Sunday, February 28, 2010


A Snapshot of My Conversion

I caught a really bad cold on Jekyll Island so I am going to make this a brief post. After the festivities last night, some of the young LvMI aficionados offered to buy me drinks if I didn't go back to my room. I considered the offer and texted my wife, "I believe the children are our future..."

Anyway, one of them was an atheist and asked me what made me convert. (I too had called myself a "devout atheist" in undergrad, and now I call myself a born-again Christian.) People ask me this a lot, so let me give the very quick summary of how my beliefs evolved.

(1) I can't go into the details here, but I went through a very powerful experience in which I experienced firsthand how much one's beliefs can influence perception. I had always known corny stuff like, "If you want to win the championship, you have to visualize success" or, "The guy who gets the girl is the guy who knows he's getting the girl." But I'm talking about much stronger stuff here, like having huge hives on your skin if you're worried about something.

(2) This newfound knowledge about how much you "create your own reality" made me really understand how it was possible that if a devout Jew truly believed the Messiah had just healed him, that he would actually be healed (of his lameness, leprosy, etc.). Note that at this point I was still an atheist. I just thought that I had figured out the trick. I no longer had to assume there was some guy Jesus who said some neat things, and then his followers invented a bunch of stories to make others pay attention. No, now things made a lot more sense: I thought there had been this guy Jesus who was earnest but had been raised in an unscientific culture, and he really believed he was God. Since he was so confident, he convinced a bunch of other people too. And you can't blame them; he was literally healing people on the spot. But it wasn't a miracle or magic; it was all due to the power of the human mind over the physical body, which I had only recently discovered.

(3) At some point (there's a lot more to the story) it occurred to me that if there were a God and He were to become incarnate as a man etc., that things would appear exactly as my atheistic investigations had revealed. In other words, what more do you want than a guy who goes around healing people, preaching the good news of the kingdom of God, etc.?

I don't expect the above to persuade anybody who thinks psychomatic medicine is some New Age touchy-feely thing, and that, "If you're sick you need some good drugs and maybe a CAT scan." But for whatever it's worth, it was the path that led from my atheism to theism.

Thursday, February 25, 2010


Scott Sumner's Money Illusions

I believe it was the acerbic von Pepe who said to me over email that Scott Sumner was right--the focus on money was an illusion. (This was a backhanded compliment, to say the least.) I tweaked it a bit for my title...

Lately Scott has been giving us sneak peeks at his book on the Great Depression (e.g. here). Scott's big thing is that the Fed needs to keep nominal GDP (NGDP) growing in order to stave off calamities. Scott admits there are other "real" shocks that can occur, such as a giant tax hike. But he's saying that in addition to all that, if the Fed doesn't print enough money to offset a huge increase in the demand to hold cash (for whatever reason it occurs), then that will be an additional kick to the economy. In particular, Scott thinks it was the Fed's timidity that caused the Great Depression, as well as the financial crisis of the fall of 2008.

So step 1, I went to the old Austrian workhorse, the depression of 1920-1921. Based on a site that a reader kindly dug up, we learn that the drop in nominal GDP from 1920-1921 was (almost) 17%. That was as big as any single-year drop during the Great Depression, except for the catastrophic year 1931-1932.

So the question is, would anybody say that the economy in 1931 was better than it was in 1921? According to Scott's theory, you might think that would be the case, since nominal GDP had fallen more sharply from 1920-1921 than from 1929-1930 (down 12%) or from 1930-1931 (down a little more than 16%). Unemployment was 8.7% in 1930, and had risen to 16.3% by 1931. In contrast, unemployment was 11.7% in 1921, but then it dropped down to 6.7% by 1922 and then 2.4% by 1923.

Now in fairness to Scott, he could say it is a cumulative matter, and in fact the figures above support his story. In other words (he could say) the reason unemployment in 1931 was higher than in 1921 (16.3% vs. 11.7%) was that nominal GDP had fallen a cumulative 26% from 1929-1931. So even though the one-year drop in NGDP from 1920-1921 was bigger than any single year drop up through 1931, it was the back to back drops of 1929 and 1930 that broke the back of the economy.

OK in and of itself, that's plausible enough. But how does Scott explain our current crisis? Assuming my late night calculations from the hotel room are correct, nominal GDP fell about 1.3% from 2008-2009. So how in the heck does that give us a ~10% unemployment rate? (You might ask, "What about the cumulative fall from 2007-2009?" But don't, because GDP in 2008 was higher than in 2007.)

Now maybe Scott would come back and refine the growth rates, and show that something happened in the 3rd quarter of 2008 that my annual figures above are smoothing out of existence. OK fine, but I don't think there's any way Scott is going to generate a recent fall in nominal GDP anywhere close the (almost) 17% one-year drop from 1920-1921. And yet, assuming the stats are measuring the same thing, the unemployment back then was just a point or two higher than it has been in our time.

Now let's move on to the decisive issue. Over email I asked Scott about these things, and he said (reproducing with permission), "Yes, there was a huge drop in NGDP in 1921, but I don't see where you are going with this. I agree with the Austrian view that a sharp fall in NGDP is a bad thing, and 1921 certainly supports that, as does 1929-33, when NGDP fell in half. I'm curious to hear your take on it."

So I said, "OK, I'm saying why did the economy escape a decade of depression in the 1920s--in fact had the Roaring 20s--when in the beginning, the 1920-1921 crash was worse (according to your theory) than the Great Depression crash? Did the Fed start targeting NGDP in 1921?"

Then Scott replied:
Bob, The 1921, 1930 and 1938 depressions were almost equally severe, as my theory predicts. The reason 1929-33 was far worse than 1920-21, is that NGDP fell in half between 1929 and 1933. Even by 1931, NGDP had fallen more steeply than in 1920-21. I think 1920-21 fits my theory perfectly, and make that argument in my book.

And yes, Strong was basically targeting NGDP in the 1920s. He said he was concerned about fluctuations in both prices and real output; that's essentially NGDP targeting. NGDP grew fairly steadily between 1921-29, which is why the economy did well. When it fell in half after 1929, the economy did poorly. If NGDP had kept falling after 1921, as it did after 1930, the 1921 depression would have been much worse.

The 1921 depression was short, but deeper than our current recession. It ended quickly because NGDP recovered strongly in late 1922.
(Hang on kids, we're almost to the finish line.) I came back with this gem: "But wait a second, of course if the economy recovers from a depression (whether because of wise Keynesian stimulus, Sumnerian Fed policy, or Austrian chanting) NGDP will recover. But I'm saying, can you point to what the Fed did to cause NGDP to recover in late 1922?"

Scott explained: "The [monetary] Base fell sharply in 1921, and rose sharply in 1922."

OK for those who are still with me, let me show you how difficult it is to square the numbers on monetary base growth to fit Scott's narrative from above.

In the chart below, I have taken the St. Louis Fed's "Adjusted Monetary Base" series, the non-seasonally adjusted one. The data is monthly, which made it hard to see broad trends. So what I first did was construct quarterly averages out of the monthly data.

Then, I constructed 6-month growth rates for each quarter. So for example, the entry for 1920 1Q is 16.3%. What that means is that the average monetary base level in the 1st quarter of 1920 was 7.86% higher than the level in 3Q 1919. Since the base by 1st Q 1920 had grown 7.86% over the past 6 months, that works out to an annualized growth rate of monetary base of 16.3%. OK?

Now that you understand what the growth rates mean, check out this table:

I've put the significant money tightening periods in red, and the loosening periods in green. Now pretend for a minute that you knew nothing of the time periods, and you were applying Scott's theory. You want to predict which periods have the worst recessions.

OK the biggest reduction in monetary base occurs in 1921. It's true, the drop in 1937 is bad, but clearly the 1921 drop is worse. And the drop in 2008 is...oh wait, there was no drop in base. You just saw a slowdown in its growth.

Now at this point, we would expect the worst depression in US history to be in 1921, the second worst to be in 1937, and the third worst in 1930. We wouldn't even expect there to be a depression in 2008. (You can't see it in the excerpts I've given you, but there were other periods post-WW2 where monetary base actually fell or grew very anemically, and yet I don't think [off the top of my head] there were bad recessions in those periods. Clearly not "the worst Depression since WW2" which is what we are currently experiencing.)

OK let's be fair to Scott. He could argue that we need to look at the Fed's rescue of the economy in 1922, when (per Scott's email) monetary base grew rapidly. So we should expect to see the most phenomenal growth in monetary base in 1922, in order to counteract the huge restriction in the base in 1921. Otherwise, it would remain a mystery how the economy bounced back so quickly in 1922.

Uh oh. My measure of base growth was negative through the first half of 1922. And then even when it picked up, the highest it hit was 11.1% in the 4th quarter of 1922. Remember, unemployment had dropped about five percentage points--falling about in half--from 1921 to 1922.

So if the second-half spurt in 1922 explains the dramatic recovery--and indeed paved the way for the Roaring Twenties--then what was the problem in late 1931? The growth in monetary base then was much bigger than in late 1922. And yet we all know that unemployment continued to rise.

A similar puzzle occurs when we look at the huge, and consecutive, growth rates in 1938 and 1939. But unemployment was 19% in 1938, and was still 14.6% in 1940. Scott can give a story about "long and variable lags" to blame the spike in unemployment in 1938 on the monetary contraction in 1937, but how can he explain the post-1921 recovery by monetary base spurts that are pipsqueaks compared to the huge injections frmo 1938-1940?

Up till this point, Scott could maybe get by with a story that involved judicious use of cumulative effects etc. But look now to the green cells in late 2008 and early 2009. !!

I submit that Scott has fallen prey to a money illusion. Of course it can screw things up if our fractional reserve system allows a huge contraction in the money supply when other things are falling apart in the real economy. But just look at the 1920-1921 episode compared to 2008-2009. It is unreasonable to say the basic cause of our current malaise is that the Fed tightened up in 2008 and then didn't open the spigots enough after the crisis set in. The numbers aren't even in the right ZIP code for that explanation.

Back to you, Scott.

(NOTE: I am writing this from a hotel room. I reserve the right to change the numbers above in case I googled the wrong unemployment rate for a certain year, or screwed up the division for computing nominal GDP losses.)


Recreating the Crime Scene at Jekyll Island

If the international bankers are smart, they will have added a secret ingredient to the catered lunch on Saturday. A bunch of us rebels are at Jekyll Island, where the blueprints for the Federal Reserve were designed--and they definitely fell into the wrong hands, namely, the hands of the guys who wrote them.

The classic work on all this stuff is The Creature from Jekyll Island: A Second Look at the Federal Reserve. I heard that it was a kook book (not to be confused with a cook book) but I'm about halfway through and I'm waiting to hit the crazy stuff. Of course, it could just be that I'm crazy.

Tuesday, February 23, 2010


Zbigniew Brzezinski: How Jimmy Carter and I Started the Mujahadeen

If I didn't know any better, I'd say this was a conspiracy theory involving high-ranking US government officials, so it can't possibly be right... But anyway check out this amazing 1998 interview of Zbigniew Brzezinski that Brad DeLong dug up:
Interview of Zbigniew Brzezinski, Le Nouvel Observateur (France), Jan 15-21, 1998, p. 76*

Q: The former director of the CIA, Robert Gates, stated in his memoirs ["From the Shadows"], that American intelligence services began to aid the Mujahadeen in Afghanistan 6 months before the Soviet intervention. In this period you were the national security adviser to President Carter. You therefore played a role in this affair. Is that correct?

Brzezinski: Yes. According to the official version of history, CIA aid to the Mujahadeen began during 1980, that is to say, after the Soviet army invaded Afghanistan, 24 Dec 1979. But the reality, secretly guarded until now, is completely otherwise: Indeed, it was July 3, 1979 that President Carter signed the first directive for secret aid to the opponents of the pro-Soviet regime in Kabul. And that very day, I wrote a note to the president in which I explained to him that in my opinion this aid was going to induce a Soviet military intervention.

Q: Despite this risk, you were an advocate of this covert action. But perhaps you yourself desired this Soviet entry into war and looked to provoke it?

Brzezinski: It isn't quite that. We didn't push the Russians to intervene, but we knowingly increased the probability that they would.

Q: When the Soviets justified their intervention by asserting that they intended to fight against a secret involvement of the United States in Afghanistan, people didn't believe them. However, there was a basis of truth. You don't regret anything today?

Brzezinski: Regret what? That secret operation was an excellent idea. It had the effect of drawing the Russians into the Afghan trap and you want me to regret it? The day that the Soviets officially crossed the border, I wrote to President Carter: We now have the opportunity of giving to the USSR its Vietnam war. Indeed, for almost 10 years, Moscow had to carry on a war unsupportable by the government, a conflict that brought about the demoralization and finally the breakup of the Soviet empire.

Q: And neither do you regret having supported the Islamic [integrisme], having given arms and advice to future terrorists?

Brzezinski: What is most important to the history of the world? The Taliban or the collapse of the Soviet empire? Some stirred-up Moslems or the liberation of Central Europe and the end of the cold war?

Q: Some stirred-up Moslems? But it has been said and repeated: Islamic fundamentalism represents a world menace today.

Brzezinski: Nonsense! It is said that the West had a global policy in regard to Islam. That is stupid. There isn't a global Islam. Look at Islam in a rational manner and without demagoguery or emotion. It is the leading religion of the world with 1.5 billion followers. But what is there in common among Saudi Arabian fundamentalism, moderate Morocco, Pakistan militarism, Egyptian pro-Western or Central Asian secularism? Nothing more than what unites the Christian countries.

* There are at least two editions of this magazine; with the perhaps sole exception of the Library of Congress, the version sent to the United States is shorter than the French version, and the Brzezinski interview was not included in the shorter version.
I am quite sure that if some "nutjob" posited this theory in 1980, he would be denounced as a paranoid pinko: "Yeah right, as if the US provoked the Soviet Union. Do you believe everything the Russkies tell you? I'm sure. Next you'll be telling me the Soviets felt threatened with all those nuclear warheads pointed at them. Like the US would ever nuke people. That's something Iranians would do, not us. We're the good guys."


Can I Pass the Keynesian Turing Test?

Robert Barro has a pretty interesting WSJ op ed today, in which he uses his historical analysis of government spending and tax multipliers to evaluate the Obama Administration's stimulus package of 2009.

In a nutshell, Barro first estimates a spending multiplier of 0.4 (in the first year) and a tax multiplier of -1.1. So if the government spends $100 billion and doesn't touch taxes (i.e. borrows and spends an extra $100 billion), then GDP goes up by $40 billion. What that means is that there is 60% crowding out. The expenditure of $100 billion directly raises GDP by $100 billion, but then other components of GDP (private consumption, investment) fall by $60 billion. Hence, the net effect on GDP (in the first year) from an additional $100 billion in deficit-financed spending is only $60 $40 billion, according to Barro's analysis of periods of big spurts in military spending.

On the other hand, Barro finds that if the government raises $100 billion in new taxes (while holding spending constant), this lowers GDP by $110 billion.

So putting the two effects together, Barro estimates the 5-year impact of the stimulus plan. The idea is that the government "buys" some output on the front end (because the spending multiplier is above 0), but then has to forfeit output (relative to the baseline) on the back end because the higher debt requires more taxes. Barro concludes:
We can now put the elements together to form a "five-year plan" from 2009 to 2013. The path of incremental government outlays over the five years in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding up to minus 300. GDP falls overall because the famous "balanced-budget multiplier"—the response of GDP when government spending and taxes rise together—is negative. This result accords with the familiar pattern whereby countries with larger public sectors tend to grow slower over the long term.

The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake.
OK I wanted to test whether I really understand the Keynesian mindset. So I honestly haven't looked yet to see what DeLong and Krugman have to say about this. Here's my guess:

My Guesses as to the Keynesian Response to Barro's Op Ed

(1) Barro is a liar, second only to Russ Roberts in his lyinghood.

(2) Barro's spending multiplier is way too low. He admits that he derives it from studying wartime periods, but that's absurd. During such periods, the government enacts strict rationing measures to ensure that private consumption and investment stay suppressed, freeing up resources for the war effort.

(3) Barro's use of the 2008 baseline is absurd. If the government had sat back and done nothing, unemployment would have continued climbing, perhaps it would have been 15% right now. That would mean lower tax revenues and more spending on social welfare programs. In essence, all the stimulus does is concentrate that unavoidable government debt increase into the beginning years, when it might obviate much of the later spending. Barro has done the equivalent of looking at a patient just diagnosed with cancer, and comparing the medical expenses of early intervention against a "baseline" of a perfectly health person's medical costs.

(4) Barro's spending multiplier makes no sense, both in theory and in terms of empirical evidence. In an economy with 10% unemployment and 0% interest rates, running a fiscal deficit doesn't cause any crowding out. We would see the telltale signs if it did. So right now, when the government spends an extra $100 billion with borrowed money, that doesn't cause a $60 billion reduction in spending elsewhere. How could it? What is the mechanism? And not only does the $100 billion raise GDP directly by that amount, with no $60 billion offset, but in fact we get further GDP gains because of the further spending by people who would otherwise have been unemployed. Barro casts aspersions on Christina Romer's estimates of a multiplier greater than 1, but he doesn't explain what her mistake was. He just says he can't understand her figures and asserts his own. What pseudoscientific nonsense. Why oh why can't we get right wing economists who know more than discredited views from the 1930s?
OK kids, go look. I promise this was off the top of my head. How did I do?

Monday, February 22, 2010


Taylor Conant Asks: Do We Live in a Movie?

Here's the rest of his email:
A bad one? Just saw this ad:

So, here's the script-- a government take-over of a major auto manufacturer, who happens to be dabbling in onboard vehicle "safety" technology that allows the company's vehicles to be controlled from a central location, and the competition is being brought down by legislative and executive agency inquiries and hearings, and a police force that is increasing militarized and has been indoctrinated to see civilians as game to be hunted and dominated. A psychological thriller exploring the psychosis of the hunters and the fearful desperation of the hunted as they try to escape the fast-enclosing walls of a terrifying police state. oh, and they're being RFIDed, too.

Submitizen, coming December 2010, tag line "Nowhere to run, nowhere to hide."

I mean seriously, any idiot should be able to see "Hmm, if the cops can get my stolen vehicle back that easily, I also can be easily detained, say if they suspect me of drunk driving, running drugs, etc. and then proceed to be harassed" but of course, they won't.


Two Cheers for Credit Cards

(Not three cheers, mind you.) The intro:
Ever since someone in grad school deviously introduced me to the concept of "irrational" debt aversion, I have been carrying credit-card balances that are far too high. Believe me, I understand the tricks these companies pull, like the clause in fine print where you unwittingly pledged away your firstborn.

I have had credit-card employees explain matter-of-factly to me that it was in my interest that they apply payments to the balances with the lowest interest rates first, and I was once driven to vulgarity on the phone by a representative who got philosophical with me when I was trying to close an account with a zero balance.[1] So believe me when I say that I get it when people complain about credit-card companies.

Yet in the present article I want to describe some of the benefits of these seductive tools of a modern financial economy. Although many critics would argue that credit cards show the flaws of capitalism, they also showcase its strengths.
And if you want to see what's good about credit cards, you'll have to read the article.


More Disinflation Disinformation

In a recent blog post titled, "More on Disinflation" Paul Krugman comments on the headlines trying to interpret the recent CPI announcement:
As Mark Thoma recently’s odd that most macroeconomic forecasts show inflation remaining stable or even rising despite continuing very high unemployment. Both history and logic suggests that this is wrong.

And declining inflation is clear using any core measure. The Fed, I happen to know, tends to focus on the core personal consumption expenditure deflator:

There are some strange bobbles in this measure, suggesting that it’s not as good a measure of inertial inflation as advertised, but leaving that aside we see, once again, serious disinflation as a result of the recession.

I still think there’s a real risk we’ll turn Japanese.
If you want to see me tackle the claim that both theory and history support Krugman's belief that high unemployment ==> low price inflation, see my recent Washington Times op ed.

Also of relevance is the fact that Krugman focused on an odd time frame. Here's the full picture:

Now is it really jumping out at you that the Price Index of Personal Consumption Expenditures--stripped of food and energy--go down during recessions?

And even in the periods where it does seem to work, is the mechanism really the Keynesian one about recessions being caused by a fall in aggregate demand? Couldn't you just as easily explain it by saying that people have to buy food and energy, and so when their prices spike--especially if it's during tough times--then the prices of everything else tend to fall?

In other words, my point here is that people say, "Oh we're stripping out volatile food and energy to look at the underlying trend." But since people care a lot more about food and energy than a lot of the remaining purchases, that's closer to throwing out the trend and looking at the residual.

Sunday, February 21, 2010


Economics, Selfishness, and the Gospel

The comments on my first attempt got swamped. (Hey kids, can we please drop the potty talk?)

The problem is that people started arguing about something that was irrelevant--I could say "orthogonal" to impress you--to my criticism of Bryan Caplan. So let me state it again. Maybe I'm wrong, but none of the critics (in particular Gene Callahan) in the comments of my original post addressed the crucial issue.

There are at least three similar questions revolving around this discussion:

(1) Is there a useful distinction between selfish and altruistic actions? Yes I think there is. Bryan and Gene agree with me.

(2) Do most people exhibit predictably selfish actions in many aspects of life? Yes I think this is probably true, depending on how we define "selfish." (E.g. is it selfish if I would choose to give my newborn one bottle of milk instead of giving three babies in Australia a bottle each?)

(3) To be useful in understanding the world, does economic theory need to assume that people are selfish? I say NO, Bryan says YES, and I'm not sure Gene understood that this was the point I was making in my first post.

For example, it doesn't matter how selfish or altruistic people are, price ceilings (if placed below the market-clearing level) will generate a shortage. Bryan's post would have you believe that this textbook outcome only occurs if people are selfish, but Bryan is wrong (I claim).

Bryan says, "Rent control leads to shortages and/or declining quality - if landlords are selfish. If they loved their tenants as themselves, it's a different story."

I want Bryan (or his defenders) to spell this out a bit. It only makes sense to talk about price controls if there is a market with an equilibrium price in the first place.

I think if Bryan thought it through, he'd end up saying that the supply curve of rental units would be a horizontal line at $0, going over to the right and stopping at the total number of units in existence. But then in that case, the rent ceiling wouldn't be below the equilibrium price.

OK so Bryan says, "Right, that's basically what I meant. The theory could be true technically, but vacuous, in a world where everyone is totally altruistic."

But hold on just a second. What if a parent allows a college dropout to move back home, but charges the kid rent? Does that prove the parent is selfish and actually doesn't love the child?

More generally, what if we have a landlord who does indeed have an upward sloping supply curve, because he is familiar with the Misesian calculation argument and believes property and prices help coordinate the use of material resources? And then he ekes out a very humble existence, and donates the vast bulk of his after-tax income to charities around the world? Is that guy "selfish" and do we conclude that he loves himself more than the tenant whom he charges rent?

I am stressing all this because I think Mises was correct to argue that economic theory is a subset of a theory of human action. I think economic principles do indeed shed light on all human interactions, and don't require an assumption of selfishness in the everyday sense of the word.

I am prepared to debate this; maybe Bryan is right. But his post seemed a bit too quick to me, and I wouldn't want to misunderstand the foundations of our entire discipline because of a hasty mistake.


I am actually running this post on a Sunday, which is reserved for religious posts, because for a while I have been toying with the idea that the anti-capitalists are right when they deride the "philosophy of scarcity" of bourgeois economists. If everyone really followed the commands of Jesus, it's entirely possible that society would be so incredibly transformed that humans would live on a different plane of existence.

Please don't say, "Even if we had spaceships, there would still be tradeoffs." You're narrowly focusing on technological things here. Imagine if there really were a world in which not only were there no wars and taxes, but there were also no insults or hurt feelings. Ever. The people growing up in such a world wouldn't know what it was like to be excluded from a game of tag, let alone would they know about the draft and fiat money.

I submit that we can barely conceive of what a relative paradise such an existence would be, compared to our current hell--designed by the prince of this world to fulfill his own agenda and unleash as much suffering on us as he can trick us into imposing on each other.

In a world where everyone truly lived as Jesus commanded, it is possible that the writings of free-market economists would seem naive or very limited. However, it's important to note that even in that scenario, it's not that the libertarian tenets would be violated. For example, people wouldn't take from the rich to give to the poor (even though those terms probably wouldn't mean anything at that point); the rich would voluntarily give to the poor.

Remember that "Thou shalt not steal" was in the 10 Commandments, as well as "Thou shalt not covet thy neighbor's goods." It's not that Jesus was overturning property rights, He was pushing us beyond them.

Saturday, February 20, 2010


Surprisingly Close Agreement Between Rowley and Murphy

[UPDATE below.]

The well-read von Pepe has been sending me links from Charles Rowley. I will have more to say on them in the future, but this one on stagflation got me excited. At first I was very pleased that Rowley's arguments were so similar to my own. But then I got a little concerned.

Here's an excerpt from my Washington Times op ed of February 19:
Prices rose 2.7 percent during 2009, according to the Bureau of Labor Statistics' recent update of the Consumer Price Index (CPI). This is a worrisome fact because last year's unemployment rate averaged more than 9 percent. This trend may signal a return of "stagflation," a merger of stagnation and inflation.
To underscore that the U.S. economy has not been in deflation for some time, consider this: In the past decade, there were five years in which prices rose less than they did just last year. Does that sound as if the U.S. is still balanced on the edge of a deflationary cliff?
Some readers may remember the "misery index," the sum of the unemployment and inflation rates. The official unemployment rate in 2009 averaged 9.3 percent, for a total misery-index rating of 12.0. This is the highest misery rating in 26 years, going all the way back to 1983 when it was 13.4.
Compare with Rowley's blog post on February 20, the very next day:
For the time being the world sleeps, as money exerts its slow influence in the manner identified by Milton Friedman. First, monetary expansion will impact on real output, as already is the case. Then it will impact on the price level, slowly at first, but then with increasing venom. The first signs are already evident: the CPI rose 2.7 per cent in 2009, according to the recent update by the Bureau of Labor Statistics, and it did so against a backcloth of 9.3 per cent unemployment. This is a first green shoot of stagflation. A 2.7 per cent rate of price inflation is above the rate achieved in 5 out of the past 10 years in the United States. It does not signify a nation teetering on the edge of deflation.

Do you still remember the Misery Index that became such a central feature of economic evaluations during the stagflation era? This Index is the sum of the unemployment and the inflation rates at any point in time. In 2009, the Misery Index is measured at 12.0. This is the highest level of the index over the past 26 years, going right back to 1983, when it was 13.4, immediately before Paul Volcker’s monetary refrigerator conquered inflationary expectations.
OK not a smoking gun, I grant you. And I don't even believe in intellectual property; I don't own the idea of looking at the last decade to see how many years CPI rose less than in 2009.

But I'm not exactly a household name, Mr. Rowley. If indeed you had read my op ed before writing your own post, how 'bout a little something for the effort?

UPDATE: Actually there is a smoking gun. Rowley's post came out on February 20, when the BLS the day before had registered the January price level.

So in my op ed, I refer to the 2.7% CPI increase during 2009 as due to the "recent" release from the BLS, but that was because I actually wrote the first draft of that op ed in late January. It just took a long time for my colleagues at PRI to vet it etc., and then place it in a newspaper.

So I'm pretty sure that's conclusive heavy lifting of my piece, right?

Like I said, no big deal, I'm glad Rowley liked my points. There's no "I" in Internet.


"Terrorist" a Meaningless Word

Glenn Greenwald documents the contradictions in the Establishment's use of the word "terrorism"--which it denied to Joseph Stack, the Austin plane crasher:
Contrast the collective hesitance to call Stack a Terrorist with the extremely dubious circumstances under which that term is reflexively applied to Muslims. If a Muslim attacks a military base preparing to deploy soldiers to a war zone, that person is a Terrorist. If an American Muslim argues that violence against the U.S. (particularly when aimed at military targets) is justified due to American violence aimed at the Muslim world, that person is a Terrorist who deserves assassination. And if the U.S. military invades a Muslim country, Muslims who live in the invaded and occupied country and who fight back against the invading American army -- by attacking nothing but military targets -- are also Terrorists. Indeed, large numbers of detainees at Guantanamo were accused of being Terrorists for nothing more than attacking members of an invading foreign army in their country, including 14-year-old Mohamed Jawad, who spent many years in Guantanamo, accused (almost certainly falsely) of throwing a grenade at two American troops in Afghanistan who were part of an invading force in that country. Obviously, plots targeting civilians for death -- the 9/11 attacks and attempts to blow up civilian aircraft -- are pure terrorism, but a huge portion of the acts committed by Muslims that receive that label are not.

In sum: a Muslim who attacks military targets, including in war zones or even in their own countries that have been invaded by a foreign army, are Terrorists. A non-Muslim who flies an airplane into a government building in pursuit of a political agenda is not, or at least is not a Real Terrorist with a capital T -- not the kind who should be tortured and thrown in a cage with no charges and assassinated with no due process. Nor are Christians who stand outside abortion clinics and murder doctors and clinic workers. Nor are acts undertaken by us or our favored allies designed to kill large numbers of civilians or which will recklessly cause such deaths as a means of terrorizing the population into desired behavioral change -- the Glorious Shock and Awe campaign and the pummeling of Gaza. Except as a means for demonizing Muslims, the word is used so inconsistently and manipulatively that it is impoverished of any discernible meaning.
(BTW GG gives hyperlinks to the claims above; I'm too lazy to copy them all in.)

I have a couple more thoughts on this:

1) The reason I think this was legit, rather than a false flag operation, is that the government isn't immediately calling it terrorism and using it to round up militia groups etc. I think they were caught flat-footed, and so their immediate response was to downplay it until they could figure out how they were going to play it. Fortunately for them, it's fine if they call it terrorism and pass the Building Protection Act of 2010 in a few months (in which all owners of private jets must donate a kidney to the federal government). Nobody will remember the initial reaction and think twice.

2) I was having lunch with someone who pointed out another reason that the government and major media weren't instantly labeling this a terrorist attack: It might cause too much cognitive dissonance among Americans who look like Stack. In other words, it's very convenient to whip people up into a frenzy over brown guys named Mustafa who worship Allah and think the US government is evil. But a white guy named Joe who (it seems) is secular and thinks the IRS is evil...well, people might not reflexively hate that kind of person so much. So the government might not want to taint the wonderful word "terrorist"--which they've built up over the last few years through careful conditioning--by applying it to the latter guy.


Notes on Privatized Banking Through Whole Life, part 1

Carlos Lara is a businessman in Nashville who contacted me out of the blue back (I think) in late summer 2008. He was a student of Austrian economics and saw on one of my books that I also lived in Nashville. It was Carlos who introduced me to Nelson Nash's concept of "infinite banking," in which a household uses whole life insurance policies as a personal bank. In particular, Nash says that individuals should finance their car and (once they are really into it) home purchases through policy loans, rather than relying on loans from auto finance companies or mortgages.

Carlos and I are writing a book on this, due out in early summer. The more I learn about it, the more I think it's a no brainer for every household where at least one person is still in prime working years to buy at least one whole life policy, as early as possible. In particular, a whole life policy gives people who run their own businesses a lot of flexibility because of the way the tax code works. (Yes, Carlos and I both have whole life policies.)

Given our intentions, it's appropriate that I start laying the groundwork now. Not only will this help introduce you to the (initially odd) idea, but it will also make it easier for me to write my portions of the book.

As this series progresses, I'll tackle specific topics in more depth, and handle some of the typical objections (like "buy term and invest the difference" and "the rate of return on a whole life policy is awful--are you nuts?!"). At this point, let me just paraphrase a point that someone at the IBC conference made to me (and yes I think he sells policies for a living): If Dave Ramsey is right and whole life is such a stupid place to put your money, then why did the government cap how much cash you could put into a particular policy before the tax exemption phases out? If the government wanted to prevent something from being used by super rich people, doesn't that make you a bit curious to explore this thing?

In the next post I'll discuss what a whole life insurance policy actually is. But if you can't wait, try this.

Friday, February 19, 2010



* If you want to be a Summer Fellow and join the elite club, look here.

* Chip Knappenberger argues that it is far from obvious that late 20th century warming is mostly due to human activity.

* Krugman made the point I could not (for reasons of truce). Namely, people recently were making fun of the economists who had predicted the Eurozone was not a stable arrangement. And then, well, you know.

* Bob Roddis sends this Detroit News article on asset forfeiture policies. There is a bill afoot to say police can't seize your property if they admit no crime occurred. (And this is news, mind you.)

* Jeff Tucker has some great one-liners in this blog post on medical costs. (I originally wrote "medical prices" to be more accurate, but c'mon it's a blog post. I may type out "ain't" before the day is done.)

* Jeff also gushes over the Hayek/Keynes rap video. OK OK, I had no idea it would get that many views. It is obviously a success. My initial reaction was totally totally wrong.

* Speaking of Russ Roberts, did you know he was the lyingest economist alive? (HT2 von Pepe)

* Just when you thought you'd nailed down Silas Barta's position on climate science...

* About a week ago all the gold bugs were going nuts over this Tyler Durden discussion of a 1995 article on economic history (!!). The thing that I don't get is, why did the Bank of England pressure the Fed to cut rates in 1927? That's the theory I endorsed in my Depression book, thinking that the BofE was hurting because of the overvalued pound and so wanted the Fed to weaken the dollar by cutting US rates (thus fueling the stock market boom in the late 1920s). But if this prof whom Tyler Durden has found is right, then the Bank of England was actually suffering from a massive inflow of gold. So what's the deal? Sure, it's great to get new evidence that central bankers are naked liars, but Austrians need to do some soul-searching if they want to endorse this guy's paper.

Conspiracy Section

* Imagine a dystopian novel where the government sends laptops home with kids, and then remotely activates the camera to spy on them and their families, and then punish the kids for things they were doing in their house. Oh wait, that's the allegation in a lawsuit filed in Pennsylvania. (HT2 Tony G)

* Did you know that the Fabian Society's stained glass window features a coat of arms with a wolf in sheep's clothing?! Griffin in The Creature from Jekyll Island claimed this, and so I went to the Internet to confirm. I found a bunch of conspiracy websites saying it, but this site seems pretty neutral and there it is, bright as day.

* I was watching a documentary that was talking about how the bankers rammed through the Federal Reserve Act with as little fanfare as possible, in fact doing it two days before Christmas. Yep, checks out: The Act was enacted on December 23, 1913.

* The Georgia state senate recently passed a bill outlawing the involuntary implantation of microchips. Maybe you're thinking it has to do with cattle or something. No, it's humans. And you should be very relieved, only two people voted against the bill. (Not sure if they opposed bans on involuntary microchip placement, or if there were something odious tied to the bill.)

* I also tried to verify this inconceivable (I don't think that word means what I think it means when the speaker is David Rockefeller) quotation I saw in a documentary. I don't know how airtight this procedure is, but Wikiquote says it is sourced (whereas some other quotes attributed to Ben Franklin on fractional reserve banking were undocumented according to Wikiquote):
We are grateful to The Washington Post, The New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. It would have been impossible for us to develop our plan for the world if we had been subject to the bright lights of publicity during those years. But, the world is now much more sophisticated and prepared to march towards a world government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries. --David Rockefeller


Triple Play From Moderate Murphy

These media hits accumulated in my PRI inbox while I was at the Infinite Banking seminar. The op eds ran on different days, and hence do not constitute a true triple play--I know some of you are purists.

* In this Townhall article I talk about lessons from Hugo Chavez' price control experiment.

* In this Buffalo News piece I talk about the "surprise" job losses in December (I wrote this a while ago), and the possible connection to the health care bill. (I think a version of this op ed may have also been published someplace else, and I had to paste it in to a blog post because there was no online version.)

* Whoa! My first op ed in the Washington Times. (The topic is stagflation.) If I get any more mainstream they'll let me host the Grammys.


Are Consumer Prices Collapsing?!

If you just read the headlines, you would be under the impression that we were once again tottering on the brink of a deflationary cliff. Darn that Fed for raising the discount rate! CNBC says for example: "Core Consumer Prices Show First Drop in 28 Years"

(The actual text of the article was fairly neutral, I should concede.)

Here's the actual situation: The raw CPI level rose 0.3% from December 2009 to January 2010. If that one-month change were to occur 11 more times, the CPI would rise a total of 4.2% for the year. Not Weimar Germany, but hardly a lack of "price pressures."

Now all this talk about "the first fall in core CPI since December 1982" is referring to this fact: If you first seasonally adjust the data (which suppresses price hikes because prices typically rise in the first quarter of the year), and then strip out energy and food prices, then that (largely meaningless) number fell from December 2009 to January 2010.

For what it's worth, the raw CPI rose 2.6% from January 2009 to January 2010. Obviously my warnings about runaway price inflation have yet to come to fruition, but the deflationist camp is hardly sitting pretty either.

And remember, we have been conditioned to think that 2009 was a period of dancing with deflation, when even the official price index has been rising at a decent clip. With this mindset, the Fed won't "have" to take aggressive action to drain away excess reserves until the genie is not only out of the bottle, but has built a condo and renewed his driver's license.


Angus, Thorn in Glenn Beck's Side, Gives Us the Rest of the Story

I believe this guy is the real deal; the two phones calls sound like the same guy, and everything he says is consistent as far as I can tell. So let's assume this is legit.

Remember "Angus" who called in to Glenn Beck and asked him why he had supported the bailout? If you didn't see my original post, please go skim that and come back...

OK now that we're all up to speed, Angus just emailed me the other day and said this (reproduced with permission):
Dr. Murphy,

This is [omitted] AKA Angus McClure. I was the Angus caller who called into the Glenn Beck show...

I wanted to give you a "bigger picture" of that call. The day before I called in to the Glenn Beck show...& tried to have a civil discussion with him right after he slandered MY choice and candidate for Governor Debra Medina (by the way she has the endorsement of Ron Paul) THAT call is here, I am the 2nd caller...

[I suggest starting it around 2:00 to hear Glenn yell at the previous Medina supporter and hang up on her, and then take Angus' call.--RPM]

I called in as Angus (I couldn't call in as Phil, I would have never gotten past the call screener) to treat him exactly the way he treats his callers with rival opinions. I am not a "truther." I am just as irritated with truthers obsession with 911 as I am with Glenn Beck's witch hunt to "expose" 911 truthers. I wanted to expose Beck for the fake that he is. He is a Neo Con, but sells himself as a Quasi-Libertarian.

** YES, I did attend the Patriotic event where you spoke. I was the guy who asked you your opinion about Reverse Mortgages. Remember?
[Yes I do remember. How could I forget a real estate broker wearing a tin foil hat?--RPM]

...Yes, I am a Saved Christian and a member of Christ Presbyterian Church, the Church you referred to as the hotbed of libertarian subversion : )
I answered Angus and asked him whether my hunch was right, when Beck hung up on him and then cited Angus' silence as proof of his idiocy. Here's the answer:
HE hung up on me. I had a business associate in my office when I was on the call. She was listening on her iphone to the call real time with the delay, so she could hear both conversations (the time delay & the actual “real time” conversation) at the same time. She was shocked that they tried to make it sound like I hung up. I was very fired up! I wish I could have responded. “Why did you support the bailout Glenn? The reason is because you are a Fake Neo Con masquerading as a Quasi Libertarian.["] Any conservative or libertarian would never give a proper excuse for being FOR ANY bailout…..but I did not get that opportunity. My business associate was actually more offended by something else Beck said. After gathering his thoughts after the call, Beck took a jab at the name “Angus.” He said something to the effect of “…you would think that someone named after a hamburger would be smarter than that.” Angus is a hamburger? NO! It is a type of cattle. My associate’s family does Cattle Ranching & has in Texas for several decades. She was appalled…..
So there you have it, kids, straight from Angus' keyboard. I think we all must agree that this guy is from Texas, as no one else would have focused on the cattle stuff.

(BTW of course I am kidding about the tin foil hat. I forget that some readers are missing the irony gene so I have to always clarify.)

Thursday, February 18, 2010


Thoughts on the Austin Plane Attack

[UPDATE below.]

A couple of readers have asked for my thoughts about the suicide note of the guy who flew his plane into an IRS building. For the purposes of this post, I'm going to assume the basic news reporting is accurate, and that this is really the guy's suicide note. Apparently the guy had had repeated troubles with his business for various reasons, and he ended the note on these terms:
I know I’m hardly the first one to decide I have had all I can stand. It has always been a myth that people have stopped dying for their freedom in this country, and it isn’t limited to the blacks, and poor immigrants. I know there have been countless before me and there are sure to be as many after. But I also know that by not adding my body to the count, I insure nothing will change. I choose to not keep looking over my shoulder at “big brother” while he strips my carcass, I choose not to ignore what is going on all around me, I choose not to pretend that business as usual won’t continue; I have just had enough.

I can only hope that the numbers quickly get too big to be white washed and ignored that the American zombies wake up and revolt; it will take nothing less. I would only hope that by striking a nerve that stimulates the inevitable double standard, knee-jerk government reaction that results in more stupid draconian restrictions people wake up and begin to see the pompous political thugs and their mindless minions for what they are. Sadly, though I spent my entire life trying to believe it wasn’t so, but violence not only is the answer, it is the only answer. The cruel joke is that the really big chunks of shit at the top have known this all along and have been laughing, at and using this awareness against, fools like me all along.

I saw it written once that the definition of insanity is repeating the same process over and over and expecting the outcome to suddenly be different. I am finally ready to stop this insanity. Well, Mr. Big Brother IRS man, let’s try something different; take my pound of flesh and sleep well.

The communist creed: From each according to his ability, to each according to his need.

The capitalist creed: From each according to his gullibility, to each according to his greed.
Here are my thoughts:

(1) This guy should not be (secretly) applauded by libertarians. There could have been a bunch of little kids who died in the fire, and they needn't even have been the kids of the IRS agents (as if that would make it acceptable "collateral damage"). There could have been delinquent taxpayers in the building pleading their cases, who brought their kids along. Since this guy doesn't know know the difference between "principal" and "principle" I'm not confident that he scoped the building out beforehand to be exactly sure of his target. This guy's justification is the same as George Bush's: There are bad people out there I don't like, so I'm going to lash out and hopefully I'll kill some of the bad people. (BTW if any of you are planning on attacking DC, don't do it when I'm testifying please. I'll post my schedule.)

(2) OK let's put aside the moral objections. From a PR perspective this was a disaster. This guy has singlehandedly discredited the Tea Party movement and other, peaceful Resistance efforts more than Sarah Palin's single hand (with notes written on it). Can you imagine how much we're going to hear about the hateful rhetoric of talk radio, angry online rants against the government, blah blah blah?

(3) Finally, let's put aside the moral objections, and let's forget winning hearts and minds because we've written off the "sheeple." It's just the hardcore dude with his plane, and a few thousand other people, stacked up against the might of the US federal government. Was that a good use of his life? What exactly will this accomplish? Is the IRS not going to be able to recruit people? Of course not, it will (if anything) just mean that the IRS has to lower the bar further. I suppose it's possible some agents will be less likely to really harass somebody on a fuzzy case, but that is hardly worth sacrificing your life for.

It is foolish to try to fight the government on their terms, using violence. They are professionals; they thrive on it. You will never be as ruthless as the people employed by the government. That is a good thing; it's to your credit. Don't be ashamed of your timidity in causing death and destruction on innocent bystanders when you are in conflict with another group.

The only way to restore liberty in the United States is to convince far more Americans that they have foolishly forfeited their freedoms, in exchange for promises of economic and military security that lying politicians cannot possibly fulfill. If we convince enough Americans, there will be no need for bloodshed. If we cannot convince enough Americans, no amount of violent rebellion will work. Violence is neither necessary nor sufficient to restore liberty.

We must convince others of the justness of our cause.

You don't persuade people by flying planes into buildings.

UPDATE: In addition to the pro-Obama people saying this just shows how awful talk radio is blah blah blah, I expect to be equally disgusted by Rush Limbaugh et al. not condoning the attack but trying to understand the motives. And for sure they won't recommend that we stop letting white people into the country. Why, I bet they would even be OK with the government investigating this as a criminal act, as opposed to an act of war.

(For newcomers, my point is that the right wing talk show guys will not treat this the same way they treated Muslims flying planes into buildings because they oppose evil actions by the US government.)


Producer Prices Rise at 18.2% Annualized Rate in January, 4.6% year/year

Now that I've got your attention... Yes the BLS reports that after seasonal adjustment, the Producer Price Index for finished goods was up 1.4% just from December to January, which works out to an 18.2% annualized rate. From January 2009 to January 2010, the PPI was up 4.6%.

Remember, this is the period of no price pressures. The Fed will begin its exit strategy big-time once price inflation picks up.

CPI numbers come out Friday morning...

Wednesday, February 17, 2010


Postponing Production to Increase Capital Base

Blogging will be sparse for the next couple of days, as I'm at the Infinite Banking Concept symposium in Birmingham. I am the after-dinner speaker tonight, here to talk about my forthcoming book (with Carlos Lara) on Austrian economics and IBC.

Also I know something has been screwy with the blog lately. It's been loading slowly, and someone emailed to see that his work labeled it as a "malicious website." The latter could be completely appropriate due to the content, but I will look into the slow loading when I get back into town...

Monday, February 15, 2010


Does Economics Require Selfishness?

I am ready to be corrected, but I think Bryan Caplan (and the approving Gene Callahan) have seriously misconstrued economics, at least in the Austrian version. Bryan writes:
applied economists habitually assume that people are selfish in the ordinary language sense of the word. Consider Yoram's congestion example. Every applied economist says, "Raise the price!" But if drivers were unselfish in the right way, all of the following would be equally economically plausible solutions:

1. Ask everyone to drive less "because they're inconveniencing others."

2. Tell people they're contributing to global warming.

3. Announce that if traffic doesn't fall by 20%, we'll abolish foreign aid to Senegal.

4. Denounce materialism so people quit their jobs and stop commuting.

Now you could say that applied economists are being closed-minded. But I think we're correct to focus on congestion charges. Why? Because the assumption of human selfishness is roughly true. Almost everyone cares a lot about the price they personally have to pay to use a road, and getting their weekly paycheck. Most people don't care very much about the effect of their driving on other drivers, global temperature, or the people of Senegal.

It's easy to multiply examples. Rent control leads to shortages and/or declining quality - if landlords are selfish. If they loved their tenants as themselves, it's a different story. Printing tons of money wouldn't cause inflation if people were happy to build up unlimited cash balances for the "good of the country." Yadda yadda yadda.
I'm not going to deal with every example Bryan raised, and I'm not here to deny that a lot of people--perhaps even Americans who are trained in Chicago School or Austrian economics in particular--are selfish in the everyday sense of the term. What I am here to argue is that modern economic theory does not assume people are selfish in this sense of the term. I think Bryan is simply wrong.

I would suggest that most of the problems with Bryan's alternate suggestions for alleviating road congestion are due to strategic and knowledge/calculation issues, not to the fact that most people don't really care about global warming, the Senegalese, etc.

To make things apples-to-apples, we should have contrasted those strategies with #5, for every mile reduced, put in $1 into a pot to be divided among all drivers. That wouldn't work either, and gosh did I just prove that people don't care about money?!

Of course not. So by the same token, if the government somehow could actually assure me that the number of Afghan civilians killed by a Predator drone would go down by 1, for every fewer mile I drove on the public road, then I definitely would alter my habits. I'm not saying every other American would took, but a lot would. So there, did I just prove people are basically altruistic?

Suppose we look over the books of a hospital or a group set up to send bottled water to Haitians, and we find that they buy the relevant stuff at Wal-Mart or other cheap vendors. Would we be aghast and say, "You selfish scoundrels! Why are you paying attention to price?!" On the contrary, we would salute them. The real scandal with such "non-profits" would be if they wasted their resources by not paying attention to prices.

Whether you had a world of Mother Theresas or Ayn Rands, the laws of supply and demand would still work, and price controls would still lead to shortages.

The law of demand doesn't say, "People always buy the cheapest thing." I am not violating the law of demand when I buy a $20 steak instead of a $5 burger.

Economics also doesn't assume workers go to where they make the most money.

No, all economic laws (properly construed as the Austrians stress) are ceteris paribus. The demand curve holds everything else equal, and then traces the impact of quantity demanded by altering the price.

In the grand scheme, demand curves slope downward because of budget constraints i.e. scarcity. They don't slope downward because of selfishness.

Like I said at the beginning, I didn't think this through such that I'd bet my life on it. Maybe Bryan can convince me that the above standard schtick from Austrian economists is wrong. But he has yet to convince me.


Freud in the News: Classic Projection by Secretary Clinton

From CNBC:
The United States believes Iran may be heading toward a military dictatorship and that its Revolutionary Guard Corps is supplanting its government, U.S. Secretary of State Hillary Clinton said on Monday.


Experience, logic, show government policy prolonging economic woes

That's the title the Augusta Chronicle gave to my op ed, which ran on Feb. 13. I don't think it's available online, so here is the text they ran:


The U.S. economy shed another 85,000 jobs in December, when most analysts had expected no change or even slight job creation.

Meanwhile, the Obama administration continues to push for health-care reform and other measures that will require higher taxes. Ironically, it is the federal government's policy activism itself that is largely to blame for the prolonged economic slump.

Some politicians speak of "creating jobs" as if they were growing fruit, but in reality the total job creation in the economy during a given period is the cumulative result of millions of decisions by entrepreneurs and business managers. The official tallies reported each month are the net figures.

In October 2009, for example, 3.7 million people were hired in the private sector, which may surprise many readers. The same month, there were 3.9 million job "separations" in the private sector, a category that includes quits, layoffs, discharges, and retirements. That is why the media reported that the private sector shed jobs in October, because on net employers eliminated more positions than they created.

Such monthly losses had been steadily shrinking. In early 2009, net job losses exceeded 600,000 per month, but the figures gradually fell until the gross gains and losses virtually balanced each other by November. It was only natural, then, to assume that there would be decent net job creation in December, as these trends continued.

Yet, that did not happen. Many analysts were taken by surprise that employers remained skittish about adding new employees, even though conventional measures suggest that the recession had officially ended last summer. What's happening?

To understand fully the net job loss figure for a given month, economists would need to get inside the heads of millions of employers to understand the motivations behind their actions. There is no single explanation for why so many jobs were destroyed, just as there is no single reason why a certain number of car accidents occurred in December. Nonetheless, economics can shed some light on the general trends.

A contributing factor was the changing fortunes of health-care legislation. As details solidified and it became more apparent that a health-care bill would pass the Senate - this was before the upset election of Scott Brown in Massachusetts - many business owners would have calculated a rising cost per employee. Facing a new set of incentives, the predictable reaction would be for such businesses to hire fewer workers, lay off more workers, and/or delay hiring new workers than they otherwise would have done.

To recognize this fact doesn't mean that health-care legislation is necessarily a bad thing. Many of the proponents of the legislation are being disingenuous, however, when they deny that raising the total cost of an employee will influence a business owner's decision over how many employees to carry.

The irony is that Obama administration officials and sympathetic pundits understand perfectly well how incentives work in the context of climate change. The "cap and trade" system favored by the administration would artificially raise the price of industrial activities that release greenhouse gases. The whole rationale for this so-called "market-based solution" is to prod businesses to move away from carbon-intensive operations and toward "greener" methods.

If a higher price for carbon causes businesses to use less of it, the same logic applies to increasing the price of employees with related health-insurance expenses - they will use fewer employees.

Regardless of the merits of President Obama's policy initiatives, it is undeniable that he is casting certain industries as enemies. In such a hostile and uncertain environment, where no owner can know who will face a public dressing down tomorrow- and a massive tax hike - it would be foolish to add employees as if this were a normal economic recovery.

The private economy has recovered from recessions in the past. What distinguishes our present recovery is the incredible amount of government "help." As the media remind us, not since the Great Depression have the federal government and Federal Reserve meddled so much in the private sector.

So it shouldn't surprise us if this turns out to be the most sluggish economic recovery since the 1930s.

(The writer is a senior fellow in Business and Economic Studies at the California-based Pacific Research Institute.)


Bursting Eugene Fama's Bubble

More piling on the Efficient Markets Hypothesis today at
In a recent interview in the New Yorker, Eugene Fama, Chicago School economist and father of the efficient-markets hypothesis (EMH), defended his theory in light of the housing boom and crash. Fama's views on asset bubbles and business cycles stand in sharp contrast to the standard Austrian position. Although Chicago and Austrian economists are on the same side on many policy questions — particularly in their opposition to Keynesian solutions — Fama's interview reveals the large differences in their theoretical toolboxes.


Jon Stewart Makes Republicans Look Ridiculous

I don't see how anybody can vote for Republicans if they watch Jon Stewart. (And I don't see how anybody can vote for Democrats if they read this blog.) The 2nd half of this clip is so-so (the Hawaii special report), but the first half made me laugh out loud. Star Wars fans get a special treat in the beginning.

The Daily Show With Jon StewartMon - Thurs 11p / 10c
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Sunday, February 14, 2010


Faith and Reason Are Not Enemies

I can remember when I was an atheist in college that I thought faith was diametrically opposed to reason. In particular, I could not STAND it when I or my atheist friends would level some crushing argument against a Christian who was (really) not nearly as intelligent as we were, and then the Christian would just say, "Well I can't explain that apparent paradox, I have faith."

And then, to add insult to injury, sometimes the Christian apologists would say something truly asinine (I thought) such as, "Well we can't prove anything. You have faith that Abraham Lincoln was president during the Civil War. You didn't see that with your own eyes." At this point it was time to stop arguing with irrational Christians and hit the bar.

Well now I am older and call myself a born-again Christian. So what is my current view of the alleged divide between faith and reason?

First of all, I don't say that Christianity is irrational. I would say it is superrational or arational if you want. To put it succinctly, I cannot use my puny mind to logically deduce--or even reasonably infer--the grand truths of the universe. But my mind leads me to say that it is perfectly reasonable to have faith in the promises of Jesus Christ. In particular, I find it implausible that someone could be so wise about human relations, and yet could be nuts or deceitful about the supernatural. (This of course is just the 'Lord, liar, or lunatic' argument.)

Let me give an analogy. Suppose you are interested in physics but you're just an undergrad major in it. You've read a bunch of Feynman's stuff and other pop physics books, but you haven't worked with a supercollidor or done original theoretical research.

Your older brother is wrapping up his PhD in physics at Cal-Tech, and he invites you to the campus to hear a guest lecture from the latest physics Nobel laureate. During the talk you think the laureate made a basic error about how gravity works. After the lecture you ask your brother, and he says, "No when you study quantum theory in a graduate program you will see that that's not a mistake. They actually teach you a dumbed down version in undergrad."

You still don't quite get it, but you trust that your brother isn't lying to you about this, and that the Nobel laureate didn't make a bonehead mistake in front of the Cal-Tech faculy who all missed it. You have faith in all of them that they didn't miss such a dumb thing, which you, a lowly undergrad major, picked up.

This is analogous to me when I read that the God of the Israelites commanded them to take the promised land through force. Some of the stuff in the book of Joshua is pretty hardcore.

And yet, for sure Jesus of Nazareth is a much nicer, moral guy than I am. If Jesus assures me that the God of the Israelites is perfect and just, then I believe Jesus. Even though it doesn't fully make sense, I have faith that Jesus wouldn't lie to me about something that important, and on a topic where Jesus is obviously far superior to me.

It is not irrational to recognize the limits of reason. It is not irrational to trust the claims of particular people who have demonstrated their trustworthiness and competence in particular areas. We do this all the time in everyday life.

There is no conflict between religious faith and reason.

Saturday, February 13, 2010


Angus vs. Glenn Beck

I heard this "live" (i.e. I'm not sure if there is a tape delay but I heard it on the radio the day of) and I found it hilarious, but not for the obvious reasons. (HT2LRC) Pay close attention starting around 1:45. After Angus points out Beck's hypocrisy vis-a-vis the bailout, Beck says something like, "OK Angus, if you have all the answers, then tell me why I was for the bailout." Angus has no answer for Beck's absurd flip flop, and Beck & Crew take this as evidence of Angus' stupidity. What's really funny is that we don't even know if Angus was speechless--"Uh, I don't know how you could have supported the bailout, Glenn, given your rhetoric of the last 12 months, that's my whole point"--or if they just cut him off. I.e. we never hear from Angus after this point, so for all we know they hung up and then Beck said, "OK Angus, if you have all the answers, why was I for the bailout?"

(BTW don't be confused: The people making this YouTube cut away as Beck gives his explanation, and show the TV clip from when he supported the bailout. Then they come back to the radio show right after he dukes it out with Angus.)

In case you're curious, what Beck actually said on the radio was that he initially was for the bailout when he thought it was necessary to stave off disaster, in order to buy time for the politicians and corporate leaders to get their act together. But then (withink two or three days I think) Beck had smelled a rat and realized they weren't going to change our sinful ways, and that's why he was opposed to the bailout from that point forward. Beck also worked in the fact that he had been predicting the financial crisis for a long time when everyone thought he was crazy.

By the way, of course people can make mistakes and we don't need to jump up and down on them for changing their mind. (I am still embarrassed about this article, for example.) But the point is, I was absolutely shocked when Glenn Greenwald sent me this video and I learned that Beck had supported the bailout when it mattered, i.e. when it was first being debated. I had been listening to Beck for only a few months, and I actually bought into his Fight the Power schtick. I couldn't believe that someone who had declared on national TV that Paulson didn't ask for enough money, was so clearly painting himself as a Cassandra and diehard opponent of the bailout just a few months later.

Last point: Angus hails from New Braunfels, TX. I wonder if he saw me give a talk there last summer?! (A church in New Braunfels is a hotbed of subversive libertarianism; I think Tom Woods was their speaker the previous July 4.)


Jim Chanos on China

Von Pepe sends this interview with hedge fund manager Jim Chanos, saying that he makes some interesting remarks about GDP accounting. Start the video at 4:30.

Note that I am not endorsing Chanos' overall opinion of the Chinese economy; I haven't studied it enough. I know they have been inflating their money and credit, but on the other hand many Asian countries in general have been liberalizing their economies through various measures over the years, and I expect that trend to continue. It's possible that both Jim Rogers and Jim Chanos are right: China will be the dominant economy in the 21st century, but it's going to have a crash real soon.

Anyway, Chanos definitely makes some interesting remarks about Western analysts who decry intervention but then praise some particular micromanagement by Chinese communists. I have been frustrated by such analyses too.

Friday, February 12, 2010


What Has Government Done to Their Money?

This is pretty funny:
An exciting new role has just opened up at the national mint of Chile, but there's a catch: successful applicants will have to be able to spell the word "Chile."

That seemingly simple task was the undoing of the former general manager of the Chilean mint, Gregorio Iñiguez, who has reportedly been let go after an embarrassing blunder.

Iñiguez minted a set of 50-peso coins with the nation's name spelt C-H-I-I-E instead of the usual C-H-I-L-E, the BBC reported.
But I think my favorite part of the story is this: "The mistake was also missed by the head franker at the Chilean mint, Pedro Urzúa, who pleaded his innocence when it was alleged the mistake was done on propose, the BBC said."

Do you see why?


Arnold Kling Smells a Fed Rat

I've said before (can't find the post) that Arnold Kling is my kind of cynic. Try this:
Rather than try to come up with an economic theory to explain Fed policy, I would suggest a more cynical approach. The goal has been to transfer wealth to banks and to the holders of mortgage securities. The thinking is that those constituents are more important to the economy than taxpayers.
The Fed has changed from a central bank to a piggy bank. Any economist who tries to interpret Fed policy from the standpoint of economic theory is playing a fool's game.


Big Shoes to Fill

Ebeling and I leave the Hillsdale College econ faculty, and now those guys can't even spell "Mises." (Just kidding.)

Thursday, February 11, 2010


GDP Bask

I am trying to pin down the nominal GDP (or GNP) in the US for the years 1919 - 1921. Wikipedia has a graph of US GDP from 1920-1940, but I can't get the actual data points. Any help would be much appreciated, or, if you dislike the passive voice, I would much appreciate any help.


How Far the Mighty Have Fallen

[UPDATE below.]

You know how I said Scott Sumner had revived my faith in economic bloggers? Well now I feel like the blond-haired kid on the beach who introduced Daniel-son to the other Cobra Kai's. How's this for you:
I believe the Great Depression had two primary causes. One cause was deflationary monetary policies during 1929-33, and 1937-38. The other cause was five nominal wage shocks during 1933, 1934, 1936-37, 1938 and 1939. These 5 shocks were caused by New Deal programs, and slowed the recovery. This is why the Great Depression lasted 12 years, ending about the time of Pearl Harbor. I don’t know what ended the Great Depression, and don’t really discuss it in my manuscript, but I suspect it had something to do with the German invasion of France, which led to a military mobilization in the US and elsewhere. This may have directly raised AD, and indirectly increased expected NGDP growth by raising the expected inflation rate. Wars are usually inflationary.
OK let's just put aside the claim that the German invasion of France ended the Great Depression. How could Scott have failed to include, among the causes of the Great Depression:

(1) Herbert Hoover's insistence on rigid wages immediately after the stock market crash, and

(2) The outrageous tax hikes passed in 1932? E.g. people who made $10,000 in 1931 faced a marginal tax rate of 6%, and in 1932 the rate had jumped to 10%. That's rather a big jump, wouldn't you say? The top bracket jumped from 25% to 63% in one year. Note I'm not saying a 63% increase, I'm saying the rate itself more than doubled in one year. And it wasn't like 1932 was a good year to begin with.

UPDATE: Well I guess I'll have to cut Scott some slack, because in the very next paragraph he addressed all of my concerns. He doesn't deal with the fact that the deflation (whether in money or CPI) was steeper in 1920-1921 than it was in any 12-month period after 1929, but OK fair enough. Come to think of it, maybe Daniel-son is all right, once you overlook him spraying water on the guys in the bathroom stall at the Halloween party.


The Contentless Book Review

Well maybe I need to rethink my "Matt Yglesias just misunderstands economics" theme. He enthusiastically links to this review of Thomas Sowell by Alan Wolfe. Go ahead and skim Wolfe's review; it's a Star Chamber in prose.

In his big bad book review, Wolfe (by my quick count) lets us know of about maybe three things that Sowell believes. But the majority of the post is dedicated to the tone of Sowell's writing, of how bad it is. For example:
The more interesting question is how Sowell managed the task of actually writing the thing. Even jeremiads should have their joys; there is something so wonderful about being a writer and a critic that delivering even bad news can be a source of unbearable pleasure. But Sowell takes no joy in anything he has to say: his tone is as dour and depressing as his conclusions. I understand that the man is a conservative, but can’t he crack a smile? Sowell is such a plodder that even sarcasm, conservatism’s reliable and sometimes amusing old ally, is beyond his reach.
Now you would think Wolfe might offer, say, a quotation from the book, but I think we are treated to a grand total of 31 words from Sowell's 300+-page book under review.

Before you shake your head at Wolfe (and Yglesias') intellectual dishonesty, keep in mind that I was upset when Tyler Cowen reviewed Naomi Klein's book The Shock Doctrine and quoted from her 31 fewer words than Wolfe did of Sowell. But at least Tyler didn't dwell on what an awful writer Klein was.


Am I a "Truther"?

The Glenn Beck ambush of Debra Medina raises an obvious question: Am I a "truther"? Since I have been and will continue to be really busy with "real work," let me throw Free Advice readers some red meat with this post.

First, I absolutely love conspiracy theories, especially when they rely on incontrovertible evidence and when their results are outrageous. For example, you can read about how NASA "obviously" faked the Moon landing, which relies on a lot of things you have seen your whole life. (Not least of which, don't most of you deep down think the government is too incompetent to send guys to the moon and bring them back--alive?) But then there are websites that go through and debunk all of the Moon-landing-a-hoax points, and it looks pretty good.

Second, I have indeed dabbled in the 9/11 conspiracy stuff. (As Stewie says when someone points out that his breath smells like kitty litter: "I was curious!") If you've never checked it out yourself, let me report that there are plenty of presentations you can see in which the people aren't obvious nutjobs, playing short of a full deck, out to lunch, etc. etc. (Try this if you want a good start. I haven't watched that particular video, but the BYU professor is one of the leading "truthers.")

Third, a few weeks (maybe months, I can't remember) into my hobbyish investigations, I just gave up. The problem is that I'd hit a point where apparently reputable building engineers would look at the 9/11 footage and say, "See that right there? Only a controlled demolition would look like that." But then other apparently reputable building engineers would look at the same thing and say, "That could definitely be the result of burning jet fuel."

On the margin, there was no point in me pushing the analysis deeper. I am already a philosophical anarchist. I am a pacifist and do not believe in violence to achieve ends, so I try to educate people that our present form of government is illegitimate and that there is a better way to organize social relations. But I'm never going to take up arms or do anything else violent, because that would violate my whole philosophy.

My point is, it doesn't really affect my behavior vis-a-vis the U.S. government whether it planted charges in the World Trade Center buildings, or whether it had advance knowledge of 19 hijackers and let it happen, or whether the official story is basically correct, and the government covered up the evidence to hide its incompetence. In any of those scenarios, my opposition to the activities of the U.S. government would remain the same. I would still write the same articles, give the same lectures, etc.

Here's why: Even if I had ironclad proof that "9/11 was an inside job," I wouldn't go around trumpeting the fact. People who heard me wouldn't trust me--an economist--with such a claim. And rightly or wrongly, there is a huge negative reaction, even among many other critics of the government, to the "Truthers." So I would be inviting a lot of negative backlash for no purpose.

What I will do is personally refrain from mocking people who think the U.S. government had something to do with 9/11. If you look into the documentaries etc., I think you too can understand why people who hate the government in the first place, could be convinced. There is a lot of circumstantial evidence, like firemen reporting hearing loud explosions from the base of the buildings etc. well after the initial impact of the planes.


Guilt By Association: How Does One Draw the Line?

When I was in San Jose, at dinner the issue of giving talks to various types of crowds came up. The issue was, is it ever inappropriate (either morally or just strategically) for an antiwar libertarian to give a talk to a particular group?

Obviously we are assuming the speaker agrees wholeheartedly with what he or she will say at the event. But the issue is, should a speaker ever decline an invitation due to the forum?

For example, I wouldn't give a talk at a Klan rally.

However, Mark Brady pushed us a bit, and said it would be fine for us to give a talk at a Marxist rally, and we agreed. The difference was, there would be no danger of any outsider misinterpreting our talk as a personal endorsement of the group's activities.

Also, it might be OK to be even at a Klan rally, if it were a debate and you were saying why racial codes or whatever were bad, and your opponent was defending them. In other words, it might be OK (though still iffy) if you were not welcomed by the people at the Klan rally.

Finally, does it affect your answer whether the speaker is being paid, or is promoting a book or something?



Glenn Beck Ambushes Debra Medina

This is very interesting. I was driving to work today and heard the opening of Glenn Beck's interview with Texas gubernatorial candidate Debra Medina. Right off the bat something seemed a little odd to me. I'm paraphrasing, but he introduced her along these lines:
GLENN BECK paraphrase: "Now just a few weeks ago this person had a scant 4% of the vote. Kay Bailey Hutchison now has y%, and folks you know I'm no friend of Kay Bailey Hutichson--she's a fine enough woman in her personal life I'm sure--but she's not what Texas needs to bring America back to the principles of the Founders. So now we have on the line Debra Medina. Debra, thanks for being with us. I wanted you to have the opportunity to introduce yourself to America, since many of us don't know who the heck you are."
To repeat, those weren't the exact words, but I think I captured the spirit of how he introduced her. In particular, I am almost positive that he mentioned her single digit polling from the past, and did not mention what her polling is right now (24% the last I checked, compared to 39% for the front runner). And I know he said she had to be on his show because a lot of people didn't know the first thing about her.

So he asks her right out of the chute, "Who are you?" Medina gives her stock answer, ripping Perry and Hutchison etc. etc. Then Beck says, "OK, but the question I asked was, who are you?"

So right out of the gate, Beck is getting all hardcore interrogator on Medina. That would be fine, except that Beck wouldn't have done anything like that with Sarah Palin or somebody else that he liked.

At this point I turned off the radio, because I don't like conflict and it was making me uncomfortable. Even by Beck's second question, it was clear to me it was going to be a hostile interview, and Beck was subtly letting his listeners know that this woman was not the Real Deal.

Apparently things just went downhill from there. Beck ambushed Medina with 9/11 Truth questioning. Here's Lew Rockwell's take: "Rick “Gardasil” Perry is scared. Ninety minutes after Glenn Beck lied Debra Medina onto his show, through a neocon producer, Perry robocalls went out using the Beck clip. Surely the whole business was coordinated by the Rovians running the Perry campaign."

To be clear, I don't know the first thing about Medina, except that Tom Woods wrote a characteristically pugnacious plug for her. I'm not saying she's awesome or even that I hope she wins. All I'm saying is that when you wonder, "Gee, how come all the politicians--from both parties--seem to be the same?" this is part of the answer.

The thing that disappoints me even more than Glenn Beck (almost certainly) going along with a hit job is that his sidekicks play such a "aww shucks, I'm just here readin' my Constitution tryin' to figure all this stuff out" act, when they have to know full well how this all works.

P.S. If anyone from the Glenn Beck show is reading and wants to have me on the show to talk about my books, my email is open. You can even ask me about the time I got cut from the freshman basketball team, I don't care. Call me!

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