Author Archive for Joseph Salerno

One-Third of a Year a Slave

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.

Mises, Rothbard, and Machlup

MISES-VE-BİLİMİN-DİYALOĞUPete 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.:)


Bubble-Sizing the Economy — The Fed Has Done It Again!

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.

Household Net Worth

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.

Academic Papers Filled With Nonsense–Literally

2168191635_6f1a83b18bApparently, it does not take much Artificial Intelligence to flummox academic scientists.

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.)

Restaurants Charge Customers for Obama Care

Obamacare surchargeSome 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.



Interview with Richard Ebeling

220px-Gold_BarsThe 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.

Employment Growth, the True Money Supply, and Janet Yellen’s Cold Feet

3479600161_67d3c9a7b6Jeff 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,  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

George Selgin Dances On (as Predicted)

DownrockGeorge Selgin responded to my earlier post. The substance of his response is captured in the following passage

According to Joe Salerno, the implication of the first of these passages is “that those of us who pursue a research program within the praxeological paradigm continually sweat and fret about using terms or formulating concepts in exactly the same way as Mises did ‘a century ago.’” Joe then goes on to point out, with what (I can’t help observing) seems like a fair amount of fretting and sweating, that plenty of Austrian economists, including Mises himself, have in fact not hesitated to depart from Mises’ 1912 definitions. To this I say can only say, Bully for them! But why is Joe pointing this out to me? He should be telling the legions of self-styled Austrian economists, most of whom presumably formed their opinions by reading various Mises Institute publications, who burst a blood vessel every time someone uses the term “inflation” to mean a general rise in prices, or the term “money” to refer to a fractionally-backed bank deposit or note.

My reply is brief:

1. I can assure George that I was as cool as a cucumber in responding to his original post. Academic debate, especially with a worthy opponent like George, is a salutary and relaxing mental exercise, and nothing to get physically exercised about.

2. Why am I responsible for “the legions of self-styled Austrian economists”? Actually these legions are of his own making. They formed as a result of his ill-tempered and rude responses to non-economists, many of whom were young students, who questioned, however mildly, George’s version of free banking orthodoxy. If George developed a thicker skin, I’ll bet that the legions would dissipate. In other words: Lighten up George, they are trying to get your goat.

3. George, very grudgingly, agrees with me that most contemporary Austrian economists associated with the Mises Institute do not worry overly much about using the term “inflation” to mean a rise in prices. (To wit: “To this I can only say, Bully for them.”) Yet he still manages to smear the Institute by asserting, without adducing any evidence, that the Selgin-created legions of self-styled Austrians have had their opinions formed by reading Mises Institute publications. Furthermore George’s insinuation that these publications promote the view that “a fractionally-backed bank deposit or note” is not money is truly outrageous. Mises, Hayek, Rothbard, Huelsmann, Hoppe, Cochran, Garrison, myself, etc, all include un-backed bank notes and deposits, i.e., fiduciary media, in the money supply. Indeed the very core of the Austrian business cycle theory, as George well knows, is that fiduciary media are indistinguishable from and perfect substitutes for fully-backed notes and deposits. Yeah, I know George, Bully for us.

George Selgin Keeps Dancing Around the Facts

318px-Pierre-Auguste_Renoir_146In his post a few days ago entitled “Don’t Ask George to Dance,” Bob Murphy referred to George Selgin’s “pugnacity” in denying that he is an Austrian. Now neither George’s pugnacity, nor his quintillionth public profession of his non-Austrianism, is sufficiently interesting to warrant comment. What does deserve comment, however, is George’s less than ingenuous explanation of why he is not an Austrian. George writes:

I don’t want to belong to any economic school of thought, or to “do” any sort of economics. I just want to “do” my own sort of economics. And what sort of economics is that? I can’t tell you — I’ve never thought much about it. But perhaps that’s just it: I don’t “think” about writing any “sort” of economics. I don’t want to have to think about whether what I’m up to qualifies as “praxeology” or not, or whether Mises would mind my using terms like “money” and “inflation” the way most contemporary economists use them, instead of the way Mises himself used them a century ago.

The implication is that those of us who pursue a research program within the praxeological paradigm continually sweat and fret about using terms or formulating concepts in exactly the same way as Mises did “a century ago.” But let us examine George’s assertion with regard to the terms “money” and “inflation.”

Let’s take the term “money” first. In Human Action (pp.429-31), Mises presented a relatively narrow definition of the money supply that is basically equivalent to the monetary aggregate that today is known as M1. Mises even refused to include saving deposits redeemable on demand in his concept of money. Yet Rothbard did not slavishly follow Mises on this issue. In fact Rothbard radically departed from Mises (pp. 727-40) in identifying the items that should be included as money, greatly broadening the definition of the money supply. Later, I refined and elaborated Rothbard’s broader definition of the money supply and criticized what I believed to be Mises’s overly narrow definition (pp. 70-73, 115-130). I also debated the issue with monetarist Richard Timberlake (425-28) whose preferred definition of the money supply was basically the same as Mises’s. Today many Austrian writers adhere to some version of the broader non-Misesian definition, variously known as TMS (true money supply) or AMS (Austrian money supply). I might add, by way of contrast, that George’s fellow free banker Lawrence White prefers a narrower monetary aggregate that is very similar to the one Mises proposed.

What about the term “inflation”? A century ago, Mises indeed defined inflation, like most other monetary economists of the time, as an increase in the money supply that is not offset by an increase in the demand for money so that a decline in the purchasing power of money must occur. Perhaps George forgot that Mises wrote much more on the topic and that his thought evolved beyond his century-old book on money. For instance, in Human Action, originally published in 1949, Mises wrote that “inflation and deflation are not praxeological concepts created by economists, but by the mundane speech of the public and politicians.” He went on to deny that these terms were useful for theoretical research, although allowing that they were useful for historical or policy purposes.

So which of Mises’s uses of the term “inflation” do Austrians stand accused by George of slavishly mimicking? In fact, Rothbard in his strictly theoretical work used the term “inflation” in its original 19th-century sense of an expansion in the supply of money; in his writings on economic history and in his popular articles, he often distinguished between “monetary inflation” and “price inflation.” Thus, neither of Rothbard’s uses of the term accords with Mises’s earlier or later terminology. Most Austrian economists writing today, including myself, acquiesce in current convention and employ the term “inflation” to denote an increase in overall prices while using terms like “monetary expansion,” “loose” or “inflationary monetary policy,” etc. to indicate an increase in the money supply. Oh yeah, the only “Austrians” who adhere to Mises’s “century old” definition of inflation are his fellow free bankers.

Now George is a scholar of no mean ability or reputation. But no matter how many times he is called to account for his many equivocations, omissions, and errors, he does not relent in his single-minded quest to prevent “the 100 percent crowd” from “hijacking the ‘Austrian’ brand name.” George just keeps madly dancing round and round.

Bitcoin vs. Gold: Hedge Fund Adviser Weighs In

220px-Bitcoin-coins-150x150Paul Singer is the manager of the $23 billion Elliott Management hedge fund. In a recent letter to investors in the fund, he expressed bearish sentiments on bitcoin, while remaining bullish on gold despite its recent fall in price. Wrote Singer:

There is no more reason to believe that bitcoin will stand the test of time than that governments will protect the value of government-created money, although bitcoin is newer and we always look at babies with hope. If you want an alternative currency, check out gold. It has stood the test of thousands of years as a store of value and medium of exchange. Better yet, it is not just a computer entry in the ether somewhere, and it is currently available at a good price. Bitcoin and its relatives represent an understandable impulse (anti-big-government, pro-freedom, pro-modernity), but we do not see how it actually survives. . . . We think that gold is a unique investment asset, the only real money that has stood the test of time throughout recorded history. With its durability, finite and difficult-to-extract supply and natural allure, it is a store of value that should be particularly attractive at a time when monetary debasement is the major policy practiced by most developed countries to keep their economies afloat.

Whether or not Bitcoin survives and whether gold returns to favor among investors and, eventually, to its traditional monetary role are, of course, purely empirical questions, which cannot be solved by theoretical arguments. At the moment both are valuable commodities and neither one can be considered as money. Thus, tedious arguments on the blogosphere which invoke Ludwig von Mises’s regression theorem, are completely irrelevant to the issue. Both items are scarce commodities which are valued by consumers and command a price on the market. As such, the regression theorem does not prevent bitcoin from being monetized or gold from being re-monetized in the event or anticipation of a fiat-money breakdown. Rather, it is a matter of human valuations and volition which are not determined by economic law. In this matter, our only guides are historical experience and what Mises called “thymological” insight into people’s likely choices under varying circumstances. Will the general public trust and routinely accept a commodity embodied in lines of computer code or a tangible commodity that has served for millennia as the general medium of exchange? Hmmm, I wonder.