bubble-denying Fed chairman, the super rich are giving us a hint at where the growing asset bubble will manifest itself next.
In 2005, three MIT graduate students developed a simple computer program that generates gobbledygook texts. They then added their names to one of them and submitted it as paper to an academic conference. It was quickly accepted. The heroic hoaxsters then offered the nonsense-generating program, SCIgen, free for download–and evidently scientists have been making widespread use of it ever since. Two weeks ago Nature reported that the German academic publisher Springer published 16 papers created by SCIgen. 100 more nonsense papers generated by the program were published by the Institute of Electrical and Electronic Engineers (IEEE).
Now befuddled conference organizers and referees–the experts designated to spot nonsense in their own academic specialties–can breathe a sigh of relief. A French researcher has created a program to help them identify papers authored by SCIgen and made it free to download. But such relief may be short lived. One of the creators of SCIgen, Maxwell Krohn, foresees an “arms race” in which ever more sophisticated computers programs are able to spew out better and better fake papers that other computer programs are created to ferret out. Nevertheless, Krohn does not regret his creation in the least, declaring:
I’m psyched, it’s so great. These papers are so funny, you read them and can’t help but laugh. They are total bull*$%&. And I don’t see this going away.
HT to Lew Rockwell. (Photo credit.)
Some restaurants in Florida and California have tacked on a surcharge to their diners’ food and beverage bills to help defray the looming costs of the Affordable Care Act. The Gator’s Dockside chain of restaurants in Florida has added a 1 percent surcharge while Republique, a trendy restaurant in Los Angeles, is increasing patrons’ tabs by 3 percent. A sign in a Gator’s Dockside restaurant advises customers:
The costs associated with ACA compliance could ultimately close our doors. Instead of raising prices on our products to generate the additional revenue needed to cover the costs of ACA compliance, certain Gator’s Dockside locations have implemented a 1% surcharge on all food and beverage purchases only.
Half of the Gator Group’s 500 employees work full time and the company opted for the surcharge in lieu of avoiding the costs of Obamacare by reducing the hours of these employees so that they qualify as part-time. The company estimates the costs of extending Obamacare to their full-time hourly employees, who currently do not receive any health benefits, to be $500,000. The surcharge is expected to to raise $160,000.
The Daily Bell features a wide-ranging and engaging interview with Richard Ebeling, Professor of Economics at Northwood University. Ebeling is one of the leading scholars in the history of Austrian economics, especially the works and thought of Ludwig von Mises. and has written voluminously in the area. Ebeling is also a key figure in the development of modern Austrian economics and was present at the South Royalton conference in 1974, which marked the rebirth of the Austrian school. He will be participating in the celebration of the 40th anniversary of the South Royalton conference that will be held in March at the Austrian Economics Research Conference.
Here are two sample passages from his interview. The first is on the operation of a gold standard under free banking:
A gold standard works on the “rule” that any currency outstanding is meant to be a circulating substitute and claim to a quantity of gold deposited in a bank or other financial institution for safekeeping. Any additions to the paper currency in circulation (or other bank deposits representing that currency in exchange) are only supposed to come about as a result of net additional deposits of gold into the banks of that country. And any net withdrawals of gold deposits are to be accompanied by a decrease in the number of currency notes in circulation. Money substitutes in the form of checking and other similar banking accounts are to expand and contract only as a parallel reflection of changes in the quantity of gold (or silver) money kept in the banking system. This, in principle, precludes the government from just arbitrarily changing the quantity of paper money in circulation to serve its own political policy purposes.
Thus Ebeling adopts the Currency School-Mises position on free banking. This holds that freedom of entry into the banking business and freedom to issue bank notes and deposits without the imposition of a legal reserve ratio will result in a situation in which banks will only emit additional notes and deposits in exchange for the receipt of an equivalent amount of gold coin and bullion from depositors. This in effect means that free banking will tend toward the suppression of all further issue of fiduciary media, that is, unbacked notes and deposits.
Ebeling also defends Mises’s position on cyclical price deflation, pointing out that it is a necessary part of the readjustment of the economy after an inflationary boom:
When the inflationary boom phase of the business cycle ends, it is inevitable that some if not many prices may have to fall “back down to Earth.” That is, price may have to correct to that post-boom reality of actual non-inflationary supply and demand conditions. Thus, when the housing bubble burst, many housing prices inescapably went bust. This, too, should be understood as part of any healthy self-correcting market rebalancing and readjustment. Thus, a degree of price “deflation” is always likely to be part of the recovery period of the business cycle.
The interview is chock-full of such lessons and richly rewards a careful reading.
Jeff Peshut has posted a nice article indicating the full dimensions of the stagnating recovery in labor markets. Peshut focuses on the absolute level of employment and the rate of growth of employment rather than looking solely at the far rosier unemployment rate. He shows that the employment growth rate was far lower during the Greenspan inflationary bubble years of 2003-2007 than it was in the periods 1983 to mid-1990 and mid-1991 to 2000. Furthermore, as Peshut points out, after almost five years of so-called “recovery” the level of employment has not even reattained its 2007 peak :
As a result of massive layoffs during the Great Recession, Employment reached a trough of about 129.4 million at the end of 2009 – a loss of almost 8.6 million jobs over two years. This means that the U.S. economy lost 500,000 more jobs during 2008 and 2009 than it gained during the entire 2003 to 2007 growth period. It’s no wonder that so many economic commentators refer to the period from 2001 to 1010 as “The Lost Decade”.
Since the beginning of 2010, the U.S. economy has recovered about 7.5 million of these jobs – slightly less than 1.9 million per year — resulting in Employment of 136.9 million at the end of 2013. This is still short of the 2007 peak.
Peshut also uses the Rothbard-Salerno TMS (“true money supply”) aggregate, which is calculated by Michael Pollaro of Contrarian Take at Forbs.com, to forecast total non-farm employment. Peshut observes:
Although TMS has been increasing over the past two years, its growth rate has been slowing, which is what really matters. The Fed’s reduction of bond purchases will likely decelerate growth of the TMS even further, setting the stage for the next credit crisis. If the two-year lag between the TMS growth rate and the Employment growth rate holds true going forward, look for the Employment growth rate to begin to decelerate from its present rate during 2014.
Extrapolating the TMS’s current trajectory into the future, TMS growth should approach zero in early 2015, setting the stage for a credit crisis near the end of 2015 or the beginning of 2016.
Of course, Peshut properly qualifies his projection, noting that the “trajectory of the TMS and the employment growth rate could change as a result of a change in the Fed’s current policy.”
As events unfold, there is much uncertainty about the Fed’s future course which could suddenly veer toward ratcheting up monetary expansion. Janet Yellen seems to be getting cold feet in pursuing further QE tapering even as the unemployment rate declined to 6.6 percent for January, a whisker’s hair above the 6.5 percent target rate that the Fed had articulated in December 2012 for implementing serious monetary tightening. In reaction to the January jobs report released last week, however, Yellen expressed “surprise” at the weak jobs data, while unnamed Open Market Committee officials “indicated that the target likely won’t hold.”
Photo Credit: Derek Jensen
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