• istock_money_falling_from_sky

    Debate: Is QE Ever a Good Thing?

    A Debate Between NGDP-Targeting and Monetary-Base Targeting Supporters  helicopter-money40 Glossary CPI: Consumer price index: Consumer goods cost more dollars when the CPI rises.

    NGDP: Nominal gross domestic product. The combined dollar value of all investment, consumption, and government spending.

    Money supply: The total amount of money in an economy. All money, including deposits at banks, cash, traveler’s checks, and bank reserves on deposit at the central bank are counted.

    Fractional reserve banking: When a bank lends out money that has been deposited at that bank. The bank lends out some of a deposit and keeps some as reserve, and the ratio between loans and reserves is called the reserve ratio. If the market-wide reserve ratio is 10%, then 90 cents can be lent out by the bank when it gets $1, and then those 90 cents can be deposited in another bank, who can lend out 81 cents, and as this process continues until $10 in total deposits are produced from the original dollar deposited.

    Monetary base: The total amount of deposits that commercial banks have in their central bank’s reserves and amount of cash in the hands of the public. The central bank can increase the monetary base, introducing some new amount of dollars, which will then be turned into a greater amount of dollars on deposit through fractional reserve banking.

    QE: Quantitative easing. A method of expansionary monetary policy wherein the central bank expands the monetary base while purchasing financial assets from commercial banks.

    Velocity of Money: The number of times a given dollar changes hand over a given period of time. In other words, the speed of circulation of money.

    Quantity Theory of Money: A macroeconomic identity M*V=P*Y where M is money supply, V is velocity of money, P is the general price level and Y is total real output. Assuming V is constant in the long-term, Y is determined by fixed stock of labor and capital, and money has no impact on real variables, an increase in M should have a proportional impact on P. Note that both sides of the equation equal NGDP.

    Hayekian Triangle: A graphic representation of the structure of production. hayekian-triangle-stages-of-production


    Andrew Criscione Austrians don’t agree with Friedman’s criticism of the Fed: He said it wasn’t expansionary enough, the Austrians say it was too expansionary. Whether the CPI is increasing or decreasing, Austrians are against expansion. If the CPI is decreasing, Chicagoans are for expansion. The problem is: The “free market” supporters flock to Friedman, the rest flock to Keynes, but they’re both wrong. Keynes is, if anything, less wrong, since he argued for Bretton Woods over a fiat dollar: “John Maynard Keynes and Harry Dexter White would lead the global return to fixed exchange rates”). Whereas the Floating Point gang was wholly composed of monetarists, including Friedman himself. Read David Stockman’s book “The Great Deformation” if you want an in-depth history of the Chicago School’s impact over the last 40 years. All the economic problems that have come from fiat money can be laid at the foot of the Chicago School.

    Zachary Woodman Not all Austrians may not agree with the policy prescriptions, but for the most part (there are exceptions at the Mises Institute, but almost all academic Austrians I know of think this ) they agree with the narrative Friedman gave that the Fed was responsible for the bank failures in 1930-33. Additionally, Austrians are not all monolithic in their policy prescriptions. Many Austrians (Horwitz and Selgin , for example) do believe in NGDP targeting which would call for expansion in some times to keep NGDP stable.I know your first response is going to be “that’ll re-inflate the bubble.” You forget that when NGDP starts growing at too fast a rate (as it did 2005-2008), there would be a massive tightening of money supply to help restrain the bubble. Sumner and the other NGDP adherents argue there should have been for significantly less expansion in the years leading up to the financial crisis, which Austrians are definitely in agreement with .

    Andrew Criscione The Old-School Austrians at the Mises Institute (and Garrison is a faculty member there) are all against QE. But there is definitely another, more inflationary strain of thought out there among the free banking branch of the Austrian School . I consider myself a free banker in that I think there would be lots of fractional lending without a state. But I disagree with Selgin and Horwitz’s prescriptions for the Fed and think the older Austrian strain of thought got it right . Remember that even Friedman didn’t advocate printing so much money as to target stable nominal GDP: He just wanted stable prices.

    Zachary Woodman The problem with the view of the old Austrians at the Mises Institute is simply a failure to recognize the current institutional reality . Sure, it might be the case that for the long-term complete inaction by the Fed to allow for the reallocation of resources is better. However, adopting such a policy does absolutely nothing to stop the Fed from causing bubbles in the distant future. In this ways, both schools of thought really have the same criticism of each other; the Mises Institute says the free bankers are causing a future bubble, and the free bankers are saying the Mises Institute isn’t doing enough to restrain the Fed in the long term which will result in bubbles in the future . Let’s do a pro-con chart of adopting NGDP:   Pros: Ties the hand of the fed permanently . Restrains bubbles in the future by cutting off expansionary monetary policy in the early part of the bubble . Mimics Free Banking in the way Selgin lays out .   Con: Might risk causing a bubble in the short term.   Obviously I have a bit of confirmation bias , I can’t think of many other cons other than that one, I’m sure you probably have another.

    Andrew Criscione If QE were several times bigger, that’s a pretty bit “might”, but sure.

    Zachary Woodman Offsetting the bubble by tying the hands of the fed when NGDP growth accelerates is the reason for my “might.”

    Andrew Criscione Your first two pros apply to both money supply targeting and monetary-base targeting, though . And NGDP trails the monetary base by a considerable timeframe. If we just start cranking the printing presses full bore until the NGDP increases back from its recessionary low, a LOT is going to be printed until the economy “recovers”, which it won’t according to the ABCT .   Japan is probably the best example of NGDP targeting gone wrong. They’ve been printing full bore for decades, and it’s causing stagnation. It’s the 1970s without the rising prices.   The Austrians view this as a price fixing problem: Monetary expansion fixes the interest rate below what it otherwise would have been, the economy won’t recover until rates go back up. If you keep the rate fixed low artificially, the savings gap won’t be bridged, supply won’t match demand. Until savings recover, there will be no recovery, and savings won’t recover until the interest rate rises and the monetary expansion stops.

    Zachary Woodman The biggest problem with your point about the pros applying to Money Supply targeting is that the second and third pros do not apply to it. If your expansion in the money supply is causing a bubble, the stable expansion of money supply just continues doing it no matter what as you continue growing the money supply . Whereas when the bubble begins inflating in NGDP targeting, there is a mechanism to offset it .   Also, Selgin’s theory of free banking does not say that money supply is stable so it doesn’t have the third benefit and I’d add another con list for money supply targeting: velocity is not stable in the short-term, as the post-Keynsians like to point out. NGDP targets not just M, but M*V, so it’s immune from the post-Keynesian criticisms.   Does NGDP  targeting trail growth in monetary base that much? I would argue that it doesn’t. Right now the reason for growth in monetary base and stagnation in money supply is that the fed is paying interest on reserves, I’ll side with Sumner and Christensen in saying they should stop doing that. But assuming that the fed stops doing that, why should monetary base trail behind growth in NGDP that much?   As for your points about Japan, they’ve kept the level of NGDP stable  (a growth rate of about 0%, which is also what Hayek advocated). Sumner and company are advocating a higher growth rate.

    Andrew Criscione The Fed can cause a bubble in one industry while the nominal GDP is shrinking due to a bubble popping in another industry: A bubble doesn’t necessarily have to increase NGDP. How much of NGDP growth is due to the bubble and how much is due to the economy as a whole? It’s the pretense of knowledge to think we can know these things.   If the Fed was handing out trillions directly to college students (not exactly a hypothetical), it would cause a bubble. But it doesn’t necessarily cause NGDP to rise, especially if there’s a depression currently going on from the popping of a previous bubble. The price level and NGDP aren’t monolithic.

    Zachary Woodman Your point about bubbles being micro-level distortions that do not follow macro-level phenomena like NGDP and the price level is well-taken, but all that does is reinforce the one con that it might re-inflate the bubble which I’ve already admitted . That is definitely a risk of it, but that is a risk of any sort of central banking regime with any policy. The only way to avoid that problem is to revert to a free-banking system, which I am heartily in support of. However, political reality is that that won’t be the case .   Regarding the Mises Institute’s proposed reforms, all they want is taking steps in the direction of free banking. I would love it if we *could* do that, but the reality is we can’t. First of all there’s the political reality that nobody in power is willing to do that, but they are willing to adopt policy rules like NGDP targeting . Second of all, there’s the reality that investors in the economy have heavily embedded in their expectations based on the very institutions (like FDIC) that they are proposing being abolished; even if it might be in the long-term interests of everyone to do so, in the short term interrupting those expectations will only serve to create regime uncertainty  and that is definitely to be avoided. On the other hand, trying policy rules like NGDP targeting are considerably less discretionary .

    Andrew Criscione NGDP targeting would be worse than both the monetary-base targeting being pushed by the Mises Institute AND total-money-supply targeting pushed by the Chicago School/monetarists/Friedmanites, I think , since NGDP-targeting would involve expanding the monetary base in any instance with a steady price level but falling NGDP. It would also be worse than the status quo, since it would involve much more QE during a depression, enough to keep NGDP stable ,But I don’t think the depression ends until QE stops, so we’re stuck with a permanent depression/stagnation/deformation, which is more-or-less what happened in Japan.But again, there’s no good way to run the Fed, just like there’s no good way to run a state monopoly shoe store.   On one side are the people saying the Fed is doing a good job, on the other side are those saying the Fed isn’t printing enough money. The old-school Austrians get left out of the debate. Mises went into the basement of the Austrian national treasury and told the central bankers: “Turn the printing presses off!” I just don’t see him going: “Crank the printing presses up higher!”   If the Fed adopted NGDP targeting, I suspect they would adopt it during a depression as an excuse to print an ungodly amount of money , and then give up on it when it called for tighter monetary policy during the boom . The layman walks away from the conversation thinking: “The free market types all want more money printing”, whereas they should be thinking the opposite. Inflation is just as bad as taxation, and for the same reason. The great tragedy of the last 40 years is that fiat money and monetary expansion/inflation have been identified as free market phenomena thanks to the Chicago School .   I don’t see how any monetary expansion could be justified in the Hayekian Triangle framework . It is simply price fixing of the interest rate, and price fixing is never justified under any circumstances. All price fixing causes shortages, and fixing the interest rate is no different. If the Fed is expanding the money supply, it is fixing the interest rate too low. Expanding the money supply pushes rates low, and nothing can change this fact. Austrian Business Cycle Theory says that monetary expansion fixes the interest rate too low, and this causes a distortion/shortage. Whether the NGDP and CPI are rising or falling doesn’t enter in to the Hayekian Triangle.

    Zachary Woodman NGDP targeting is not more expansionary than money supply fixing . At the very least it is on net the same because during a period of malinvestment (like the 2005-2008) it forces the fed to stop artificially reducing interest rates with expansionary monetary policy as NGDP skyrockets . That’s part of the reason why Hayek himself supported it .   Let me quote Horwitz on why Austrians should support NGDP targeting: One thing policymakers can do is ensure that, when enough time has passed, market participants will return to an institutional environment conducive to the market process . This requires addressing two major problems moving forward: monetary instability and moral hazard…In our view, monetary stability means continuously adjusting the supply of money to offset changes in velocity . Given the current monetary regime, where such adjustments are in the hands of the central bank, they should be made as mechanical as possible . Discretionary monetary policy unnecessarily introduces instability into the system with little or no offsetting benefit. Instead, the Fed should commit to a policy rule . Given our monetary equilibrium view, we hold that the Fed should adopt a nominal income target. Although nominal income targeting would require price adjustments in response to changes in aggregate supply, these particular price changes convey important information about relative scarcity over time and would be much less costly than requiring all other prices to change as would be the case under a price-level targeting regime … Under a nominal income targeting regime, monetary policy would have the best chance to maintain our goal of monetary equilibrium , at least to the extent that central bankers can accurately estimate and commit to follow an aggregate measure of output . As imperfect as this solution would be, we believe it is superior to the alternatives available in the world of the second best, and certainly an improvement over the status quo of the Fed’s pure discretion in monetary policy and beyond.   What’s missing from your analysis is a discussion of changes in velocity I mentioned earlier and an understanding of monetary equilibrium.

    Andrew Criscione You said earlier:  “NGDP targeting is not more expansionary than money supply fixing.” Monetary base fixing by definition means there is no expansion . NGDP targeting means enormous monetary base expansions during a depression, the likes of which would make Bernanke blush. The Fed’s QE was pocket change compared to the amount that would have needed to be printed to keep NGDP from dropping even a penny. Here is a good Austrian criticism of NGDP targeting.   Now, is monetary-base targeting necessarily a good answer? No. I think it’s less bad.   When the Fed lowers rates i.e. expands the monetary base, this eliminates the natural risk signal to investors and causes bubbles. This is true whether the NGDP is increasing, decreasing, or constant. Stop blowing bubbles, and they’ll stop popping, but if you keep blowing them, they’re going to keep popping and causing problems. It’s just as easy to blow a bubble during a downturn as it is during an upturn. ABCT doesn’t magically stop existing during depressions.   Whenever the Fed expands the money supply, it lowers interest rates below what they would otherwise have been. This causes a distortion. It might not necessarily cause NGDP to increase, but there will be a very dangerous bubble, even if NGDP is decreasing.   The interest rate matches supply and demand for savings/loans. When it is fixed too low, there is a shortage of savings. Until it is allowed to rise, until the money printing stops, the depression will continue . This is why the Depression of 1920 lasted one year, when the interest rate was allowed to rise, unlike during the early Great Depression. The market monetarists or monetary equilibrium theorists can’t explain this, only the Old-School Austrians can. If you look at the savings rate in 2007, it was the lowest since the Great Depression, and thanks to QE, nothing has changed since. Until the interest rate recovers to market levels, there will continue to be a shortage of savings and a credit crunch.   Why would a different set of economic laws apply during the “contraction” period?  I just don’t buy that ABTC has nothing to say about the crunch: Half of Garrison’s Mises Institute lecture on this theory is on the crunch and how the economy recovers by removing the shortage of savings via an increased interest rate. I don’t see how lowering the interest rate again through printing would do anything but prevent the recovery from occurring.

    Zachary Woodman To see what makes Friedman’s proposal inferior to NGDP targeting, let’s turn to the quantity theory of money. Friedman calls for a constant growth rate in M . However, let’s say there’s a sudden change in velocity (which often happens during the period of resource misallocation in the Austrian Business Cycle Theory). Friedman’s rule calls for still growing the rate of M  constantly regardless of what happens to V. If V accelerates during a speculative bubble, continuously growing M keeps interest rates low which exacerbates malinvestments. By contrast, when we target NGDP we are targeting not just one variable, but the equation, M*V . So if there’s a sudden spike in V (as happened in 2005-08) , the fed is forced to tighten its money supply , thereby allowing real interest rates to stick much closer to the natural rate of interest and helping to lessen the malinvestment. That cannot happen if you are simply targeting M.   This is exactly why Hayek supported NGDP targeting, and why Horwitz does. See again the paper I cited by Horwitz, where he says his monetary equilibrium view is “characterized as a desire to keep the MV side of the quantity equation constant , and allow P to move inversely to Y.” And also: “In our view, monetary stability means continuously adjusting the supply of money to offset changes in velocity. ” I would recommend you read that paper in the entirety, it also lays out the Rothbardian view you seem to be taking and that the types at the Mises Institute take and distinguishes his own “monetary equilibrium” view from that.   So there is little doubt that NGDP targeting has a major advantage of preventing bubbles as compared to Friedmanite money-supply targeting . However, I suspect the main area of our disagreement is the post-bust policy prescription. You argue that because NGDP is falling, the Fed with an NGDP-targeting rule would be expanding monetary policy , which is inherently bad as that would create other bubbles. That is a potential problem with NGDP targeting , but let me explain why I think you’re overstating it and are slightly misunderstanding Hayek’s theory.   First, let me answer this question which you ask: “Why would a different set of economic laws apply during the ‘contraction’ period?” It’s not that a different set of “economic laws” apply, the very same insights from the Hayekian triangle apply. The point is that it is a case of things going too far in the opposite direction.   It does not follow from Austrian Business Cycle theory, especially Hayek’s “The Structure of Production,” that central banks should never increase money supply . If interest rates are diverging from the natural rate in the positive direction (if it becomes artificially too high rather than too low) , which is the case when there are deflationary spirals (such as 1930-33 during the Great Depression), that can also create massive distortions and create underinvestment in capital .   The key point here is that a deflationary approach during the contraction period may create its own distortions. This can be illustrated by the hypotenuse on the Hayekian Triangle being stretched into the outward direction; it artificially creates incentives to invest in lower level capital goods rather than higher ones creating less than optimal resource allocation . Let me quote Hayek on this matter: “The moment there is any sign that the total income stream may actually shrink [during a post-bust deflationary crash], I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.” This is why Hayek agreed with Friedman on the great depression: “I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.”   However, you do point out the problem that the bank does not know how much to expand the money supply because the “natural” rate of interest is not directly observable. There is the danger that, as you point out, the Federal Reserve could act far too much in the opposite direction, expanding the money supply excessively and driving interest rates far below the natural rate creating more resource misallocation, creating an inflationary boom.   Obviously, the best solution is to leave it to the market with a free banking system. However, that is not politically possible so we are in the world of choosing a second-best . I argue that NGDP targeting is the second best for the reasons I lay out, though I readily admit it is far from perfect. But most of the imperfections are more problems inherent in the existence of a central bank than any particular problem with NGDP targets: don’t confuse your criticisms of the monetary regime with the specific monetary policy .   That leads us to this question: has monetary policy been too tight or too loose in the last few years? The view you are reacting to is Sumner’s, which is that we needed more QE and the Fed did not do enough. I disagree with Sumner, placing me closer to your view. I’ll let Horwitz comment: It is true that nominal GDP growth—which averaged 5.7 percent a year from 1986 to 2006—began falling in 2007 and turned negative in late 2008, suggesting that monetary policy was too tight. But if the last decade was marked by monetary expansion (as we argue above), the 5.7 percent benchmark overstates the sustainable long-run GDP growth rate. As such, the fall in nominal GDP growth might very well indicate the inevitable return to the sustainable long-run trend. Whether the decline in nominal GDP growth is evidence of monetary disequilibrium is harder to discern given that the prior years of growth took place in an inflationary environment, but the magnitude of the decline suggests that some increase in the monetary base over the past two years was likely the appropriate response. Even if the Fed acted in the right direction, it is not at all clear whether this expansion was too big or too small.   My own view is a combination of the two: the Fed likely expanded the monetary base too much, however that was offset by the fact that it was paying interest rates on reserves, distorting the transmission mechanism in monetary policy. So it was too tight in one sense (interest on reserves), but too lose in another (open market operations). On net, it was too tight  (though not nearly as much as Sumner thinks). Now that the Fed has expanded the base too much, we can’t put the toothpaste back in the tube (I suspect you’ll agree with me on this point) . My solution: we need to stop paying interest on reserves and adopt a NGDP targeting policy.   Though you might interpret that as reinflating another bubble, I think the long-term benefits outweigh those short-term costs . NGDP will rise relatively quickly as M1 money supply growth catches up with the monetary base, which will lead to some inflation, lower-than natural interest rates for a short time (most likely no more than a few months), and a limited amount of resource misallocation. But the minute the bubble forms the NGDP targeting will force the fed to stop the printing presses, emulating exactly what you think needs to happen. That sudden tightening of money supply will do exactly what NGDP targeting is designed to do: stop the bubble before it can get out of control.   You are likely going to say at this part that there is going to be a recession from the resource allocation. However, that is not the fault of NGDP targeting, that is the fault of the bad policies adopted before the target was taken. Even under your proposed policy of immediately stopping the presses, this short-term problem exists . Let’s adopt your policy say we just stop the presses without taking an NGDP target: the low interest rates, in your view, of the last few years have already led to malinvestment that needs to be worked out so a bust will inevitably happen. That is the same short-term cost that you say is the problem of NGDP targeting. The difference comes in the long term: now NGDP targeting has tied the hands of the fed significantly reducing its ability to cause problems in the future . In short, your proposed policies carries the same short term costs as NGDP targeting without the long-term benefits. In fact, NGDP targeting effectively implements the very policy you want: halting the presses if a bubble begins to arise. Please tell me if there’s anything here that is unclear, or you think I’m wrong on.

    Andrew Criscione I think the Old School Austrian suggestions to the central bank were better than Hayek and Friedman’s. Probably, it was Hayek’s biggest mistake apart from his invention of Obamacare in The Constitution of Liberty (which was later picked up by Heritage in the 80s and Romney in MA). Hayek and Friedman said to print giant amounts of money during recessions to keep the price level stable (Friedman) or the NGDP stable (Hayek). Note that Hayek is more inflationary than Friedman, since, when we reach the point of stable prices yet a declining NGDP, Friedman says to turn the presses off.   The Old School Austrian approach is to allow the recession to run its course: The rising interest rates and the crash is the cure to the boom. The boom is the disease, and the bust is the cure.   “Though you might interpret that as reinflating another bubble, I think the long-term benefits outweigh those short-term costs”   I don’t see any long-term benefits to expanding the money supply drastically (QE would have had to been bigger to make the NGDP not drop a penny if NGDP targeting were instituted in 2007, it seems to me like Horwitz is being misleading). Every expansion of the money supply distorts interest rates. Japan is the perfect instance of NGDP targeting failing, and now the only solution the neo-Austrian, market monetarist consensus can come up with is to print even more money and abandon the goal of a stable NGDP. The fact is that trying to stabilize NGDP is as silly as trying to stabilize the price of shoes, and it’s going to cause shortages just like the state would if it tried to stabilize the price of shoes. The shortage is a shortage of savings, it’s very real, and it’s the biggest problem in the economy today. There are problems with monetary-base targeting, namely that you first have to establish a money supply i.e. pivot, which is something the Fed currently doesn’t even bother doing, read Brendan Brown’s Mises Daily for more on that.

    Zachary Woodman I think you’re really misunderstanding what you call the “new Austrians” are saying (they’re more accurately called Monetary Equilibrium theorists, but that doesn’t matter ). The debate between “old Austrians” (the Rothbardians at the Mises Institute) and “New Austrians” (Monetary Equilibrium theorists in academia like Horwitz,) isn’t over who’s more inflationary and who’s more deflationary, it’s over disagreements about the nature of money and banking itself . Most of the disagreements you claim modern Austrians have with older Austrians really don’t exist.   As Horwitz says: The monetary equilibrium approach should not be confused with the standard neoclassical position of price level stability. Both the Rothbardian and ME approaches recognize that prices—and, as a result, the aggregate price level—should fall in response to increases in productivity. Similarly, if goods become more scarce on average—as a result of a natural disaster, for example—the aggregate price level should increase to reflect this. ME theorists do not advocate stabilizing an aggregate price level. Rather, they suggest changing the money supply to offset changes in money demand and allowing the price level to move inversely to changes in productivity.   NGDP targeting allows for the price level and real output to drop when necessary. Don’t confuse real output for nominal output.   You say: “Note that Hayek is more inflationary than Friedman, since, when we reach the point of stable prices yet a declining NGDP, Friedman says to turn the presses off.”   You’re mischaracterizing the disagreement. It’s not a matter of Hayek being “more inflationary” at all. In the face of a massive short-term decrease in velocity (v) and NGDP targeting, that is when monetary equilibrium (ME) say we should be growing money supply . However, if V begins to accelerate Friedman would say keep the presses going no matter what and Hayek would say turn the presses off . And, again, in the face of productivity gains ME theorists say let the price level fall and Friedman would say keep growing Money Supply. In both those cases, Friedman would be far more inflationary than ME theorists.   It is not a matter of who’s more hawkish and who’s more doveish, and it extremely misleading to frame the debate in those terms. It is a matter of disagreement over what the monetary constitution should be.   “I don’t see any long-term benefits to expanding the money supply drastically.”   I’ll address your claim that NGDP targeting entails “expanding the money supply drastically” in a minute, but I think you misunderstood what I meant by “long-term benefit” to NGDP targeting. Namely it, completely restricts the Fed permanently from engaging in discretionary expansion. I thought we were in agreement on this, you said earlier that was also a benefit to Money Supply targeting and did not disagree that it is a benefit to NGDP targeting. Did I misunderstand you?   “The boom is the disease, and the bust is the cure.”   I’m not disagreeing with this at all. The bust is the cure, NGDP targeting allows for the bust to occur. (P is moving inversely to Y, so real GDP is certainly allowed to fall.) The difference is NGDP targeting has the added benefit of avoiding a deflationary spiral whereas just keeping monetary base constant (which is what the Mises Institute wants) does not. Sometimes, this is not necessary (eg. the twenties recession), sometimes it is (eg. Great Depression).   “QE would have had to been bigger to make the NGDP not drop a penny if NGDP targeting were instituted in 2007, it seems to me like Horwitz is being misleading.”   That is not necessarily the case. If the transmission mechanism hadn’t been distorted by paying interest on reserves, QE likely may not have needed to be as large as it was. This is what Scott Sumner means when he says that the Fed is not really doing QE; they didn’t allow for expansionary monetary policy to work because they distorted the transmission mechanism by paying interest on reserves. There is even good reason to believe that QE may have even been too large if the transmission mechanism would’ve been working (just look at how huge the growth in Monetary Base was relative to growth in M1). Just because NGDP fell does not mean QE needed to be bigger. Sumner makes that claim, but Horwitz and I completely disagree with him on that.   “Every expansion of the money supply distorts interest rates.”   That’s just simply not true. Every artificial expansion in money supply distorts interest rates. Likewise, an artificial contraction in money supply (like during the Great Depression) also distorts interest rates, in which case an expansion of money supply is necessary to offset the distortion.   Now you’re likely going to say that NGDP targeting calls for artificial expansion of money supply. That is somewhat true, but the point is that interest rates can never follow the real rate of interest perfectly so long as we have a central bank. The only point that ME theorists have is NGDP targeting is the best we can do to approximately follow it if we have a central bank. Do not confuse problems with a policy prescription that are really problems with the monetary regime.   “The fact is that trying to stabilize NGDP is as silly as trying to stabilize the price of shoes, and it’s going to cause shortages just like the state would if it tried to stabilize the price of shoes.”   That is definitely a bad metaphor. NGDP is not a price, it is an income level . You are again confusing the neoclassical argument that price level stability is needed with the Monetary Equilibirum perspective that we need to avoid monetary disequilibrium (ie., deviations from the natural rate of interest. ) NGDP targeting is not an instance of central planning any more than the Rothbardian prescription that we need to keep money supply absolutely level in the short term is. You ignore the fact that free banking theorists argue a completely free banking system would tend to stabilize NGDP . See George Selgin on this: How does free banking help? It does so, first, by allowing for a completely market-determined bank reserve ratio  and, second, by allowing commercial banks to issue their own currency to take the place of publicly-held central bank notes . To the extent that commercial banks are able to “capture’ the market for paper currency, the public’s preferred “currency ratio” (that is, it’s preferred mix of currency to bank deposit balances) ceases to influence the money multiplier, that is, the relationship between the stock of base money (B) and that of broad money (M). In the limit the multiplier, instead of having its usual, textbook formula of [(1 + c)/(r + c)], where r is the system reserve ratio and c is the currency ratio, becomes simply 1/r, making M = B(1/r); while the quantity of bank reserves, R, becomes equal to the stock of base money. The reserve ratio, in turn, will rise in proportion (though not necessarily in strict proportion) to the volume of gross bank clearings, that is, of payments, which will themselves depend on the velocity of money. As total payments increase, so does the demand for bank reserves. It follows that, for any given B (or, equivalently, any given nominal quantity of bank reserves) there will be a unique volume of payments consistent with equilibrium in the reserve market. Changes in V will tend, therefore, to give rise to such changes in r as will keep MV relatively stable.   Therefore NGDP targeting doesn’t try to control anything, it simply tries to emulate free banking to the best that we can with a central bank . The only response that I can see you making at this point is that Selgin is wrong about the nature of free banking . And Rothbardians typically do make this claim because his theory depends on Fractional Reserve banking which they think wouldn’t exist in a free banking system. (I contend there is very little doubt that they are wrong about that, but that’s a debate for another day.) The point is the core of the disagreement isn’t one of “inflationary” v. “deflationary” or planning v. not-planning, it’s a disagreement over the nature of banking in the first place. Rothbardians think that keeping money level completely stable emulates a full reserve system, Monetary Equilibrium theorists contend that NGDP targeting emulates free banking the best.  That is what is at odds here, not who’s more inflationary or who’s more deflationary.   I don’t necessarily disagree with all of the Mises Institute’s proposed reform. Indeed, I agree with these: Abolishing the payment of interest on bank reserves. Strict curtailment of lender of last resort function. Long-term abolition of deposit insurance.Fed withdrawal from creating liquidity in debt markets (no more eligible bills, repo-transactions, etc.). A legal attack on monopoly power in the credit card business which results often in payers of cash not enjoying a discount.”   So long as “long-term” abolition is understood as taking steps to abolish it in the future so as to avoid creation of regime uncertainty . This is implicitly endorsed by Horwitz in the article I linked to you earlier in his discussion of Moral Hazard, which he views along with Monetary Disequilibrium as the other key problem with banking today.   However, I don’t think the author has a good idea of what they mean when they say “set interest rates free.” NGDP targeting is how I would set interest rates free as it is the only way a central bank, given its existence, can approximate the neutral rate of interest in the way I’ve already described. But, again, this paragraph reveals the nature of the disagreement: Under the gold standard the pivot was a fixed price for gold alongside the widespread use of gold coins. And so the amount of high-powered money in the world grew in line with the above ground stock of yellow metal, which occurred at a glacial, but flexible pace. The demand for high-powered money was itself a fairly stable function of income and wealth. And so the system was well-anchored. Yes, there were imperfections, including the advent of fractional-reserve banking which meant that the demand for high-powered money became less stable.   Fractional reserve banking was not an “imperfection,” it allowed for the supply of high-powered money to better keep up with demand for it. That’s why it was created, and why it flourished in free-banking systems like in Scotland  and Canada . Most of the Rothbardian criticisms of fractional reserve banking are completely false . Rothbard and his disciples disagree with basically every other Austrian-oriented person on Fractional Reserve banking (Mises included). But you see here that the disagreement is not whether monetary policy should be expansionary or not, it is in what “setting interest rates free” means. For Rothbardians, this means keeping short-run money supply completely stable to emulate the “glacial” growth in supply of high-powered money under a full reserve system ; for Monetary Equilibrium theorists, this means NGDP targeting to emulate the mechanism Selgin describes that changes in M are proportional to changes in V under a fractional reserve free banking system.   In summary, Monetary Equilibirum theorists agree with Rothbardians that output and price levels should be allowed to drop when appropriate . They disagree about what policy prescriptions best allow for this because they are seeking to emulate two different banking systems.

    Andrew Criscione NGDP targeting obviously doesn’t eliminate bubbles, as we’ve seen in Japan : It simply makes the economy stuck in a permanent bust, where a new bubble is being inflated constantly while the old one is constantly popping, with very few periods of recovery . This is what we can look forward to if the US ever institutes nominal GDP targeting. NGDP targeting may be better than what the Fed is doing now during upturns, but it’s worse than what the Fed is doing now during downturns.   “NGDP targeting allows for the price level and real output to drop when necessary.”   The necessary time for the price level to drop is during a depression, this is how to cure the bubble. But NGDP targeting says to print an enormous amount of money, more than the Fed has ever printed in a depression, since all depressions have involved shrinking NGDP in the past, despite the Fed’s massive historical interventions. So even though NGDP targeters aren’t explicitly targeting interest rates or price levels, QE by its very nature raises the price level and lowers interest rates, which is the exact opposite of what the economy needs. Money velocity AND the money supply plummeted in 1920, when the Fed took no action, so this is what a “free banking” situation would look like during a depression: A truly free banking system would not have massive inflation to offset a crisis, the opposite occurs, as we’ve seen historically. Selgin is simply wrong on this.

    Zachary Woodman “QE by its very nature raises the price level and lowers interest rates”   Not true, NGDP targeting does not necessarily raise the price level in a depression . Let’s say there’s a fall in Y. All else equal, NGDP should fall and under NGDP targeting there will be some expansionary monetary policy, true. But does it necessarily follow that to offset the fall in Y, we must raise P? Absolutely not. NGDP targeting raises both P and Y. P might raise a little, but the more important thing is raising real output.  This is because we are raising M in reaction to changes in V, not P in changes to Y which is what the Taylor Rule does in targeting inflation. To argue that NGDP targeting necessarily results from inflation during a depression does two things: first, it relies on the discarded monetarist assumption that a change in M will necessarily lead to a proportional change in P in the short-term (though that might hold true for the long-term). That is not true because, especially during depressions, V and Y are changing drastically (which is something Austrians like Mises have pointed out in reaction to Monetarists). Second, it confuses the neo-classical urge to target P with the Monetary Equilibrium urge to target M*V (and therefore also P*Y).   So no, it does not follow from the monetary equilibrium idea that we must raise the price level in a depression . If, for an example in the 1920s, there was no deflationary spiral, NGDP targeting would have done very little additionally . Monetary policy would have been slightly looser, but not that incredibly loose as, though NGDP fell, it did not fall substantially.   “The necessary time for the price level to drop is during a depression, this is how to cure the bubble.”   Why?  It does not follow from anything in Austrian Business Cycle theory that deflation (ie. a sudden collapse in prices ) must occur during a bust. In fact, almost all Austrians  who aren’t Rothbard agree that if something like the thirties (and arguably 2008) occurs when you are having a massive drain in money supply for governmental reasons (in that case, the Fed’s monopolization of clearing houses) a rise in money supply may be necessary. In that case, a rise in money supply is not necessarily distortionary but what would occur in the absence of the central bank monopolizing control of money, as Selgin argues .   As I explained earlier, artificially tight money has the same distortionary effects as artificially loose money, just in the opposite direction. If the Hayekian triangle is “thinned” by the interest rate pushed too low (as it did 1925-1927), than that distorts investments in the direction of capital goods; but if it is “thickened” (as it did in 1930-33) by the hypotenuse being pushed in the outward direction, that distorts investments artificially away from capital goods. It is possible for actual interest rates to be above or below the natural rate, to ignore that is to fundamentally misunderstand Hayek’s “Prices and Production.”   “A truly free banking system would not have massive inflation to offset a crisis, the opposite occurs, as we’ve seen historically. Selgin is simply wrong on this.”   What historical examples do you have in mind? We did not have free banking in the twenties . To emphasize this point again, it does not follow at all from Selgin’s theory that there would be massive inflation in reaction to a crisis, just an offset in M to counteract the fall in V. And though money supply does fall for a short time during a crisis, it does eventually rise again as we get out of a recovery. There is a slight delay in the mechanism Selgin describes (which he admitted). Also, I would definitely (and you probably should too) defer to him on the history of Free Banking and how it handles crises as he literally wrote the book on it.   Finally, about Japan. Your perspective is completely factually off-base. First, they never explicitly adopted an NGDP targeting so it is awkward that you keep invoking it as an example of NGDP targeting’s failure . The reason they’re not invoking NGDP targeting is relevant is because decision makers were never able to make plans according to expectations on NGDP futures, a critical component of the NGDP target as Sumner and Christensen emphasize .   Second, what caused their lost decade and the crash in 1992, I think you agree, was likely way too loose monetary policy in the late eighties . Money supply growth exceeded 10% every year up until 1990. NGDP exploded at perhaps too fast a rate. That caused a bubble and a crash .   From a Monetary Equilibrium standpoint, the Japanese monetary policy during the nineties in reaction to the bubble was too tight. Interest rates were low, but that is because of expectations of deflation in the future. Instead, Japan kept money supply growth pretty slow, especially relative to the late eighties when it was 11.5% in 1987 alone (I’m pulling my numbers from the text book Economics: Public and Private Choice by Gwartney, Stroup, Sobel, and Macpherson edition 14e). If anything, they actually followed your policy prescription with tight money and turned the presses off allowing for money supply to reach -0.4% in 1992 and and growth below 3% throughout most of the decade. Meanwhile, they’ve experienced consistent deflation  since 1998 and NGDP has fallen consistently since the early 2000s, which not what Hayek would want with his stable NGDP rule nor what Sumner would want with some degree of NGDP growth. So no, Japan is not an example of NGDP targeting failing.   Instead, Japan is the perfect example of a central bank’s commitment to price stability failing. The reason for the relatively flat NGDP growth isn’t because they are targeting NGDP, but because they are targeting P. With Y pretty much flat or falling and the central bank attempting to make P stable, P*Y has also been flat. If anything, Japan is a poster child for why NGDP targeting should be taken rather than a Taylor Rule.   Also, I never claimed NGDP targeting eliminates bubbles . I merely claimed that it is the best we can do to reduce them by allowing interest rates to stick as closely (though far from perfectly) to the natural rate as possible in the way Horwitz describes. You are right that NGDP targeting may make monetary policy too loose at times, it is far from perfect, but it is the best a central bank can do .

    Andrew Criscione If we’re going to have a Fed, we want it to do what it did in the Depression of 1920. You should really read this article by Jim Grant.  The money supply collapsed, the price level fell, the nominal GDP shrank, interest rates skyrocketed, and the economy rebounded quickly. This is the closest the Fed is ever going to get to a policy that mimics free banking. The Fed wasn’t engaging in Open Market Operations at all during this time.   I think you’ll agree that Japan has come closer than any other country in targeting NGDP, no other country has even come close. So while they may not have perfectly followed Hayek’s prescription (they printed a bit less) or Sumner’s (they printed waay less, he wants NGDP to rise), it’s the closest we get to see the policy in action.   I don’t know what the Fed’s intentions are, no one does, the important thing is how much they’re expanding the monetary base. People in Japan have the expectation that NGDP is going to be targeted, because that’s what the Fed has been doing, whether or not they’re talking about it. It might be unintentional or intentional, it doesn’t matter. The market has set its expectations, they’ve been doing it for so long, and there’s still obvious problems.

    Zachary Woodman No, is not an exemplar of NGDP targeting at all. The NGDP stability was coincidental, not a result of Central Banking policy.   Japan had the expectation of low inflation-to-deflation, which is why interest rates were so low, because the central bank was targeting the price level. The expectation was never focused on NGDP futures . What the central bank says does matter a lot for the formation of rational expectations, you seem to be assuming adaptive expectations if you think that just because NGDP was stable they would assume it would remain so.   As for the twenties depression, nobody had the expectations that the Fed really would act as the lender of last resort. It had only been in existence since 1913. After the Fed has acted as such with the establishment of the FDIC, and its last seventy years of operation, one can’t make policy based off of regime expectations  of eighty years ago.   Also, the question that needs to be answered is this: why did the Fed’s inaction  in the thirties result in a deflationary spiral and how do Rothbardians think that complete inaction would get us out of it? Horwitz and Hayek are right about the Great Depression.

    Andrew Criscione “It is possible for actual interest rates to be above or below the natural rate”   Expanding the money supply lowers the interest rate, that’s economics 101. The NGDP targeters think there should have been expansion in 2007, that QE wasn’t enough to counteract the Fed’s interest on deposits, as you put it because the Hayekian triangle was supposedly crunched up due to higher-than-market interest rates. But interest rates were near-zero, even despite massive expansion! How on earth is that higher than the market equilibrium rate? When does the market ever produce 0% interest rates !   “Why did the Fed’s inaction in the thirties result in a deflationary spiral and how the hell do Rothbardians think that complete inaction would get us out of it?”   You should read Rothbard’s America’s Great Depression.  Hoover’s price fixing and Smoot-Hawley tariffs were the main reason prices weren’t allowed to fall and the economy wasn’t able to restructure. The Fed then printed an insane amount of money in 1933, which caused another bubble that crashed in 1937. Modern university researchers agree with this view on Hoover.   The real question is: Why did doing the exact opposite of what NGDP-targeting supporters advocate work so well in 1920? I haven’t seen Horwitz answer that.

    Zachary Woodman “The NGDP targeters think there should have been more expansion, that QE wasn’t enough”   You’re, again, misunderstanding the NGDP targeters’s position. True, Sumner and the Market Monetarists think there should have been more QE. However, the Monetary Equilibrium theorists, as Horwitz says, argue that it is unclear whether QE was big enough or not. The point was that the transmission mechanism was distorted by paying interest rates on reserves (which the Mises Institute is also against). Had the Fed not been doing that beginning in 2008, the QE they put in may have been too large.   It’s not a question of “too large” or “too small” it’s a question of kind.   I agree with Rothbard that the other actions in the Great Depression (ie. the Tarriffs, the National Labor Relations Board, National Recovery Act etc.) completely distorted the market and made things worse . Friedman says that, Sumner says that, nobody relevant to this discussion disagrees. But those policies have nothing to do with the run on the banks and the destruction of money supply that occurred in 1930-33.

    Andrew Criscione You are saying that, because the money supply shrank during 1930-33, the depression happened. But correlation is not causation. The money supply shrinking is the cure. You can draw a correlation between medicine intake and illness, but that wouldn’t show its causation, the opposite in fact.   And I’m not talking about base money shrinking, just to be clear: Base money stays relatively constant as a pivot (or it used to before the Fed got rid of it). In a fractional system, a cluster of error means lots of bankruptcies, and most money is credit, so the bankruptcies shrank the larger money aggregates, but not the base money.   Two medicines are needed to cure a depression: Monetary inaction, and floating prices. In 1920 we had both. From 1930-33 we only had one.   The money supply shrank in depressions before 1913: Whenever there are a lot of bankruptcies, the money supply shrinks in a fractional reserve system unless a central bank is pumping out enormous amounts of paper by expanding the monetary base drastically. For the same reason, the nominal GDP shrank during pre-Fed depressions.   So I don’t see how a central bank pumping out lots of paper during a depression resembles free banking at all.   When the state floods the market with high-powered i.e. base money, whatever the distribution scheme is, prices are fixed below what they otherwise would have been. If the central bank shrinks the base money, i.e. the pivot, that would be bad, I agree with you there. That would cause a shortage on the other end, just flip the supply/demand curve.  But for the same reason that would be bad: Whenever the central bank expands the money supply, it fixes interest rates lower than they otherwise would have been i.e. the market rate. And I don’t have to explain to you what lower-than-market interest rates do to the Hayekian Triangle. My point is that, even during the “deflationary” 1930s and during 1920, the central bank didn’t contract the supply of the money pivot/base. The base stays relatively constant over time.   If we’re not going to go back to a gold standard, and I’m not sure myself whether that would necessarily be a good thing in and of itself , what we could do is simply make the monetary pivot the supply of cash. Print new cash for wear and tear but nothing else. Strictly tie high-powered money and the monetary base to the supply of cash. ]This way, since people don’t burn money and it’d be state policy not to either, we wouldn’t have to worry about monetary base deflation i.e. the Hayekian Triangle becoming convex. And if we follow Mises’ advice to “turn the presses off, and keep them off!”, with some modification for wear and tear on paper money I suppose, we’d never have to worry about inflation of the monetary base. Rather than try and do what Japan accidentally ended up doing plus or minus a few tenths of a % per year, which involves wildly fluctuating the base money supply, why not try to replicate what the market chose before we got into the central bank nightmare: A relatively stable monetary pivot/base, with free banking determining the larger money aggregates, interest rates, and nominal GDP.   A hokey metaphor I came up with:  A prankster sneaks into a farmer’s house and replaces half his eggs with fake eggs. Eggs are savings: The market thinks the savings are real, and acts as if they are. The farmer spends all his money on consumption and long-term investment, anticipating a huge egg harvest which won’t come. Nothing can ever justify those fake eggs being snuck in to the farmer’s hen house, since it always causes problems.

    Zachary Woodman Money supply only shrank by 5.6% during the Depression of 1920. By comparison, between 1929 and 1933, money supply shrank nearly 31%. The difference is there were a series of bank runs in 1930-33 that did not take place at all during the Great Depression . There was significantly less “contagion of fear,” to quote Milton Friedman and Anna Schwartz, in 1920 that did take place in 1930. The biggest difference between the two, as my professor Ivan Pongracic points out “was bad times in the farm belt, where the banks were especially weak and poorly diversified.”   The reason why banking panics in 1930 warranted action on the part of central banks whereas previous banking panics were resolved relatively quickly without a central bank (1893, 1907) was because the Fed had nationalize clearing houses (see Pongracic’s quote on Larry White in that article for that). I can’t seem to find data on NGDP during 1920, but I suspect it did not fall an incredible amount especially compared to the Great Depression. Monetary policy may have been slightly looser, and that may have been unnecessary in that case, but the lack of banking panics in 1920 makes it not comparable to banking panics like 1930 and what would have happened absence of Fed action in 2008 with the Central Bank in control of clearing houses.   With the given monetary regime, it is necessary most of the time for the bank to act with loose monetary policy in reaction to financial crises to avoid deflationary spirals like what happened in 1930. For that reason you are wrong when you say   “Two medicines are needed to cure a depression: Monetary inaction, and floating prices.”   Monetary inaction is sufficient if there aren’t massive bank closures, but monetary action is necessary so long as you have monopolization of clearing houses.   “My point is that, even during the ‘deflationary’ 1930s and during 1920, the central bank didn’t contract the supply of the money pivot/base, i.e. gold. The point is that the base stays relatively constant over time.”   Not true, the bank did restrict monetary base in 1936, which caused the onset of the secondary depression in 1937.   “So I don’t see how a central bank pumping out lots of paper during a depression resembles free banking at all. I know we’ve never had free banking, but to the degree that we’ve come close, the market responded in the exact opposite way to depressions, than Selgin is saying.”   Again, that wasn’t free banking in all those depressions (eg., 1836, 1872, 1893, and 1907). If you want to assess how free banking reacts to crises, turn to Scotland  and Canada. Again, Selgin (along with Larry White) literally wrote the book on that. That view is also fortified by Roger Garrison in the final section of this paper.   Furthermore, it might be true that there are short-time falls in money supply as there is some delay in the mechanism of providing liquidity in face of a fall in V.   “Why not try to replicate what the market chose before we got into the central bank nightmare: A relatively stable monetary pivot/base, with free banking determining the larger money aggregates, interest rates, and nominal GDP.”   First of all, because we are currently operating under a fundamentally different banking system. Clearinghouses can’t work the way they did prior to the Federal Reserve. I, again, turn over to George Selgin: In short, free up the banks all you like; today, in the U.S., they will continue to receive and pay fiat Federal Reserve dollars, so long as no steps are taken to actually demonetize such dollars. Banks might, of course, also offer notes and deposits denominated in other less popular but still well-established currencies; and a few might even offer gold accounts and notes. But such non-dollar bank monies will be but tiny sideshows compared to the main act.   And it will be a rare bank indeed that dares to enter the base-money-creation business, the rest remaining content to leave that business to central banks. It follows that, because it leaves the base regime largely unaltered, a move from regulated to free banking today would not serve to eradicate inflation or otherwise guarantee monetary stability. Such a move would have led to improved stability a century or more ago, because it would have entailed depriving central banks of their role as currency suppliers: so long as gold and silver were economies’ final settlement mediums, to deprive central banks of their paper currency monopolies was equivalent to reducing if not eliminating altogether any tendency for other banks to treat central bank paper (or other central bank liabilities) as a reserve medium, and hence as what might be termed “pseudo” base money. The strict dichotomy of bank- and base-regime that applies today did not, in other words, pertain to specie-based monetary systems.   Today, however, the strict dichotomy is quite valid; and this means that freedom of banking alone will no longer suffice to make our (or any) monetary system sound. Something else is needed, then. And that something must of course consist of a reform of the base regime itself. Broadly two alternatives exist for such reform. These are: (1) the restoration of a base medium consisting of some form of specie, or perhaps of some other commodity; and (2) reform of the existing fiat regime. Both options have advantages and disadvantages. A major advantage of the second is that it is likely to be less disruptive. This advantage isn’t itself decisive. But it does supply one important reason for not simply dismissing out-of-hand proposals for imposing strict rules upon fiat-money issuing authorities, including rules that call for targeting NGDP. Where people have become long accustomed to using fiat money, the scarcity of which necessarily depends on some sort of “central planning,” to suggest a better central plan, instead of merely insisting that people “ought” to use gold (or forcing them to use it when doing so may seriously disrupt their plans), doesn’t make one a pinko–not, at least, so long as one also insists that there be no barriers in the way of people switching to gold voluntarily. It’s easy enough to say, in hindsight at least, that Imperial Russian authorities screwed-up when they decided on a railroad gauge broader than that used elsewhere in Europe. But it doesn’t follow that ripping up the old tracks post-haste, or just neglecting them, is a good idea. With base monies likewise, there is such a thing as sunk costs.   Second of all, you are ignoring the concept of money demand and the distortionary impacts that comes from changes to purchasing power in monetary disequilibrium. What is really in contention here are you are taking a Rothbardian approach and I am taking a monetary equilibrium approach to monetary theory. I would recommend Steven Horwitz’s discussion of Rothbard in Chapter 5 of Micro Foundations and Macroeconomics: An Austrian Perspective starting around page 170. The short and dirty of it is that Rothbard defines inflation and deflation in such a way that is so heavily linked to his belief in full reserve banking that he doesn’t allow for the concept of money demand. In doing so, he argues just to keep money supply constant (as you say) at least in the short term. However, if money demand suddenly falls (ie., velocity increases) and money supply is held constant, Rothbard acts as if the Purchasing Power of Money can just quickly adjust. However, that can only happen *via changes in individual prices* that, in the process, undermines the discovery process on the microeconomic level and leads to highly distortionary effects. In short, if we just keep the monetary base and money supply constant and allow for the price level to fall, that price level carries with it changes in relative prices that distort economic investment as well.   In sum, here are three flaws with keeping monetary base and money supply constant: the distortionary effects of changes in the purchasing power in money when money demand changes, and the fact that our current monetary regime of holding clearinghouses creates the possibility of massive run on banks creating a deflationary spiral, and the fact that trying to reform our base regime is highly disruptive of the plans people have made, creating regime uncertainty.   In conclusion, let me more explicitly answer this question you raised earlier:   “The real question is: Why did doing the exact opposite of what NGDP-targeting supporters advocate work so well in 1920? I haven’t seen Horwitz answer that.”   First of all, see Horwitz’s discussion of that exact question here: “Put differently: the 1920-21 episode was, in fact, a severe, though not particularly long, recession. Allowing the money supply to fall isn’t painless. Allowing the money supply to fall in an environment of severe downward wage rigidity is VERY ‘not painless.’ The 1920-21 episode doesn’t demonstrate that deflation is harmless. It DOES demonstrate that if you have deflation, it will be less bad if you have nominal wages that are flexible downward. That recession is the best example of why Hoover’s wage policies were such a mistake. Hoover, as Secretary of Commerce, wanted to intervene in that recession but Harding held him off and we had ‘only’ a severe recession. The 1920-21 episode does not, in my view, show that deflation by itself is painless.”   You likely won’t be satisfied by that point, but we are in the world of counter-factuals and you have to admit that Steve Horwitz’s counterfactual is, at least, possible. This is a question that economic theory can answer to help us with a conception of this raw data since history is not giving the direct question, and Horwitz does have a point that sudden changes in the purchasing power of money do happen with Cantillon effects that follows directly from the Hayek-Mises emphasis on the epistemic value of relative prices in the discovery process by entrepreneurs. With that theory in mind, the take on the empirical episode of 1920 that Horwitz takes does seem, at the very least, plausible. Second of all, I would respond to that question with my previous point that there wasn’t systemic bank runs that were experience during the Great Contraction. Perhaps it is the case that deflation isn’t as horrible with less wage rigidity caused by interventionist policies such as those of Hoover and Roosevelt *and* the systemic bank failures. But it doesn’t follow from the 1920 depression that inflation is not horrible as there are key differences–both in the nature and extent of the crisis and the policies surrounding it–between it and the Great Depression.

    Andrew Criscione  You say: “In short, if we just keep the monetary base and money supply constant and allow for the price level to fall, that price level carries with it changes in relative prices that distort economic investment as well.”   You cannot “keep the monetary base and money supply constant”. You are conflating two opposite policies. If the monetary base is kept constant and the money is not debased by the government through monetary base expansion, the market will determine the larger money supply, including bank deposits, etc. If the larger money supply is fixed, as Milton Friedman argued for, then QE and monetary base contraction will have to alternately be engaged in order to fix the larger money supply at some number. If the nominal GDP is fixed, alternating between QE and monetary base deflationwill also have to occur. If interest rate targets are pursued, as in the Taylor Rule, alternating between QE and monetary base deflation will have to occur. Monetary base fixing, by definition, involves no QE or monetary base deflation, and is the only policy that involves no QE or monetary base deflation.   We no longer have a monetary base/pivot, but a pivot could be re-established, whether or not it involves gold. This would chiefly involve ceasing interest payments on Fed deposits, which we’re both in agreement would be a good thing. The question is: Once we establish a clear monetary pivot again, should we debase it?   Advocates of a privately or publically run gold standard, whether they supported free banking or full-reserve banking, were opposed to debasement of the monetary base by the state, when the monetary base was gold. “Debasement” is a curse word in the Austrian literature: The Mises Institute has compiled pretty much all of it, and a quick search for the word “debasement” on their website returns 186,000 results, check for yourself to see whether any of them are positive. I can’t see any of the older Austrians being in favor of this, they were fiercely opposed to debasement of the pivot/base when it still involved a strong or loose tie to gold, so why would removing that last vestige of fiscal/monetary restraint from the state make Austrians more eager for monetary base expansion than they were before?   As Mises put it in The Theory of Money and Credit: In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur.   So: How do we determine demand for money? Well, one thing is certain: Like demand for any other good, it cannot be determined by the state. If the market is allowed to determine the larger money aggregates, then supply and demand will meet. Note that Mises was friendlier than Rothbard to free banking. But if the state interferes with this process by debasing the monetary base (which also fiddles with interest rates, whether or not that’s what the Fed is trying to do), then this is inflation, in the sense that Mises defines it. And in this sense: Inflation always causes harmful distortion.   The Hayekian Triangle becomes distorted/concave when the money supply increases faster than demand for money due to state expansion of the monetary base: There is overinvestment in final-stage capital and early-stage capital, with a shortage of investment in mid-stage capital. This is because the artificially low interest rate that monetary base expansion produces leaves a gap between savings supplied and savings demanded: This gap is made up for through the newly created money arising from monetary base expansion.   In order to fix this distortion, investment in mid-stage capital must increase, and investment in early and late stage capital must decrease. They must increase and decrease, respectively, until the Triangle is flattened out. In order to incentivize investment in mid-stage capital, and discourage investment in early and late state capital, the interest rate must rise from its sub-market price-fixed level back to its market level. It was at its sub-market price-fixed level because of monetary base expansion by the central bank. In order for the interest rate to rise back to its market level, the central bank must stop engaging in the activities that are fixing its price below the market level: Monetary base expansion.   Can the Hayekian Triangle become convex, i.e. can interest rates overshoot market levels due to Fed contraction of the monetary base (or even not enough Fed expansion of the monetary base)? Well, this would mean that interest rates are higher than market levels. During a boom, interest rates are too low, and during a bust, they must recover to at least market levels. This means that interest rates need to rise at least a little during a bust. Interest rates are certainly NOT above their market levels if they are lower during the bust than they were during the boom, which is the case almost everywhere today thanks to monetary stimulus. Central banks almost universally lower interest rates during recessions, with a few historical exceptions like Warren Harding’s central bank. So the arguments for monetary expansion on the grounds of the Triangle being convex make no sense in this day and age.   Selgin and Horwitz say the monetary base should be expanded enough to counteract any fall in NGDP. The NGDP has fallen during nearly all recessions in modern times. But yet the Fed has always lowered interest rates during recessions, instead of allowing them to rise to their market level, and so we know that the Hayekian Triangle isn’t convex. This means that the Hayekian Triangle is concave and NGDP targeting will prevent it from snapping back into place during a correction.   Ideally, we should end the Fed. If that can’t be done, a stop-gap measure we both agree on would be to re-create a monetary pivot by stopping interest on Federal Reserve payments and other basic reform measures. The question, then, is what to do with this pivot of high-powered money that was once the gold base. If the government could magically produce new gold at will like Scrooge McDuck in this old cartoon, should it fiddle the dial up and down to try and hit some statistical target that has deep problems (there are dozens of different ways that various governments and economic agencies calculate NGDP, it ignores black market activity and has numerous other problems that all economists admit), or should it leave this mystical dial alone? This is essentially what the government will have control over, if we re-create a monetary pivot, and we base targeters just want the government to leave that pivot/base be, with no debasement, or if we must, with a debasement that mimics the historical rate of increase of physical gold (2-3% a year).

  • timthumb

    Why Advocating Free Trade Means you Must Reject the Term “Illegal Immigration”

    Lately, immigration has been a hot button issue and because of it, the term(s) “illegal immigrant” or “illegal immigration” have been thrown around so much that they have almost lost all substantive meaning for me.  Then again, how can any objective thinker respect an argument that is solely based in ‘Authority of the State is divine, so of course it’s purposeful’? With all the rhetoric from those that claim they are pro market and liberty minded, you’d think a more Laissez-faire immigration policy would be an easy persuasion for those that are opposed to it….for reasons you think you understand, but the debate continues… so I guess we don’t.

    At face value the argument against immigration seems like a legitimate one; welfare and taxes.  I mean no one likes paying taxes and no one likes having their money go to encouraging unproductive people and increasing people’s dependency on the State. Wasteful and unnecessary spending, I’m with ya.  (If that’s the case conservatives. Eh hem…. War!) So why continue to concentrate on the symptoms of government social programs? Why still make excuses to be against immigration based on everything from a warped view of property rights to the really flimsy “They may bring in outside diseases”?

    Disease? I mean come on, they are not aliens from another planet with unknown biological conditions or time travelers from mid 14th century Europe infected with the Black Plague. Or maybe they arebut these kind of problems are not solved with putting up restrictions and making it harder for people to immigrate. Doing this just creates difficulty and assures people will take greater risk by acting in a less than favorable manner, where it will go unnoticed and unchecked, until it’s too late. (ie; the war on drugs and the violence it creates.)  A much more liberal (in the classic sense) immigration policy and a simple screening process would lower the risk and the openness of such a policy would bring potential issues to light and allow for problems to be solved quicker and easier, where we are all better off for it.

    Even more than disease is this new argument for being against immigration, of a warped view of property. Claiming government owns all the land inside the imaginary lines of jurisdiction, because the citizens “pay” taxes and therefore the USA is private property based on some misconceived Home Owner Association (HOA) idea. I mean the basic argument is: I own my house, therefore I own the land that is on it, therefore I own the entire country that my property exists within. I’m sorry, but entire counties are not and cannot be your property, (collectively) through government. I’m not even sure government owns property legitimately, let alone citizens owning large areas of a continent, via the State, just because they say so.  The imaginary lines are there for jurisdiction, not for some communist idea of shared property of everyone that has their money stolen from them (taxes) by those that operate within those same lines of jurisdiction. Even if the country was basically and HOA on a grander scale, an HOA isn’t about telling people they cannot become part of the community. The HOA is about establishing rules (that are explicitly agreed upon by buying a home/property in one) to preserve and better the community and to create growth to incentivize others to become a part of it. So even if the entire country was some massive HOA, (which it’s not) it/they would benefit from not being against the equivalent of having borders for immigration. Here is a great video explaining how property is legitimately acquired: You Can Always Leave. So at best, this “The U.S. is private property” argument, is basically the same ‘Social Contract’ theory argument that the other side often makes to justify it’s pro-government/economic ignorance perspective and as someone that doesn’t share that ideology, don’t you wan’t to separate yourself from such things?

    The only real legitimate argument against immigration is the welfare State or because it hurts the government socialized economy, but even then I’m not quite sold on that as a good reason to restrict trade and (continue to) regulate markets…specifically labor markets. Austrian economics isn’t about crunching numbers and statistics, but according to the CBPP; the Federal budget 
    for welfare spending is 10% and that is including those that had been working and paid the taxes for things like unemployment and food stamps. So factoring that in, welfare dependency spending is about 5 or 6% of the total federal budget….of everyone receiving welfare spending. Now because immigration policy is so restrictive, you essentially create a black market. So it becomes very difficult to separate the numbers between those that are “legally” in the U.S. and receiving welfare and those that are “illegally” in the U.S. and receiving benefits. Now considering the Census Bureau says that 108 Million are receiving some sort of welfare and the liberal estimates of those that “illegally” reside within the US are (way south of) 15 million. The studies also show that immigrants tend to flock to States with growth potential, rather than lavish benefits. Simple math and logic tell us that foreigners come here to produce (work) and/or create capital, rather than the opportunity to land on ‘Free Parking.’ Even if every one of those so called “border jumpers” are on welfare programs, it’s your fellow Americans that vastly outweigh and are contributing to the unsustainability of the welfare system, not the boogeymen foreigners.

    Maybe your objections to immigration are Dey tuk r jerbs, but a job cannot be taken, only given because the employer/owner/entrepreneur create the jobs and not the worker. You own your labor, but not the job. Jobs don’t simply belong to those that work them, but rather owned by those that see the  job needs to exist and thus has the final say of who should get it. The market is global, resources (such as labor) and the goods created from it are exchanged despite borders.  Also, jobs do not disappear as if there is just enough to go around. Jobs are created because to the changing and increasing economic environment due to the people in it, not by some fixed equilibrium. Jobs are not lost due to the efficiency or the saturation of the market, they simply shift to elsewhere within the structure of production or are redirected elsewhere in the economy.  This is why we are not at 50%+ employment and (while also poorer) despite the population increase over the last century. I mean, are we worse off for not having a milk man or not having an ice man and a refrigerator in our homes? My point is made with immigration at the beginning of the 20th century. They came here to work and for a better life. All they got was a simple screening process, not a welfare check (because early 20th century immigration came before government welfare programs) and the boom in population certainly didn’t result in record unemployment or bring the economy to it’s knees, but wars and government policy sure did…. has. Maybe the argument is that foreign workers in domestic markets are bringing down total wages. What about economics, does economics not apply to the labor market or what is created from letting entrepreneurs do what they do best?……Improve the lives of the masses. Here is economist Ben Powell debunking the Myths of Immigration to show you that the mainstream economics of immigration have some misconceptions.

    Don’t misunderstand, I am not defending or in support of any government welfare (redistribution). I don’t support taxes (theft) to go to foreigners that have immigrated here or American citizens alike, regardless of the reason given. I understand that the economy is tough and we need things like safety nets or ways for people to be able to sustain themselves during things like this… “recession”, but funded through the productive efforts of the rest of us in the form of taxation (theft)? It’s just asking for bubbles and economic decline. Which we are getting considering that out of 320 million people living in the U.S., only 90 million are actually doing anything for the total economy. I mean going back to those CBPP study statistics: welfare, defense, and (the only increasing thanks to the ACA) healthcare spending (yes, pensions are a problem as well, but for another post) account for nearly 60% of the total budget. There is no reason why the money that is saved by not having income subsidies, military adventurism, and socialized medicine, couldn’t be spent by individuals in the private sector (through savings/investment or creating charitable organizations) to actually properly allocate the resources to provide for the poor and needy more effectively than any government redistribution program could. The poor are worse off for having their incomes subsidized for them (through the theft of everyone else) and encouraged to be dependent, which makes us all worse off for it, as the capital is not created to flow to where it is needed the most. (providing for the needy and masses). If you still believe that immigrants come here for benefits, the best way to disincentivize such behavior is to not have have a public welfare system. It’s economics 101; simple supply and demand! To reduce demand, you raise the price and because you cannot increase prices, you’ll have to limit supply… to zero. Being the welfare system is already overburdened and we know that American citizens are mostly responsible, arbitrarily restricting immigration wouldn’t improve either the situation of welfare or immigration. So why still stand against free trade?

    Usually advocates for free markets also take issue with modern day unions, because it can make it quite easy for the workers to gang up on those who pay the wages of the worker and thus labor prices become distorted.  What you may be missing is the protectionist market unions create and what they are really benefiting from, which force artificially higher wages at the expense of productive employment. Here is our good friend Uncle Milty explaining The real role of unions. Just like the artificial markets government backed unionized labor create, immigration policy can essentially create similar externalities. Labor markets know no boundaries, productivity and people seeking a better life crosses the imaginary lines we call borders. So why put them up and be against immigration? Saying it may be a drag on our economy and protectionism in trade can be good economic policy, is essentially the same argument the other side makes with Unions.  We already know free trade is a good idea, because each party involved believes they are benefiting.  So why is labor markets that cross lines of government jurisdiction (immigration) the exception? Foreign labor into (your) domestic markets is not a zero sum game, even with welfare it’s a net positive. Why meddle in labor markets with immigration policy and burden yourself with unnecessary costs of  the restrictions, regulations, and opportunity costs of it, while create unseen negative externalities? Socialist policy always begets more socialism in attempt to fix the problems the policy was created to solve. Let’s break that cycle and embrace free trade, free the market!

    If by this point you are STILL against immigration or justifying your misconceptions by saying something like “I’m just against ILLEGAL immigration” then you are just validating my original suspicion of why you are really against immigration. This is because the State says to be and your loyalty is really with government, it promises security in the fear of the unknown (despite the chaos it delivers) and not with the prosperity of free trade and giving people the opportunity to improve their lives on their own accord and merit (which guarantees positive outcomes for everyone). Government has a terrible track record of causing serious problems in the economy and society, via it’s terrible misallocation of resources and regulatory policies. If you doubt me, pick up a major newspaper tomorrow morning and I’m sure it will go on about disruptions in markets or the instability of something or someplace. I’m not sure why you would look to them to influence your perspective and use legality as objections to free trade and labor markets, as all the evidence is against it. Can we really say that thousand of laws and thousands upon thousand of pages of legislation/regulation are necessary? I mean what has a simple government stamp of approval or using violence to control outcomes, done for the efficiency and productivity of capitalism and voluntary exchange? Government defines illegal immigrant as: an alien (non-citizen) who has entered the U.S. without government permission.  You are just agreeing with government’s definition of a government idea, that exist to serve no real purpose besides (arguably) socialism of labor. A person is not illegal, an act (that harms person or property of another) is illegal and certainly not the act for just crossing some border put up by men to restrict the the free trade of other men. I mean, permission to for the pursuit of happiness? It’s counterproductive and silly, let alone undermines The Deceleration of Independence! No person can be illegal for existing in a particular geographical location. Mere existence can never be illegal and the right to exist trumps any man made arbitrary law and border. Such acts as trade and travel should not be illegal and such government edicts should not be supported by anyone who advocates for the freedom of markets, over the coercion of the State.

    If controlling immigration through borders put up by government is such a good idea, then how has 50 country like states became so prosperous for simply having a welcome sign when people cross that  imaginary line we call a border, between let’s say Illinois and Missouri? Which are ranked 45th and 9th in Mercatus Center’s Freedom in the 50 states 2013 study. In a previous Mises Boston article; how do you think Hong Kong got so rich when it itself is a resource poor country, by putting up barriers, regulating/restricting trade? People care only to improve their lives by satisfying their subjective needs and wants of their value systems. Therefore, what’s the real objective difference between a state and a Country? Maybe imagination, just like immigration. Borders only exist in our minds, because we either believe they service a purpose or we refuse to question their validity.  By all means though, reject my argument(s) and continue to defend the safety of controls, out of fear of where accepting my premise may take you.

  • Skyline of the Freest Market in the World

    Hong Kong: A Model of Free Market Success

    As the plane descended, I saw the spectacular coastline and mountainous region that make Hong Kong a destination of such natural beauty. This was my first time in Asia and hoped it would be one of many. Fifteen hours later, I was finally on the other side of the world.

    From the moment I landed there, it was nothing short of amazing. As a special administrative region of the People’s Republic of China, Hong Kong follows the “one country, two systems” model, referring to how its political system differs from the mainland. As a sovereign state, Hong Kong enjoys a high level of autonomy for the next 100 years as stipulated by the British government upon passing control back to China in 1997.

    Along the Avenue of the Stars

    Along the Avenue of the Stars

    The first weekend I was there, I toured Hong Kong and saw the famous city skyline of Kowloon. I walked along the Avenue of Stars under the beautiful night sky illuminated by the bright lights along the water. Modeled after Hollywood’s Walk of Fame, Kowloon pays tribute to some of Hong Kong’s most famous residents, such as the late Bruce Lee, Jet Li and Chow Yun-Fat.

    Statue of Bruce Lee in Kowloon

    Statue of Bruce Lee in Kowloon

    Halfway along the Avenue of Stars, Bruce Lee, Hong Kong’s most famous resident, is memorialized in bronze against the backdrop of the skyline. Serving as a sad reminder of his premature death, the statue depicts him striking his classic pose as seen in his 1972 movie The Fist of Fury.

    World renowned for its economic prosperity and high quality of life, Hong Kong is the world’s freest economy according to the Index of Economic Freedom. Jointly created by the Wall Street Journal and the Heritage Foundation, the index measures the degree of economic freedom in every country around the glob

    Implementing the belief that individual liberty results in greater prosperity for all of society, the index designates which nations are more conducive to economic prosperity. As a supporter of free markets and limited government, I witnessed Hong Kong’s economy firsthand in a program through Georgetown University.

    In conjunction with the Asia Institute for Political Economy, I spent the month of July studying Hong Kong’s economy and how it became a free market success story. Our professors covered various topics, including the theories of Austrian economists Ludwig von Mises, Murray Rothbard, Friedrich Hayek, Carl Menger as well as economic prosperity, free trade and the decline of the American dollar.

    One of our many important economic lessons

    One of our many important economic lessons

    Another component of this unique program was to hear from the leading political, business and economic experts in Hong Kong today. Memorable guest speakers included Richard Vuylsteke, president of the American Chamber of Commerce in Hong Kong; Thomas Easton, Asia business editor of The Economist; and Andrew Work, co-founder of the Lion Rock Institute, Hong Kong’s leading free market think tank.

    While there, I wanted to absorb the culture and interact with the residents, which I was able to do during our first out-of-class activity.  An exciting yet challenging assignment for our economics class was to negotiate for five items at the night market. Temple Street marks the location of Hong Kong’s longtime tradition of vendors lining the streets selling their goods at rock-bottom prices. The night market was bright, humid and crowded as I witnessed shoppers haggling with merchants in Mandarin.

    I spent a lot of time just wanting to get lost in Hong Kong and immerse myself into its customs and traditions. A lot of us spent time exploring Lan Kwai Fong, which is a section of cobblestone streets lined with numerous shops, restaurants, bars and clubs. Known for its nightlife, Lan Kwai Fong is home to the unique Balalaika Russian Ice Bar & Restaurant. Well known for its closed-in freezer ice bar, it can accommodate a small party and is stocked with a full bar, ice counters, ice seats and fur mats.

    Lantau Island’s scenic and quaint Tai O fishing village

    Lantau Island’s scenic and quaint Tai O fishing village

    While there, I wanted to see other parts of Asia, which prompted a weekend visit to China’s other administrative region, Macau, as well as Lantau Island. I also toured an old Chinese fishing village, sang karaoke, visited an interactive exhibit in the dark, went to a trolley party, ate dim sum, climbed the highest peak for a stunning view of Hong Kong, and got caught in a typhoon.

    Hong Kong was not the only destination to choose from, but I clearly picked the right one. Due to mainland China’s oppressive government and policies, I have had some people ask, “Why China?” Anyone who has been there would understand.

    Hong Kong felt like paradise with its tropical climate and stunning landscape. It is an enchanting place full of history, high-rise buildings, mountains, bays, parks, waterfalls, and sections reminiscent of a jungle. It is, after all, Asia’s Gateway City, known for its skylines, the ice bar and free markets.

  • federal-reserve-dc

    What Is Austrian Business Cycle Theory?


    • The Austrian School is an under-respected economic school which unequivocally embraces free markets in favor of central planning.
    • Austrian Business Cycle Theory attempts to explain the business cycle through the actions of central banks.
    • Austrian Business Cycle Theory offers foresight into the effects of the Federal Reserve’s Quantitative Easing program.

    Austrian Business Cycle Theory

    abct-chartThe six main steps of the business cycle can be seen in my flowchart above.

    1. The first step to understanding an economic bust is knowledge of central bank policy prior to the bust period. The actions that explain the entire cycle are interventions undertaken by the central bank. For this example, we’ll use the fictitious island of Senyek. In the fictitious land of Senyek, central bank policy maker Eknanreb chooses to fix interest rates at near .1% to stimulate economic growth. Eknanreb can hold interest rates near .1% through an incredible inflation of the monetary supply.
    2. Eknanreb’s actions bring us to the second phase of the cycle, actions taken by banks in response to central bank policy. As the monetary supply increases rapidly under Eknanreb’s direction, more funds are able to be lent out. As more funds are able to be lent out, banks incentivize taking on a loan by offering a low interest rate.
    3. Once banks offer credit at low interest rates, businesses respond to the market signal and start to take on debt. Businesses then overinvest in projects with easy credit. The fundamental problem exists in that the credit offered at low interest rates by banks is not a real market signal. Sure, it’s a market signal in that it provokes another action, however, the origination of the market signal is inherently fake. In a free market, low interest rates arrive as a result of decisions made by market participants. For example, interest rates naturally reach low levels if market participants choose to save instead of borrow. As market participants stop borrowing and start saving, banks respond by lowering interest rates to incentivize borrowing. Decisions made by banks to lower interest rates in response to market signals from other market participants create real market signals as the signals represent actions of other market participants. Decisions made by banks to lower interest rates in response to policy directives from a central bank create false market signals, as the signals fail to come from the market.
    4. The next phases of the cycle can be explained by malinvestment. Malinvestment, the misallocation of resources, occurs once businesses have over-invested in projects with easy credit. A great way to explain malinvestment comes from Mises’s Human Action. Mises uses the example of a master builder who planned to build a large house. The builder, unaware that he doesn’t have enough bricks to complete the house, continues to build a house he can’t complete. The building of the house creates a great economic boom, and everyone involved in the project is thrilled. Once the builder reaches the last brick, he realizes what has happened, and the project comes to a grinding halt and an economic bust ensues. This example does a great job explaining what is happening on the island of Senyek. On Senyek, businesses are unaware of the false market signals driving their malinvestment. Likewise, the builder is unaware his great house has too few bricks. The builder has been fooled into allocating resources into building a giant house while Senyek businesses have been fooled into investing in projects derived from an artificial market signal. At last, the unsustainable boom period fueled by easy credit and fake market signals leads to a severe bust period. If only someone told the builder that he had too few bricks earlier, the fallout of the bust would be less severe. Likewise, if the central bank hadn’t created an artificial market signal, the economic bust period would be less severe.

    Applying Austrian Business Cycle Theory

    In the U.S., the Federal Reserve buys $65B worth of bonds every month. In accordance with the Austrian School, this fake stimulation is currently fueling malinvestment and overconsumption. Once the “Fed” completes the “taper” of Quantitative Easing, the current bond buying program, the master builder will realize the market signals he received were false, and his house will crumble. Likewise, the next catastrophe in the U.S. is not too far in the future. Actions taken by the Federal Reserve in response to the Great Recession have fueled a boom period characterized by overconsumption, and a severe bust will follow.

  • Student Loan Debt

    A Vicious Cycle Fuels The Massive Student Loan Bubble


    • A vicious cycle of government-backed loans fuels the massive student loan bubble.
    • Student loan debt is a drag on economic growth.
    • Too many young people go to college.
    • The student loan bubble resembles the recent housing market bubble.

    A Vicious Cycle & Its Impact On Growth

    student-loan-cycleThe student loan bubble begins with the government. Loans offered to students are guaranteed by the federal government. Colleges can then charge higher tuition rates if the government intends to back its own loans. The effect of government-backed subsidies and loans is staggering inflation. As seen in the image below, college tuition prices have easily outpaced benchmark inflation.

    tuition-pricesIn fact, college tuition prices have outpaced inflation every year since 1981. Secondly, college tuition increases at an average of 6% greater than benchmark inflation. One method of reducing prices would be to increase the supply of students, thereby lowing tuition costs. However, colleges choose to solve the problem by raising prices and will likely continue to do so. The effects of higher tuition costs are starting to impact the financial stability of students. Two-thirds of college students are in debt and the average graduate owes $25K. In total, student debt exceeds $1T. As a result of mounting debt, the student loan default rate is growing quickly. From 2003-2010, the student loan default rate more than doubled from 4.5% to 9.1%! To compound problems, student loans from the federal government are non-dischargeable. With non-dischargeable loans students cannot declare bankruptcy and rid themselves of student loan debt. Instead, students are only allowed to purchase essential items for survival as the federal government aggressively garnishes the wages of those in debt. An increasing number of consumers that can only purchase essentials serve as a drag on the U.S. economy.

    Too Many Young People Go To College & Similarities To Th> Housing Market Bubble

    It’s hard to argue with the statistics that indicate too many high school seniors go to college. For one, the U.S. has the highest dropout rate in the industrialized world. If the federal government didn’t guarantee student loans then fewer students would go to college. With fewer students attending traditional higher education, the runaway inflation of college tuition prices would be under control. A second effect of fewer students obtaining traditional higher education degrees would be the decrease of structural unemployment. Too many decent, well-paying vocational jobs go unfilled in the U.S. In other industrialized nations such as Germany, some students choose to attend job training programs offered by companies that are happy to hire dedicated, well-trained high school graduates. It’s healthier to both the individual and the broader economy to be a vocational worker with a $44,000 salary and no college debt than an unemployed humanities major with a frightening amount of student loan debt. In fact, half of humanities students obtain jobs that don’t require a college degree.

    That being said, a simple comparison of salaries indicates that it is unquestionably better to have a college degree than solely a high school degree. The issue is not higher education, it’s too many students pursuing higher education with a huge, government-backed loan. Similarly, too many people became “homeowners” and as household debt soared, the housing market bubble increased. Homeownership is a good thing, but becomes a problem when too many pursue it. Likewise, a college education is a good thing, but not when those who don’t need it pursue it. In both cases, the root cause lies with the federal government and its inflation fueling loans and subsidies. Just as the federal government encouraged home ownership in the years leading up to the housing market bubble, the federal government is actively pushing some students to obtain a potentially unneeded major. Even worse, as college tuitions rise, public pressure increases to increase loans and subsidies to college students! Politicians, responding to the wishes of the people then increase loans and subsidies. And in increasing government loans and subsidies, those in government only add fuel to a rapidly growing bubble that threatens to puncture growth.

  • netneutrality-tollbooth

    Net Neutrality is Central Planning of the Internet

    Should the government impose “net neutrality” legislation/regulations? The question is better asked as: Should the government fix prices for Internet data? Net neutrality mandates that all Internet service providers (ISPs) treat all data equally, instead of offering various prices for different data. For instance, some ISPs are charging Netflix extra per unit data due to the fact that Netflix eats up the vast majority of data. This would be similar to a sewer company charging more per unit sewage to a sports stadium than to its other customers in the neighborhood. By outlawing this practice through net neutrality legislation, the government is essentially subsidizing Netflix.

    Apart from Netflix, ISPs do tend to charge equally for data. This is consistent with Austrian price theory: As Rothbard writes in Chapter 4 of Man, Economy, and State: “Just as in the case of direct exchange, there will always be a tendency on the market for one money price to be established for each good.” In one ostensible exception, Netflix, a few companies do charge a different rate. But this is because Netflix is in an important sense consuming a different good: 90% of a network’s data may be treated differently by a company than .01% of a network’s data. The sports stadium may be treated differently than the homeowner by the sewage company, even though the sewage coming out is the same. Companies may charge a progressive rate to ensure one company doesn’t eat up all of its product, or if it does, that company pays a bit more for the privilege. Isn’t this what progressives are suppose to be in favor of: The largest economic actors paying more?

    The real danger in this price fixing is that it cements the Internet as a public utility under the law. Even more dangerously, it becomes a federal public utility, which is worse than a municipal one. At least the terrible decisions made in East Bumbleberry don’t affect residents of West Bumbleberry: There is some degree of competition with local government.

    In the recent Boston Globe article “A Rising Tide of Internet Regulation,” the process of turning the Internet into a public utility is explained: “More recently, Netflix elected to pay Comcast to pump its millions of data streams directly into Comcast’s Internet servers, a common Internet practice called ‘peering.’ But Netflix opposes any FCC moves that would let Comcast or another Internet provider charge more for faster access to individual homes….Advocates of Net neutrality want to forestall [Comcast charging more for home access] by invoking an existing law that lets the FCC treat broadband providers as public utilities. The FCC could then order ISPs to provide the same standard of service to all comers. But this means putting the hitherto free-wheeling Internet industry under federal control. Similar oversight of the telephone industry led to decades of technological stagnation and artificially high prices.”

    Price fixing is central planning. If an entrepreneur doesn’t have the freedom to decide prices, then what freedom does that entrepreneur have? Some make the argument that state barriers to entry have contributed to the size of currently existing ISPs, and that prices should be fixed to correct this grievance. Well, if state regulation is responsible for the size of Wal Mart, we don’t solve the problem by fixing the price of food. If state regulation is responsible for the size of banks, we’re certainly not solving any problems by fixing the interest rate. More regulation doesn’t solve the problems caused by existing regulation.

    In fact, the main problem with regulation is that it spawns additional regulation to “solve” the problems it created. As Ludwig von Mises wrote in Interventionism, first a regulation is enacted, then prices go up, then price fixing occurs to “solve” the problem, then shortages occur, then quotas are imposed to mandate companies offer the products in short supply. Finally, bankruptcies occur, it is impossible to do business, the state nationalizes the industry to “solve” the problem, and full socialism in that industry is the result. The most clear-cut example of this process at work in the US is the railroad industry. They too were forced to be “fair” and obey price fixing decrees, and later quota requirements. Then they went bust and were bailed out/nationalized/socialized by AMTRAK.

    Net neutrality legislation is mostly a solution looking for a problem, since Netflix is the only company currently affected by disparate data pricing. But there are certainly problems in the ISP industry, and those problems are caused by state intervention. The focus of Internet reformers shouldn’t be regulation, but deregulation.

    According to the recent Wired article “Don’t Blame Big Cable. It’s Local Governments That Choke Broadband Competition”:

    Local governments and their public utilities charge ISPs far more than these things actually cost. For example, rights of way and pole attachments fees can double the cost of network construction. So the real bottleneck isn’t incumbent providers of broadband, but incumbent providers of rights-of-way. These incumbents — the real monopolists — also have the final say on whether an ISP can build a network. They determine what hoops an ISP must jump through to get approval. This reduces the number of potential competitors who can profitably deploy service — such as AT&T’s U-Verse, Google Fiber, and Verizon FiOS. The lack of competition makes it easier for local governments and utilities to charge more for rights of way and pole attachments.

    Deregulation at the municipal, county, state, federal, and international level is essential for the Internet to remain a vibrant laissez faire industry that is able to operate outside of state control. As the state reaches its tentacles further and further into the Web, it will be able to do more things like UK’s recent ban of child porn that actually ended up banning dissident websites. This must be fought at all costs.

  • nate-silver

    The Signal and The Noise, by Nate Silver: an Austrian review

    Nate Silver is a figure who needs no introduction – thanks to the spectacular success of his election forecasting system, he has become a household name in recent years. In late 2012 he released a book, The Signal and The Noise, which quickly became a bestseller. In it, he discusses the art of using data intelligently in order to make predictions, with illustrative chapters showing how the ideas can be applied to fields ranging from climate science to poker. It is, overall, a superb book, meticulously researched and lucidly written, and Silver’s versatility in discussing such a wide variety of real-world applications is particularly impressive.

    However, Silver conspicuously fails to ask one very important question: how do we know which disciplines are amenable to this type of empirical reasoning in the first place? Nowhere in the book does he question the assumption – so common in modern discourse – that the road to understanding always lies in data; that if a field of inquiry can conceivably be approached via study of quantitative variables, there is no question that it should. As such, it will come as no surprise to an Austrian reader that when Silver turns his attention to economics, the results are far from convincing, even when taken on their own terms. Interestingly, the economics chapter does contain a healthy dose of Silver’s typically incisive reasoning; despite the inauspicious choice of Paul Krugman as one of his primary sources, he nonetheless manages to form a perceptively critical evaluation of the profession’s status quo, astutely highlighting many of the difficulties that economists currently face. But because he stops short of questioning the central premise of modern economics – that an economy can be evaluated through statistical measurements, and that forecasting these measurements is therefore what economics is ultimately all about – he is unable to resolve these difficulties satisfactorily, and his conclusions end up ringing decidedly hollow. A later chapter in the book is devoted to the Efficient Market Hypothesis, and the particular phenomenon of bubbles; here Silver’s approach gets him into even deeper trouble, and his explanation ends up being entirely unconvincing. It may seem unfair and unproductive to criticize an economics discussion in what is primarily a book about other topics. We nonetheless find it worthwhile to do so, because The Signal and The Noise serves as a particularly vivid illustration of the importance of methodology in the ongoing debate between Austrians and mainstream economists.

    Silver’s chapter on economics gets off to a promising start, as he takes the profession to task for their woeful record of predictive success. He notes that economists are much too confident in their GDP-forecasting ability – leading them to make predictions that have proven to be “poor in a real-world sense” – and points out that in contrast with fields such as meteorology, economic forecasts have shown little improvement over the past few decades. Guided by his discussion with Goldman Sachs chief economist Jan Hatzius, Silver then offers several very insightful explanations for why this is so. To begin with, he notes that there is little stability in the cause-and-effect relationships that emerge from the study of economic variables – for example, five of the seven “leading indicators” of the 1990 and 2001 recessions failed to indicate a problem in 2007. Furthermore, economic forecasting involves not only anticipating changes in policy decisions, but correctly gauging how these changes might impact the forecasting model itself. He cites Goodhart’s Law, which tells us that the targeting of variables by policy-makers causes them to lose their predictive value – housing prices, for instance, cease to function as a bellwether of increasing prosperity when they are deliberately manipulated by government policy. As Silver explains: “Most statistical models are built on the notion that there are […] inputs and outputs, and they can be kept pretty much separate from one another. When it comes to the economy, they are all lumped together in one hot mess.” A related problem is that the economy is a complex, ever-changing entity; as such, a seemingly well-established empirical relationship can cease to hold, seemingly without warning. This phenomenon was well illustrated in 2009, when the venerable Okun’s Law suggested that 2 million jobs should have been gained – instead, 3.5 million were lost. And as if this were not enough, we are also faced with the difficulty that much economic data is simply not very good, subject as it is to official revision months or years later. As an extreme case, the initial 4.2 percent growth estimate for the fourth quarter of 1977 was eventually rewritten as a contraction of 0.1 percent.

    At this juncture, the reader is surely entitled to ask an obvious question: why are we so certain that empirical analysis is the right approach to economics in the first place? After all, we have been convincingly shown that economic data is inherently unreliable, and that even when taken at face value, it necessarily maintains only a tenuous correspondence with the real-world phenomena that it purports to explain. Surely one very reasonable conclusion would be that economics is simply a discipline that is most effectively approached through purely deductive methods – this, of course, is what Austrians have maintained all along. But amazingly, not only does Silver fail to embrace this idea, he never even seems to consider it as a possibility. While he does praise Hatzius for basing his gloomy 2007 forecast on a coherent narrative (being “right for the right reasons”) , it remains clear that he views logic merely as a guiding force toward better empirical predictions, rather than the methodological substance of good economics in its own right. The idea that one could dispense altogether with the statistical element remains an anathema.

    A particularly striking microcosm of the entire chapter occurs when Silver acknowledges that the steady GDP growth of so-called Great Moderation between 1983-2006 was “fueled by large increases in government and consumer debt, along with various asset-price bubbles.” Very true: a more compelling indictment of GDP-based economic analysis would be hard to imagine! But Silver brings this up only in order to illustrate his point that changing economic conditions make statistical analysis a difficult task in economics. And so it leads him to offer only the stunningly insipid conclusion that the Fed may have erred in their 2007 GDP forecast because they failed to adequately consider data from prior to 1983. (!!)

    This leaves Silver in something of a bind when he tries to offer a prescription for how the economics profession might improve its performance. He remains implicitly devoted to the idea that this performance must be in the form of statistical forecasting – yet he has just finished presenting strong evidence that this approach is merely an exercise in futility. So it is no surprise that the chapter ends on a feeble note: apart from the aforementioned suggestion that predictions should be based on a logical understanding of how the world works (with which, needless to say, we entirely agree) his only substantial suggestion is that economists need to be given stronger incentives to make good predictions. But surely this is hopelessly far-fetched. As Silver himself notes, the resulting implication is that there currently exist willing consumers of bad economic forecasts; this is a rather implausible notion, and Silver gives no real evidence of why we should accept it. Moreover, even if we grant that professional incentives are in some sense a problem, it remains unclear how a successful resolution would be sufficient to overcome the formidable obstacles to successful prediction that Silver has just outlined. Will the economy cease to be a “hot mess” of inputs and outputs, just because economists are more motivated to provide accurate forecasts? As a result, in stark contrast with the other sections of the book, the reader comes away from this chapter having been offered no convincing explanation of how signal and noise are to be separated in economics.

    That Silver has failed to develop an entirely sound understanding of economics is confirmed several chapters later, when he turns his attention to financial markets, and the phenomenon of bubbles in particular. This is a prime example of an issue where the logical approach to economics favored by Austrians proves its superiority. It is quite easy to identify the underlying cause of bubbles through a simple thought experiment: where is the money coming from to support these ever-rising asset prices? Is there any evidence whatsoever that they are financed by decreased expenditure on other goods and services? When the question is considered in this manner, it immediately becomes clear that inflation of asset prices, no less than of consumer prices, is always and everywhere a monetary phenomenon. On the other hand, bubbles are inherently difficult to study empirically, so it is no surprise that commentators beholden to the positivist approach have largely come to grief in their efforts to explain them.

    Unfortunately, Silver proves to be no exception. Like so many other writers in the wake of the financial crisis, he apparently believes that psychological considerations alone constitute a sufficient explanation, and his variation on this well-worn theme is no less fundamentally inadequate. He begins by blaming bubbles on the incentives of individual traders: “so long as most traders are judged on the basis of short-term performance, bubbles involving large deviations of stock prices from their long-term values are possible – and perhaps even inevitable.” But the reasoning that he offers in support of this is blatantly circular: he notes that given the empirical probability of crash in stock prices, it can take a long time for a bubble to burst, and claims (not implausibly) that anyone who prematurely calls the top during this time is likely to find himself out of a job. The problem, of course, is that the frequency of market crashes is itself the result of the aggregate actions of individual traders – it cannot be the ultimate cause as well. Silver’s attempt to ground his case in an innate psychological propensity for “herding” behavior does not fare any better. In support, he refers to a 2008 InTrade incident, where a rogue trader temporarily pumped up the market value of John McCain’s election probability, only to see the “true” price restored six hours later. But it is difficult to understand what he is getting at here. Surely this anecdote actually provides stronger evidence for the Austrian conclusion: that in the absence of sustained manipulation, the market will rapidly smooth out all misaligned prices. Why did the InTrade distortion resolve itself in a matter of hours, instead of turning into a long-term mania? (Conversely, would anyone have noticed the housing bubble if it had lasted for six hours?) Finally, as if somehow sensing that he has not quite proven his case, Silver tosses in one final attempt at an explanation near the end of the chapter: “There might be a terrific opportunity to short a bubble […] once every fifteen or twenty years when one comes along in your asset class. But it’s very hard to make a steady career out of that, doing nothing for years at a time.” This, however, is simply bizarre: why on earth should we assume that “bubble-popping” is such a specialized career niche that its practitioners are incapable of other activity during normal market conditions?

    The upshot is that bubbles prove to be an unfortunate lacuna in the context of The Signal and The Noise, just as they are for mainstream economics in general. Silver’s discussion is sadly illustrative of the hopeless muddle that invariably results once commentators fall into the trap of attempting to explain economic processes through purely psychological mechanisms. It also highlights the vital importance of methodology in the study of economic phenomena. Had Silver come to the conclusion – so thoroughly implied by his discussion in the economics chapter – that it is a discipline best approached through a priori reasoning, he would surely have found the correct answer without difficulty. As it is, having initially chosen the wrong set of tools, not even his powerful intellect was able to construct anything close to a compelling explanation.

    In The Signal and The Noise, Nate Silver offers Austrians a ray of hope, by revealing the degree of skepticism that many well-informed commentators possess toward mainstream economics. More importantly, however, he also gives us an invaluable (if inadvertent) reminder of where we must focus our rhetorical efforts, in order to take full advantage of this state of affairs. It is nothing short of astonishing that a thinker of Silver’s caliber, having marshaled such an impressive array of evidence against the mainstream data-crunching approach, should fail to even consider Austrian-style methodology as a possible alternative. This is a quintessential example of the unquestioning belief in positivism that underlies contemporary thought – “data uber alles” seems to be the credo of 21st-century epistemology. It is this methodological error that we must first seek to correct, if we ever hope to make substantial progress in converting intelligent, open-minded people – such as Nate Silver – to Austrian economics.

  • Capture

    5 Non-Idiotic Economic Reforms Millennials Should Work For

    Rolling Stone, that bastion of intellectual economic policy analysis, has recently produced the article “5 Economic Reforms Millennials Should be Working For.” Libertarians far and wide have already rebutted the nonsense in this article, and I decided to do my part by producing a sane alternative. After all, as philosopher/engineer R. Buckminster Fuller once said: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” So here is my attempt to make Rolling Stone more obsolete than it already is, which may be difficult, since Rolling Stone is already pretty obsolete.

    1.) No More Slavery

    During the height of chattel slavery, roughly 4 million Americans were imprisoned for a crime against no one. (1) How could such a horror take place? Could you imagine if millions of Americans today were imprisoned for a crime against no one? Well, this is precisely the situation today: In modern America, 7.3 million Americans are imprisoned (2), and 75% of prisoners are in prison for crimes against no one, meaning drug, weapon, public order, and immigration “offenses” (3).

    Offenses against the state are not crimes against a victim: The state is a concept, not a person. Offending the state is a crime against no one unless there is a real victim involved. This means that there are MORE people imprisoned for crimes against no one today than there were in 1860. President Obama, with a stroke of a pen, can pardon/free more slaves than there were at the height of chattel slavery.

    It should be noted that all of Rolling Stone’s “reforms” involve taxation i.e. forced payment under threat of imprisonment. Disobeying a tax law is a crime against the state, i.e. a crime against no one. Rolling Stone’s suggestions, then, are incompatible with the abolition of slavery.

    2.) The Legalization of Summer Jobs

    It’s getting tougher and tougher for teens to find summer jobs. “Less than a third of 16- to 19-year-olds had jobs this summer…” (4) What gives? Are teenagers a bunch of lazy bums who don’t like money? Do greedy capitalists hate teenagers and deny them jobs on purpose? One obvious culprit for the absence of summer jobs is that the vast majority of potential jobs in the US are illegal.

    Think of it this way: If the government imposed a minimum income requirement on small businesses, outlawing any small business that didn’t make the minimum income, would this help the small businesses who are currently making below the minimum income? Will consumers suddenly flock to the less successful small businesses they weren’t patronizing before, in order to help the businesses comply with the law? No, of course not, the least successful small business owners would find themselves unemployed.

    Every wage laborer is a small business owner, a capitalist in charge of his own human capital, who must convince customers/employers to buy the wage laborer’s labor. If the government makes the product too expensive through price fixing, the supply and demand won’t match: There will be a shortage, and a shortage of jobs is called unemployment. Economists nowadays are generally in agreement that price fixing for goods like gasoline and laptops would result in shortages. But for some reason many turn a blind eye to the most important price of all: Labor.

    Minimum wage laws don’t just hurt teens: They also hurt young adults and many other sets of workers trying to make their way up the career ladder. Many businesses would offer training and valuable work experience to low-skill workers as apprentices/interns, but unless the worker is producing an amount of goods/services worth at least the minimum wage, it is not economically feasible to hire them. Businesses have found a loophole whereby they can pay workers nothing and call them volunteers. Obviously making nothing is not an improvement over making a buck less than the minimum wage, and so workers are worse off due to the minimum wage law.

    But even this is becoming illegal: California and several other states have passed a law mandating college credit be attached to unpaid internships. (5) So now, anyone who isn’t in college will be shut off from opportunities to climb the first rung in the career ladder. Everyone who does get to work has to pay thousands of dollars for college credit to do so. Paying thousands of dollars to work, of course, is not an economic improvement from being paid a buck less than the minimum wage.

    Among poorer populations, minimum wage laws can be so destructive that workers threatened with unemployment will riot: South Africa workers, for instance, revolt whenever the minimum wage laws are raised. (6)

    3.) An End to the College Bubble

    This one won’t require much work from millennials, since all bubbles pop, but millennials should be demanding that it pop as soon as possible. Like the Housing Bubble, the College Bubble is the result of easy-money subprime loans, guaranteed by the federal government, that created an asset bubble. “Federal aid for students has increased 164% over the past decade, adjusted for inflation… After adjusting for differences among schools, the authors find that Title IV-eligible schools charge tuition that is 75% higher than the others. That’s roughly equal to the amount of the aid received by students at these schools.” (7)

    The Housing Bubble was very painful when it popped, but all bubbles must pop eventually. The sooner the bubble pops, the less damage it causes. The cost of an asset bubble is what that money otherwise could have been spent on: Instead of loans going for overpriced houses, loans could have gone to machinery, job training, research and development, or any number of other investments that increase real wealth in the economy. And, indeed, during the peak of the Great Recession, as housing prices were plunging, money started being used for productive uses. GDP was falling due to the housing market, but manufacturing hit an all-time high in 2009. (8)

    The money that students currently spend paying off their overpriced college loans could be invested, used to produce real goods and services instead of bloated college bureaucrat salaries. $200,000 could be lent more productively to start-up companies instead of 18-year-olds majoring in art history. If the government stopped incentivizing college loans by insuring them, you would see the price of college plummet (along with the endowments of many colleges, which will not make college administrators happy, so expect them to lobby for a bailout).

    4.) Cut Off Our Welfare-Queen Parents

    If the government neatly separated the population into two tax groups, one with an average net worth 49 times higher than the other, and then took a chunk out of the poorer group’s paycheck every week and sent it to the richer group, this would be a travesty! And it is! “Older Americans are 47 times richer than young” (9), but a hefty chunk of the young people’s salaries are stolen from the poor and given to the rich, so to speak.

    In The Simpsons, a homeless man asks Grandpa Simpson if he has any change, to which he replies, “Yeah! And you ain’t gettin’ it! Everybody wants something for nothing!” He then promptly walks into the Social Security Office and says, “I’m old, gimme gimme gimme!”

    Social Security in the US is not invested in an account that grows like the Chilean Social Security System or a 401k (10). Social Security is a direct transfer from the young to the old, and since the population demographics are getting older, young people have to pay in more than they get back. Congress set aside a Social Security Trust Fund account to ostensibly make things slightly fairer for millennials, but this Trust Fund is filled with US Treasuries (11), which are promises by the federal government to tax the young even more! And even if young people were getting back everything they put into Social Security adjusted for inflation, this would be a raw deal, since they would be losing money when they need it most (economically, you can say that the marginal utility of money for young people is higher).

    Adjusted for inflation: “A single earner couple turning 65 in 2010 and earning the average wage would have paid in about $294,000 in Social Security taxes over a lifetime — but would get about $447,000 back” (12). Again, there is no interest being earned on Social Security “investments”, they are a zero sum game: Any “capital gains” on them means increased theft from the young. And Social Security is not the only form of indentured servitude for millennials: “If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion.” (13) That’s over $700,000 in debt per American; in other words, young people are born with a mortgage and no house.

    5.) Cheaper Weed

    I was expecting to at least agree with Rolling Stone about drug legalization, but it was conspicuously absent from their “reforms”. I already covered the truly sadistic aspects of drug laws when discussing slavery, but there is another economic side to drug laws that destroys human happiness and productivity.

    Drug laws make drugs more expensive: In Canada, legal THC-free cannabis costs 45 cents a pound (14). An anonymous, confidential source I cannot possibly disclose tells me that illegal cannabis costs thousands of times more (and is sometimes awful). The two goods are not equivalent, but legal hemp does give us a window into how far economies of scale, capital investment, and a fairly deregulated market could drive cannabis prices down. If alcoholic beer were illegal and cost $20 per bottle on the black market, and legal non-alcoholic beer cost 50 cents per bottle, it would give us some cause to believe that legalization would make beer cheaper.

    If drugs were far cheaper, what would the money gained by drug consumers be spent on? This, in the words of 19th-century French economist Frédéric Bastiat, is the unseen cost of prohibition. Some consumers may currently be doing cheap, deadly drugs such as methamphetamines or krokodil (15). Were drugs legalized and prices driven down, these consumers could switch to safer drugs like cannabis. This is one hypothetical reason why, when Portugal ended its drug war, drug abuse rates fell by 50%. (16)

    But what of the new, legal markets for THC-containing cannabis in Colorado and Washington? State legislators have seen the light, told the US Supreme Court to shove it (17), and created legal “taxed and regulated” cannabis markets. The only problem: If you tax and regulate a market too much, you interfere with that market’s ability to match supply and demand. The result is that there are widespread cannabis shortages in Colorado’s legal market, legal cannabis prices have been driven sky high, and the situation is so bad most cannabis consumers have chosen to risk jail and continue using the black market. (18) Millennials should be striving for a true, free market for cannabis, not a highly regulated, state-planned faux market.

    *                                         *                                      *

    Millennials should shake off their Stockholm Syndrome and stop demanding small welfare bribes in lieu of real, meaningful reform. End slavery, don’t reform it. Legalize jobs. Fire the academic establishment’s pampered bureaucrats. Stop stealing from the poor and giving to the rich. And let us have the cheap, quality weed that only a deregulated market can provide.


    (1) http://economics.ucr.edu/papers/papers03/03-12.pdf
    (2) http://www.nytimes.com/2009/03/03/us/03prison.html?_r=0
    (3) Data from 2009: This statistic is actually higher than 75%, because some misdemeanors are victimless crimes, and the study doesn’t separate misdemeanors into categories, so I didn’t count them. http://www.bjs.gov/content/pub/pdf/fjs09.pdf
    (4) http://online.wsj.com/news/articles/SB10001424127887323423804579025192355931448
    (5) http://www.policymic.com/articles/50069/unpaid-internships-aren-t-the-problem-working-for-credit-is
    (6) http://www.nytimes.com/2010/09/27/world/africa/27safrica.html?pagewanted=all
    (7) http://www.marketwatch.com/story/why-college-aid-makes-college-more-expensive-1330033152060
    (8) http://www.industryweek.com/global-economy/manufacturing-index-hits-all-time-high
    (9) http://money.cnn.com/2011/11/07/news/economy/wealth_gap_age/
    (10) http://news.investors.com/ibd-editorials/092613-672776-score-another-one-for-the-chilean-model-of-private-pensions.htm
    (11) http://www.ssa.gov/pressoffice/factsheets/WhatAreTheTrust.htm
    (12) http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf
    (13) http://www.npr.org/2011/08/06/139027615/a-national-debt-of-14-trillion-try-211-trillion
    (14) http://www.omafra.gov.on.ca/english/crops/facts/00-067.htm
    (15) http://sacramento.cbslocal.com/2013/09/27/cheap-heroin-alternative-krokodil-eats-users-flesh-from-the-inside-out/
    (16) http://www.forbes.com/sites/erikkain/2011/07/05/ten-years-after-decriminalization-drug-abuse-down-by-half-in-portugal/
    (17) The US Supreme Court even told the states that they couldn’t have medical cannabis:
    Luckily, 20 states and even the District of Columbia have disobeyed them on that:
    (18) http://business.time.com/2014/01/04/colorados-pot-shops-say-theyll-be-sold-out-any-day-now/

  • Mises-Hayek

    5 Facts that will Annoy Your Keynesian Economics Professor

    Not every college professor is a Keynesian, but there’s a good chance that yours is, or at least subscribes to part of the Keynesian mindset. If so, here are some fun facts you can bring up that desecrate the Keynesian worldview.

    1.) The Not-So-Great Depression of 1920-21

    The Great Depression (1929-1940+) was a horrible era, and it takes center stage in a lot of the current debate on economic policy. But few people mention the Depression of 1920-21. Unlike the Great Depression, which lasted one-and-a-half decades, the Depression of 1920 only lasted a year or so. During the Great Depression, massive government stimulus was used. Everyone knows that FDR was a big supporter of stimulus i.e. increasing the debt, spending money, and lowering interest rates, but it has been left out of the popular dialogue that Herbert Hoover also engaged in massive amounts of stimulus.(1) Now contrast that with the Depression of 1920, which was dealt with, as Jim Grant put it in the Washington Post:

    By raising interest rates, reducing the public debt and balancing the federal budget. Eighteen months after the depression started, it ended.(2)

    The Keynesian prescription of lowering interest rates and increasing government spending was not only ignored, but the exact opposite was done. Let 21st-century economists rub their eyes in disbelief.

    2.) The Nonexistent Depression of 1946

    Millions of Americans were employed in the armed services in 1945, and according to Keynesian logic, if they were all laid off at once and government spending was drastically cut, an enormous depression would result.

    Prominent Keynesian Paul Samuelson said:

    When this war comes to an end, more than one out of every two workers will depend directly or indirectly upon military orders. We shall have some 10 million service men to throw on the labor market…were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced.

    And indeed, the troops were all laid off, price controls ended, and federal government spending was cut by an incredible 61%. Did the worst economic catastrophe in history occur? No, the economy entered the enormous prosperity of the late 1940s and 1950s once resources were taken from the nonproductive state sector and given to the productive private sector.(3)

    3.) The Harvard Business School Study that Shows Government Stimulus Hurts the Economy

    The Keynesian theory doesn’t differentiate between good spending and bad spending: All spending in a recession/depression is good for the economy. In fact, Keynes notoriously claimed that,

    If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez faire to dig the notes up again…there need be no more unemployment.(4)

    So any study the shows government spending harms the economy deals a death blow to the Keynesian theory, but this is precisely what a Harvard Business School study found:

    Recent research at Harvard Business School began with the premise that as a state’s congressional delegation grew in stature and power in Washington, D.C., local businesses would benefit from the increased federal spending sure to come their way. It turned out quite the opposite. In fact, professors Lauren Cohen, Joshua Coval, and Christopher Malloy discovered to their surprise that companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses…’ The average state experiences a 40 to 50 percent increase in earmark spending if its senator becomes chair of one of the top-three committees.’(5)

    As the government spends more, it occupies a larger share of the economy: The government snatches resources up and crowds out private, productive investment.

    4.) The 1870s

    During the 1870s, prices in America were falling. The Keynesian theory says that wages are “sticky downwards.” This means that, if prices as a whole are falling, there will be high unemployment. But this simply was not the case in the 1870s:

    Historians long attributed the turmoil to a ‘great depression of the 1870′s.’ But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870′s depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history. Employment grew strongly, faster than the rate of immigration; consumption of food and other goods rose across the board. On a per capita basis, almost all output measures were up spectacularly. By the end of the decade, people were better housed, better clothed and lived on bigger farms.(6)

    The economy increased production faster than the amount of dollars grew. Today, in a few very fast growing industries like cell phones and laptops, prices fall, but almost every other industry grows at a slower pace than the money supply, and this means prices rise. But this doesn’t have to be the case.

    5.) Stagflation

    According to the Keynesian theory, either prices are rising and unemployment is falling, or prices are falling and unemployment is rising: A situation where prices are rising and unemployment is also rising is impossible. But this is untrue because,

    In the 1970s, however, many Western countries experienced ‘stagflation,’ or simultaneous high unemployment and inflation, a phenomenon that contradicted Keynes’s view.(7)

    To this day, macroeconomics students are taught that there is a direct trade-off between inflation and unemployment. But the 1970s show this is clearly false.

    So, What’s Going On Here?

    Despite the enormous failings of the Keynesian theory, how is it that this theory has remained the most-taught theory in the economics profession? It’s a question that’s up for debate, but I will point out this fact: The Federal Reserve is an institution that is explicitly Keynesian in its policies. The Fed lowers rates during recessions with the intent of stimulating the economy. This is also known as printing money. And what are some of the things it does with this money?

    The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession.(8)

    Now, I wouldn’t confront your professor and accuse him of corruption, he is the one grading you at the end of the day, but the Fed’s involvement in academia is an interesting fact to note.

    (1) http://www.voxeu.org/index.php?q=node/4105

    (2) http://www.washingtonpost.com/opinions/warren-harding-curing-a-depression-through-austerity/2012/01/19/gIQA5VEsEQ_story_1.html

    (3) http://econlog.econlib.org/archives/2010/07/paul_samuelsons.html

    (4) https://www.mtholyoke.edu/courses/sgabriel/keynes.htm

    (5) http://hbswk.hbs.edu/item/6420.html?wknews=052410

    (6) http://www.nytimes.com/2006/06/02/opinion/02morris.html?_r=1

    (7) http://www.britannica.com/EBchecked/topic/668896/stagflation

    (8) http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html

  • MG_6861_W

    The Intention of an “Evil” Rich Capitalist in a “Libertarian Utopia.”


    I’m sure we have all heard such a premise in conversations with those that….well, those that don’t share our understanding for markets and libertarianism. For me, the best way to understand anything is to live it and use real world examples to develop, refine, or reject perspectives. A good one came my way this past Wednesday at work, when I was let in on some “Privileged” information and in the interest of trying to maintain some anonymity of my work and those that would rather keep this information more hush hush, I will say I deal in rental and commercial property in a wealthy and a ever growing desirable community in the Boston area. I will also say that the owners of said property started from very little and then made some great business decisions over the years and even though they don’t own mansions or drive around Rolls-Royces, they probably could and if they did I don’t think it would phase or surprise many people.

    Now I’m not sure if it is fear due to ignorance or envy, but any anti-capitalistic and/or libertarian strawmen arguments needs some addressing. One such common argument being: “In a libertarian Utopia, there would be no regulations and the rich could and probably would buy up all the land around them.” This assertion is two parts; one making the fallacious argument that libertarians believe in chaos and that libertarianism is about establishing a perfect egalitarian society without any rules, which is flat out incorrect. The other being capitalism is malevolent and a capitalist’s only goal is to own and control/restrict as much as the world as possible. This is debatable, (because people’s intentions are subjective) but I will explain here (using a real world example) how such an assertion is unlikely and that it is logical that any good capitalist would have greater success with more benevolent intentions.

    I will not explain to you what libertarianism is…..or isn’t, really. For that, Lew Rockwell does a great job here.  I will also not go into capitalism or market theory. I will just be discussing the capitalist accumulation of property with the only restriction being by those unwilling to sell to them. So let’s say a rich investor rolls into a town or community and get their hands on a bunch of unused public property and buys up some real estate that someone is looking to offload. He raises the rent on the existing real estate, but also slowly improves it. Yes the tenants will have to pay more, but they get a nicer/better place to live and they also have the option to live somewhere more suitable to their needs and costs if they can’t or don’t want to afford the new price of the apartment. So people are actually making value judgments and thus improving their living standards and happiness, regardless of if they move or stay. He also builds on all that unused land, in hopes to make more money and increase his total wealth (Profit). Now this rich investor just expelled a ton of his wealth buying up properties, land and building on it. Now because he/she (To be PC) is providing value to people, (tenants) he/she is slowly creating capital and making their money back. They realize this so he buys up more properties and creates more opportunity by building more, thus increasing their total ownership or stake in the community. One could say that no regulations on what this investor or group of investors can or cannot own, (because libertarianism has no real restrictions on property and the legitimate ownership of it) would create chaos and the capitalist would end up owning all the land/property. This is a non sequitur, but a common thought process and argument among those that border on anti-(private)property and/or those that think government actually protects and regulates property and without it, the rich would just usurp all the important land.

    To entertain this absurdity though, let’s us say such a logical fallacy may not be untrue and suppose there is a possibility that small groups of or individual people would own huge amounts of property. I don’t think it would be similar to a private monarchy, where a whole town or community would be owned by one person or a few key people. However, for the sake of this argument, let’s say it would be that draconian. Let’s go down this road and pretend this happens.So What?! Do you think they are going to accumulate property the size of a community and burn it to the ground? Do you think they have a vested interest in spending their wealth, only to destroy their investment or any capital they would get from it or do you think they are going to improve the community and continue to ensure its future prosperity and desirability for everyone else? Is it better to acquire wealth through measures of control and coercion or by pleasing people and creating potential value for them through voluntary interaction? I think the latter is true, because such things are attractive to people who want a nice and safe community, which in turn also benefits them (The “evil rich” capitalist) in the long run. Logically there are very few sociopaths in this world that would go out of their way to acquire a “golden goose”, only to kill it. And I think most off of them exist within government. But for those few that cause chaos in society and negatively impact the lives of others, there would clearly be a demand for some type of arbitration to settle disputes. Any good capitalist would recognize and jump at the opportunity to capitalize off of bad actors in society, which unfortunately will always exist. Arbitration is a very important facet of society to settle disputes and transfer wealth from bad market actors to those effected by them, but dispute resolution is for another time and if you would like to learn more on the subject; this is a great Mises daily article.

    Realistically though, I don’t think a small few would end up owning all the important land absent the restrictions on the ownership of property. Remember, all legitimate transactions need to have a willing buyer and seller. (Unless you’re the first owner, but homesteading is for another time though) Some would be unwilling to sell. Others may be willing to sell, but they also have the right to discriminate. Other buyers may place greater values on the same properties and thus competition would breed ownership diversity. Also, one would reach a point where it would be impossible to properly allocate resources in their massive ownership stake and selling would eventually HAVE to be an option because of it. So there are plenty of reasons why it would be very unlikely for there to be a huge ratio to the amount of property or land owned, to those (few) that own it.  Not to say that the capitalist pursuit of property is anything like the game of Monopoly, but similar to the game, you win by everyone else making poor decisions and going bankrupt and not by who first controls the entire board.

    Now, to use my real life example to make my insignificant and drawn-out point. My work has been putting a bunch of money into their properties; upgrades, improvements, new equipment, infrastructure….Even diversifying where they invest. This “privileged” information that I received the other day, was that they bought a small automotive repair shop, very near to a ton of other properties that they already own. At the time this didn’t make any sense to me, being they have more money than they need (I hate to use that phrase, but given their wealth and how they don’t really spoil themselves, they really don’t “need” any more capital) I now understand why someone would do something like this and shame on me for thinking only in terms of monetary value. The capitalist wants to improve and ensure the quality of his community, just the same as those who live and are a part of it! I mean if you made all the right decisions and had money burning a whole in your pocket because of it, wouldn’t you buy up assets to keep out any riff raff and to ensure the cronies don’t bring down the morale and quality of the community? Talk about literally “investing in your community” Real capitalists are conservationists. They take care of and preserve their resources and wherever possible, improve upon them.

    It turns out that is exactly what these people I work for are doing! They see value in at the very least making sure this community isn’t overran with any…..undesirables. Doing this, they are improving things for their own selfish benefit and thus creating demand for others to live there and prosper. The kicker; their investment is exponentially returned to them for the value they create for others. We don’t know what will come about with this repair shop deal, but if the last 45 years of community improvement and town desirability says anything…..this will only make it better. For a libertarian, the best part is that property and the pursuit of it did this. Not government or the guns they point at peaceful people as they voluntary interact with each other to create value for society. The simple concept of property and people being allowed to own however much of it someone else is voluntarily willing to exchange, is not a bad thing and actually makes for a better society and creates value for people. I know it did for me when I moved here.

    So the next time someone tells you that we need government to manage and control the exchange and accumulation of property, because capitalists will just buy up all the property and control and oppress people. Tell them government already does that and they don’t even legitimately own any land! The failures with this terrible idea of government are not synonymous with the unrestricted concept of ones pursuit of property and should not be compared to each other. Rules created through property rights and the respect for them, are far superior to the coercive authoritarianism of the State to dictate the free association of people and their pursuit  of and with the fruits of their labor. So whether libertarian chaos rules the day and “Evil” rich people use voluntary exchange to acquire vasts amounts of property or the more reality based scenario where they pursue just enough of it to keep out cronyism, really doesn’t matter. Both would be far better than the system we have now where government gets to decided the legitimacy of the ownership of property and then uses coercion to dictate how it’s used, while also demanding rent for said legitimate ownership of property. Not to mention the irony of then claiming it exists to protect such things.  Remember to pay your property tax so you don’t get evicted from what you thought was your property and/or thrown in a cage for failure to pay…..What seems like rent to government and how does such a perversion of property rights benefit anyone or at all legitimate?35

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