PRESTOPUNDIT -- "It's a team sport, baby!"

ECONOMISTS

Other signers include William Allen, John Baden, Charles Baird, Don Bellante, Bruce Benson, Michael Boskin, Roy Cordato, Arthur M. Diamond, Jr., Martin Feldstein, Fred Foldvary, Bettina Bien Greaves, James Gwartney, Arthur Laffer, Deepak Lal, Larry Lindsey, Donald Luskin, Doug MacKenzie, Yuri Maltsev, Paul McCracken, Allan Meltzer, Steve Moore, E.C. Pasour, Jr., George Reisman, Mark Skousen, Ben Stein, Robert Tollison, Gordon Tullock, Richard Vedder, Richard Wagner, and Walter Williams, among many others.

What I see when I read that list is a lof of folks who learned applied price theory from Milton Friedman & his students, a lot of people who know their Friedrich Hayek, a lot of people who know their public choice theory, and a lot of people who understand the various fallacies of Keynesian economics. I also see a lot of economists with experiences outside of academia -- in think tanks, in public policy, and in the wider world of multi-disciplinary ideas. These aren't ivory tower "idiot savants" who do nothing but mine data and play mathematical games inapplicable to social phenomena (although it should be said that plenty of the signers excel at math and do lots of statisticals work).

More here.

"TEAM AMERICA:

Early versions of the film had puppet sex so graphic that the Motion Picture Association of America gave the movie an NC-17 rating, which prohibits any moviegoer under 17 from seeing it. But the version of the movie submitted last week, with tamer puppet passion, squeaked out an R, which admits those under 17 if accompanied by a parent or guardian. To argue the studio's case, America producer Scott Rudin prepared a 45-page memo citing such explicit films as American Psycho, Eyes Wide Shut and In the Cut, all of which received an R rating .. The MPAA declined to comment on the controversy but released its explanation for the rating: "For graphic crude and sexual humor, violent images and strong language -- all involving puppets."

ACADEMIC ECONOMISTS

As I've here noted before, many top economic departments have a 5-1, 10-1 or even 20-1 Democrat- to- Republican composition, making the economics faculty only marginally more diverse than the English, Sociology, or History departments on those same campuses. The dusty old myth assumes that academic economics is overwhelmingly populated by free-market Republicans. Sadly, the truth is that economics departments are overwhelmingly populated by second-rate physics, math, and engineering students who were originally attracted by the math and data games which substitute for economic thought in today's academic journals. These folks are what the American Economic Association special committee on graduate education has called "idiot savants" -- they don't actually know that much about what happens in a real economy or even how it works. And they certainly aren't richly schooled in economic theory -- e.g. the history of economic thought has been removed from the curriculum and most economist today have never read the work of Adam Smith, John Maynard Keynes, Friedrich Hayek, or any other economist you can name off the top of your head. What they do day in and day out is a lot of math and here and there bits of "blackboard economics" (see Ronald Coase) -- stuff premised on "simplifying assumptions" which make it inapplicable to the real world (e.g. the constant use of mathematical uncertainty rather than epistemic uncertainty -- see Donald Rumsfeld).

So in crucially important ways, a great mass of these folks aren't particularly good economists -- they've internalized a lot of mathematics but they exhibit no sound understanding of the severe limitations of all this mathematics, a problem which comes to a head when you closely study the singularly massive failure by economists to coherently use this mathematics to explain anything (for some sense of the nature and scope of this failure see the work of Alex Rosenberg or Bruce Caldwell).

The things which would lead one to favor markets over Democrats in a robust fashion are missing from the mind-set of perhaps most academic economists -- a deep understanding of economics theory, a hands-on familiarity with the real world, a genuine mastery of public policy specifics, and last (but not least) a multi-disciplinary framework for imagining the institutional foundations upon which markets and goverments rest. Lacking these, and having only their math and perhaps a "Leftist Arts" education to fall back on, it shouldn't surprise that the vast majority of economists from the ivory tower would prefer John Kerry-- not only in charge of public policy and the economy -- but also as boss.

UPDATE: Blogosphere reactions here, here, and here.

Scott Campbell from Blithering Bunny writes:

It was only after reading Thomas Sowell's Basic Economics that I started to get a feel for economics. More books like this need to be written, explaining the fundamentals of economics, and providing an overall perspective, with real-world applications. Hardly any academics that I know have any appreciation of how markets work, and some better intro books will help.

Free to Chose by Rose & Milton Friedman.

Applied Economics: Thinking Beyond Stage One by Thomas Sowell

Economics for Real People by Gene Callahan.

Economics in One Lesson by Henry Hazlitt.

Hidden Order : The Economics of Everyday Life by David Friedman.

A Modern Guide to Macroeconomics: An Introduction to Competing Schools of Thought by Brian Snowdon, Peter Wynarczyk & Howard Vane.

UPDATE II: Edward Prescott, the new Nobel laureate in economics, is calling for bigger tax cuts.

FINN KYDLAND & EDWARD PRESCOTT

Reactions:

From Tyler Cowen, and also here. From the Mises Institute -- with a comment by Roger Garrison. From Arnold Kling. From the NY Times. From Alex Tabarrok. From Brad DeLong. From the WaPo. From Mitch Townsend. From the Arizona Republic.

Google news search Kydland & Prescott & Nobel Prize economics.

Federal Reserve Bank of Minneapolis Edward Prescott Nobel Prize page.

List of Research by Edward C. Prescott -- Minneapolis Fed.

Edward Prescott Nobel Prize page -- Arizona St. U.

Google search "Edward Prescott". Google Search "Finn Kydland".

Barriers to Riches by Edward Prescott & Stephen Parente.

Business Cycle Theory by Finn Kydland.

A Modern Guide to Macroeconomics: An Introduction to Competing Schools of Thought by Brian Snowdon, Peter Wynarczyk & Howard Vane.

Conversations With Leading Economists : Interpreting Modern Macroeconomics by by Brian Snowdon & Howard Vane.

"Time to Build and Aggregate Fluctuations" by Edward Prescott & Finn Kydland.

"Rules Rather Than Discretion: The Inconsistency of Optimal Plans" by Edward Prescott & Finn Kydland.

And don't miss a week's worth of blogging on business and economics at today's new The Carnival of the Capitalists.

THE NOBEL PRIZE IN ECONOMICS

THE NOBEL PRIZE IN ECONOMICS

And here's a preview/backgrounder on the prize.

AN INTERVIEW

[The] whole interview troubled me .. I just got the impression he had no idea what real people are like, that in reality there's not much for a person to go on in siding with a candidate besides trust, that in reality most people can't go to school and study economics .. Altman seemed out of touch.

.. I asked Altman what he majored in when in college. He answered Political Science, and I said I guess that explains a lot. He wasn't happy with my reply.

A STEADY 5.4% UNEMPLOYMENT RATE

Labor also said that .. the economy added about 236,000 more jobs than previously thought in the year ended March 2004 .. After including the projected change, it appears that about 585,000 jobs have been lost since President Bush took office in January 2001.

A lackluster unemployment report and fresh questions about President Bush's rationale for invading Iraq frame the second face-to-face encounter Friday night between Bush and Sen. John Kerry ..

Bush cast the addition of 96,000 jobs as proof his tax cuts have bolstered the jobs market and the economy overall while Kerry pointed out that the country has seen a net job loss under the Bush administration, a first since the Depression.

On the day the report came out, Bush's campaign unveiled an advertisement for national cable networks that touts "nearly 2 million jobs in just over a year," resulting in "nearly 2 million more people back working," and "nearly 2 million more people with wages."

Kerry called the number "disappointing" and contended that even the jobs that have been created under Bush pay less and offer fewer benefits than those that have been lost. "The president does not seem to understand how many middle-class families are being squeezed by falling incomes and spiraling health care, tuition and energy costs," he said in a statement.

UPDATE: The Heritage Foundation takes a closer look at the numbers here. Quotable:

The [current] 5.4 unemployment rate is .. lower than the average 5.76 rate of the 1990s.

The brightest spot in the Labor Department�s September report is a 3.2 percent annual rate of increase for third-quarter hours worked. This is the strongest quarterly rise in seven years. It probably foreshadows 5 percent real GDP growth for the third quarter, a number that will be released on the last Thursday before the Tuesday presidential election. As for wages, average hourly earnings have increased by 3.1 percent annually through September.

2008 --

IN THE RUNNING

HERE'S AN IDEA --

THIS STUFF MATTERS.

The ability of the human species to lengthen its lifespan .. has dramatic effects on the need for saving .. The bottom line .. is that the need for savings has grown tremendously in the past fifty years. However, because of Social Security and Medicare, many people feel insulated from this dramatic increase in the need for savings ..

in the middle of the 20th century many economists succumbed to anti-saving bias. John Maynard Keynes saw the "hoarding instinct" leading to reduced demand and unemployment. His followers shared his concern that excessive saving could reduce output and employment. This anti-saving bias was the basis for Social Security's design, in which contributions and benefits were decoupled. Interviewed by Randall Parker in Reflections on the Great Depression, Moses Abramowitz said,

"We wanted to increase incomes, and so demand for goods, and so employment, and so on around. And the structure of Social Security, the fact that benefits were divorced from previous contributions, was part and parcel of the business of supporting demand. We didn't want a Social Security system where everybody paid an employment tax and didn't get immediate benefits from it. We wanted something that paid immediate benefits. But we didn't want to increase saving..."

Social Security has a built-in bias against saving. This was deliberate, based on a Keynesian distrust of thrift. Economists no longer believe that saving is contractionary. Government's largest program is designed to implement a theory that is decades out of date.

PUT A "BUY" ORDER

Virtual markets and election outcomes are discussed in this article. Friedrich Hayek and the division of knowledge come up. And this is pretty funny.

FANNIE MAY UPDATE --

A LESSON IN ECONOMICS 101:

Cuba plans to close more than 100 factories for all of October as part of a plan to deal with power shortages. Other measures to save energy include a shorter working week, reduced street lighting and scheduled power cuts. The power shortages have caused a range of problems - affecting the flow of drinking water in homes and causing fridges and freezers to stop working.

Western diplomats say Cuba is finding it difficult to make the investment its power system needs because of a US trade embargo.

KEYNES WAS WRONG.

Noneconomists imagine that God has so poorly designed the world that a lack of thrift, even tending to avarice, is, alas, necessary to keep the wheels of commerce turning, to "create jobs" or "keep the money circulating." .. It's the alleged paradox of thrift .. Dorothy Sayers, who was more than a writer of mysteries, though not an economist, complained in 1942 as a Christian about "the appalling squirrel cage . . . in which we have been madly turning for the last three centuries . . . a society in which consumption has to be artificially stimulated in order to keep production going." To tell the truth, many economists in the era of the Great Depression had reverted to this noneconomist's way of thinking. The theory was called "stagnationism." It was a balloon theory of capitalism, that people must keep puff-puffing or the balloon will collapse ..

THE TIP

"I wasn't planning on working for Wal-Mart the rest of my life."

"THE MYSTERY MEAT KNOWN AS FANNIE'S FINANCIALS"

DRIP, DRIP,

DAN

UPDATE: James Pinkerton:

The two key concepts in this never-ending techno-saga are the increasing ubiquity of Internet-based technology and the decreasing barriers to entry into a public forum. That is, anybody with a computer and a modem can be a blogger, and any blogger can be a media-player. So what comes next? The past tells us that techno-change is tectonic change. Prior to the 15th century, the Catholic Church maintained its monopoly in part by controlling Bible production. Bibles were not only scarce but were hand-scribed in Latin, which only priests could read. Then came Johannes Gutenberg, who used movable type to mass-print Bibles, eventually in local languages. Soon ordinary folk were reading the Bible for themselves and thinking for themselves. Protestantism was born. What followed was a century of religious war, but the world was transformed. One of those transformations was the radical new reality that technology would continue shaping events. So today, Rathergate is just so much foam on the surface. The deep current of our time is that the old networks have lost their power to a bunch of scruffy no-names. Techno-change is shaping history yet again.

AARON DIRECTOR,

[Director] wrote a review of Friedrich A. Hayek's "The Road to Serfdom," which had a British publisher but had been turned down for publication in America. Mr. Director urged the University of Chicago to publish what would become a landmark paean to free markets by a future Nobel laureate. The book sold more than 200,000 copies and precipitated Mr. Director's own long-held wish to join the faculty at his alma mater.

MONETARY POLICY IN CHINA

As president, I would take America in the right direction � acting vigorously to end China's illegal currency manipulation without tying one hand behind my back and taking potential options off the table.

144,000 NEW JOBS

And nearly 4 million new jobs have been added to the American economy since George Bush took office. Analysis here.

Where are the new jobs? Well there are 430,000 sellers now selling full-time or part-time at Ebay. I'm guessing most of these jobs do not show up in the W-2 payroll Employment survey.

GREENSPAN'S

"Hey, Mr. Propaganda" -- BILL O'REILLY

IS EMPLOYMENT

WHY EUROPE

FACTS

BILL CLINTON'S

SHOCKING LABOR NUMBERS

"One of every four black men [between the ages of 20 to 64] was idle all year-round .. [including] forty-four percent of black men with no high school diploma [who] were idle year-round ..".

The number of new immigrants who joined the labor force [represented] 60 to 62 percent of labor force growth. Between 2000 and April 2004, the total number of new foreign-born workers who were employed was 2.1 million. During that same period, employment of native-born workers and established foreign immigrants declined by 1.3 million, due to higher unemployment and reduced labor force participation.

ROBERT SHILLER --

And of course, the big question is when will rising interest rates change the housing market?. And then there is this:

In a recent report called "The U.S. Housing Bubble -- The case for a home-brewed hangover", HSBC Securities U.S. economist Ian Morris also made the case that home prices are out of whack when compared to rental prices, income and other key indicators. Home prices, he warned, could decline by 5 percent to 10 percent nationally over the next five years. "Expectations of future house price appreciation are spectacularly, and unrealistically, high," he said.

THE CARNIVAL OF CAPITALISTS

PLACE YOU BETS

LOSS OF SEARS CREDIT

"YOUNG AMERICAN OUTSOURCES HIMSELF TO INDIA"

MY INFLATION,

YOUR JOB AT MCDONALDS

INFLATION

MORE TIGHTENING AHEAD

Let's see. Does that mean the FED is planning to give us both higher interest rates AND higher inflation?

Chances are AMERICA'S POOR

Consider this. 64% of today's poor households have a cable or satellite TV hookup. And this. In 1970 a whopping 17% of U.S. households did not have a refrigerator. Today only 1 out of 1000 households fail to have a fridge. Or imagine this. In 1874 households spent 74% of their income on necessities (food, clothing, housing). In 1995 they spent 13% on such necessities.

All of these stats are from Nobel Prize winner Robert Fogel's The Escape from Hunger and Premature Death, 1700-2100 : Europe, America and the Third World.

UPDATE: The lesson? "Don't look at wage data, look at consumption data." So adds Tyler Cowen.

KERRY'S ECONOMICS TEAM

AMERICA'S MOST PROFITABLE EXPORT

Corporations battle the division of knowledge

Good enough, but this is the innovation I'd like to see -- major newspapers opening futures markets allowing bets on which news stories will prove to be bogus. Up side -- this might ultimately bankrupt the LA Times and NY Times.

Economist Tyler Cowen changes his mind.

China Watch.

David Hale in the National Interest quoted by ParaPundit, " China Becoming Much Larger Portion Of World Economy".

The Carnival of Capitalists.

Greenspan gave us recession & now inflation.

An economist discovers the real world.

30-year morgage dips below 6%.

The huge hidden cost of union firefighers.

Greenspan -- flying by the seat of this pants.

Hot seller at Amazon.

Milton Friedman.

[Friedman] sees businessmen and academics as the two biggest problems, albeit for opposing reasons. Businessmen want freedom for all other people, only not for themselves. Then they want various subsidies, tariffs, privileges, etc. Academics want freedom for themselves, but not for other people.

Wal-Mart & Productivity.

Quotable: "For example, in retail, the key thesis for Lewis is not just Wal-Mart increasing retail productivity, but the market response to Wal-Mart increasing productivity. The following comes from p. 92-96:

Starting in 1995, accelerated its productivity growth rate from 3.3 percent per year to 5.1 percent per year. The competition, however, increased its productivity at an even higher rate of 6.4 percent per year. When Wal-Mart captured 27 percent of the market in 1995, it could no longer be ignored. The race for survival was on. By 199, Wal-Mart had increased its market share onlu slightly, to 30 percent. One-third of the productivity growth jump in general merchandising retailing came from Wal-Mart's accelerated rate of improvement. Two-thirds came from the competitive reaction of Sears, Costco, Target, Meijer, Kohl's, MacFrugals, etc.... "

Fed Rate Hike.

The wheel of history turns.

It looks like like the Fed is going to give us months and months of slow drip water torture all over again.

The Fed statement is here.

Quotable: "underlying inflation still expected to be relatively low .. ".

InstaFisking: Let's cut to the chase. High rates of monetary growth -- i.e. inflation -- have artificially prevented prices from a benign natural falling, as huge productivity gains create supply increases at lower cost. So large productivity gains are masking substantial underlying inflation in the economy. For the Fed to now sanction higher unmasked inflation is simpy to fan the flames of an unsustainable inflation-generated artificial economic boom -- fueled in some large measure by an unsustainable housing bubble.

2:15 p.m. EDT -- the End of an Era.

In related news the value of the dollar strengthens against foreign currencies.

Don't miss

Why is the Fed raising rates?

The Boston Globe -- lowest rates in 46-years are history. Quotable: "By year's end, many economists expect the benchmark rate to double to 2 percent from its current 46-year-low of 1 percent, and then double again, to about 4 percent, by the end of 2005."

Linda Chavez on Unions -- the Interview.

Chavez is the author of the bestselling Betrayal : How Union Bosses Shake Down Their Members and Corrupt American Politics

Jude Wanniski & Galbraith.

Yes, we gotta no inflation No inflation We gotta no inflation today. I sella you no inflation. Hey, Mary Anna, you gotta no inflation? Why this man, he no believe-a what I say .. Hey, Mary Anna .. Yes, inflation, no No, yes, no inflation today We gotta no inflation. Yes, we gotta no inflation today.

Elsewhere, the Washington Times calls for a 1/2% rate increase.

Fed Goal: 2% Inflation at 2.5% Fed Fund Rate.

Also: "J. Bradford DeLong .. said he thought inflation would remain low for some time because there were still large numbers of unemployed workers. The nation has one million fewer jobs today, he said, than it did when employment peaked four years ago. In addition, he said, the adult population in the United States has expanded by about 1.4 million a year over the last four years. "We are still five to six million jobs below where we should be," Mr. DeLong said, even if one assumes that many adults will choose not to work. "We are still very short of reaching potential output.""

Bubble Trouble.

Philadelphia Fed President

FED President on Inflation.

The FED raises interest rates WEDNESDAY.

The CSM on the same story.

Taxes will go up -- and so will interest rates.

Fannie Mae and Freddie Mac are now such huge players in the mortgage market that their combined debt is close to $3 trillion, as millions of Americans have refinanced their mortgages to take advantage of low interest rates and rising housing prices. This also means that even the tiniest mistake by these organizations could have massively disruptive effects on financial markets.

The U.S. is becoming more and more dependent on foreign capital inflows to finance the federal debt and domestic investment. Indeed, foreigners now own more than 50 percent of liquid Treasury securities. Even a slowdown in foreign Treasury purchases, perhaps due to fears of a fall in the dollar, would also be massively disruptive.

Among the largest purchasers of Treasury securities has been China, whose economy has been booming. But some analysts now believe that the Chinese bubble may soon burst, just as the telecom and dot-com bubble of the late 1990s burst here. That could force the Chinese to stop buying Treasuries and start selling them. Once again, this would be massively disruptive .. ".

MORE -- Bruce Bartlett "Get Ready. Taxes have to increase".

Debt-ridden American families

U.S. Economy --

UPDATE: Postrel has more.

Not since Johnson

Take this in: during Bill Clinton's first term Government spending increased 4.2%. Under George W. Bush Government spending has increased 19.7%.

Going Up -- Grant on interest rates.

Capitalist bloggers.

Assume the economic position.

What's up with China & Japan?

USA vs. EU -- Europe ranks just above Arkansas & Mississippi.

Download the full report "EU versus USA" (pdf) by Dr Fredrik Bergstr�m, President of the Swedish Research Institute of Trade, and Mr Robert Gidehag, President of the Swedish Taxpayer's Association.

And here is the WJS on the report:

"U.S. GDP per capita was a whopping 32% higher than the EU average in 2000, and the gap hasn't closed since .. Higher GDP per capita allows the average American to spend about $9,700 more on consumption every year than the average European. So Yanks have by far more cars, TVs, computers and other modern goods. "Most Americans have a standard of living which the majority of Europeans will never come anywhere near," the Swedish study says. But what about equality? Well .. in 1999, 25% of American households were considered "low income," meaning they had an annual income of less than $25,000. If Sweden -- the very model of a modern welfare state -- were judged by the same standard, about 40% of its households would be considered low-income.

In other words poverty is relative, and in the U.S. a large 45.9% of the "poor" own their homes, 72.8% have a car and almost 77% have air conditioning, which remains a luxury in most of Western Europe. The average living space for poor American households is 1,200 square feet. In Europe, the average space for all households, not just the poor, is 1,000 square feet.

So what is Europe's problem? "The expansion of the public sector into overripe welfare states in large parts of Europe is and remains the best guess as to why our continent cannot measure up to our neighbor in the west," the authors write. In 1999, average EU tax revenues were more than 40% of GDP, and in some countries above 50%, compared with less than 30% for most of the U.S. .. ".

INFLATION -- The Economist wants to know ..

It is alarming, therefore, that monetary and fiscal policies are currently so lax. In the G7 economies the average budget deficit as a share of GDP is almost as big as at any time in the past 50 years, while global monetary policy is, by some measures, at its loosest since the 1970s � when inflation last took off."

Milton Friedman -- 4 ways to spend money.

Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I'm not so careful about the content of the present, but I'm very careful about the cost.

Then, I can spend somebody else's money on myself. And if I spend somebody else's money on myself, then I'm sure going to have a good lunch!

Finally, I can spend somebody else's money on somebody else. And if I spend somebody else's money on somebody else, I'm not concerned about how much it is, and I'm not concerned about what I get. And that's government.

And that's close to 40% of our national income .. ". MORE -- An interview with Milton Friedman.

Fed Rate Moves.

Arnold Kling -- the Left marches on.

-- the failure of wage-price controls in the United States and other countries in the 1970's
-- the poor performance of state-run enterprises in Europe and the success of Margaret Thatcher's privatization initiative in the United Kingdom in the 1980's
-- Japan's "lost decade" of the 1990's, which ended the last myth of rational central planning, as Japanese industrial policy foundered in stagnation
-- the ability of computers on the Internet to self-organize in the 1990's, demonstrating that Friedrich Hayek's concept of "spontaneous order" is valid. It was Hayek who argued strenuously that the market's ability to process local information makes it more efficient than central planning.

With all this evidence in favor of markets and decentralization, the good news is that much of the Left now recognizes the efficiency of markets and is in favor of them, with some exceptions. The bad news is that the exceptions include the sectors of education, health care, and retirement security, which have been and are likely to continue to be increasing as a share of GDP. Although all of the arguments against central planning apply to government provision of these services, the Left employs its Compassion weapon there, while using the Corruption weapon to fight a rearguard action against markets everywhere else .. ". MORE "The Left's Tactical Weapons" -- Arnold Kling.

Nearly 1 out of 3 new U.S. jobs go to non-Americans.

The news report is based on this PEW Hispanic Center study (pdf).

U.S economic BOOM -- the latest.

Reagan staffer PAUL KRUGMAN exposed.

Greenspan Decoded.

Prof. Ronald Reagan.

Inflation rips at 5.5% annual rate.

Here is your carnival of inflation coverage:

"Most fund managers believe the Fed, which says it wants to raise rates at a "measured" pace, is dangerously behind the curve, keeping the accelerator too close to the floor and risking runaway inflation." "Wall Street vs. the Fed: Investors and the Fed disagree about inflation" -- CNN Money.

"A cab ride in New York now costs 26 percent more than it did a year ago. In Omaha, Neb., the price of Oxboard, a stronger form of plywood, is up 187 percent over the past six months. Since January, buying a $10,000 used car has cost about $320 more. Don't even mention the price of anything sold by the gallon. If you think things are getting more expensive, you're right. While two months ago jobs were the biggest worry, inflation is now emerging as one of the main threats to the US economy .. "This isn't pretty," says Bob Gay, chief economist at Commerzbank Securities in New York .. ". "Inflation a top threat to economy" -- Christian Science Monitor.

"Prices for commodities such as copper, soybeans and cotton, which fueled Wall Street inflation worries at the beginning of the year, have cooled off." "Signs of Inflation. Or Not." -- CNN Money

"Food and beverage prices rose 0.9 percent, the department said in its report, the biggest monthly increase since 1990." "CPI jumps but in line with forecasts" -- CNN Money.

"Our general view is that inflationary pressures are not likely to be a serious concern in the period ahead," Mr. Greenspan said."Consumer Prices Surge at Fastest Rate in 3 Years" -- NY Times.

CofC is UP.

French ambition.

You don't say.

Bruce Bartlett.

The Era of Big Government -- IT'S BACK!

Clinton & Bush II -- our worst modern Presidents.

Johnson, 4 out 15
Nixon, 3 out 15
Carter, 5 out 15
Reagan 1, 8 out 15
Reagan 2, 10 out 15
Bush, George H., 2 out 15
Clinton 1, 9 out 15
Clinton 2, 0 out 15
Bush, George W., 0 out 15

The USSR vs. Reagan's America.

Arnold Kling.

Reagan's greatest domestic achievement.

Three months -- 947,000 jobs.

An economist at Smith is railroaded by the Left.

248,000 New Jobs in May.

Yes Virginia, there is a housing bubble.

U.S. tort costs are double those in France, U.K.

Richard Ebeling.

Douglass North, Vernon Smith

Got to love this.

Inflation hits the labor market.

Inflation -- here it comes.

Blogging for grades.

A penny for your thoughts ..

The Tax Misery Index.

U.S. boom continues.

Economists grade Bush.

Capitalists + blogs =

More art!

The Edgeworth Box

Your next house will be built by a robot.

BOOM.

Bruce Bartlett on Productivity.

China by the numbers.

China.

Bruce Bartlett.

"China

Sleeping Giant -- the Bank of China.

UPDATE: The Big Picture on how Chinese demand helps fuel the oil price spike -- and how Chinese banks are cooling the red-hot Chinese economic pressure cooker.

What will Fed rate increases do

Josh Cohen brings you

I particularly liked this posting by Patterico.

James Grant -- The Fed is chasing its own tail.

Why the Fed decided to propagate inflation, after having so long battled against it, is a story that begins with the return to common usage of an old word. Late in 2002, officials began to warn of the danger of "deflation," or broadly falling prices. Everyday low prices are well and good, the central bankers allowed. Yet if prices steadily and predictably fell, people would stop buying things. They would stay home to wait for tomorrow's guaranteed lower prices. And if the American consumer stopped shopping � and borrowing to shop � where would we be?

So, last June 25, the Fed pushed the federal funds rate, the rate it directly controls, down to 1 percent, the lowest since the second Eisenhower administration. And it warned that "the probability, though minor, of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation from its already low level."

Before the Fed was founded, in 1913, there were recurrent cycles of inflation and deflation. In general, prices rose in wartime and fell in peacetime. In the last quarter of the 19th century, prices persistently fell. Technological innovation pushed down costs, and lower costs translated into lower prices. Wage-earners flourished as the spending power of money increased. Creditors prospered, too, as interest rates declined.

Then, about 1900, the world struck gold � in Alaska, Colorado and South Africa. As gold was then the monetary asset on which national currencies were based, the world, in effect, struck money. For the next two decades, prices went up.

It is a relatively new thing in finance that prices should not be allowed to fall. The Federal Reserve implicitly admits as much. On the one hand, it extols the rising productivity of the United States economy. On the other, it declares that this extraordinary progress should not be registered in falling prices. In so many words, the central bank says that what is good for Wal-Mart's customers is not necessarily good for the country.

The Fed doesn't literally print money. Instead, it manipulates the interest rate that induces others to print money. In a modern economy, money-printing takes the form of credit creation, i.e., lending and borrowing.

There has been a great deal of this in recent years. By any and all measures, America is more heavily indebted than ever before. In 1958, when the funds rate was last at 1 percent, the economy's overall indebtedness was about half of today's. Back then, overall debt (excluding the borrowings of banks and the federal government) represented 84 percent of gross domestic product. Nowadays, it stands at 163 percent of G.D.P.

The weight of this indebtedness, foreign as well as domestic, helps to explain why the Fed set its rate so low. One percent is an emergency rate, unseen before the institution of the Fed and only rarely since. It was the rate intended to raise the economy from the Great Depression and to see it through World War II and the immediate cold war era.

The Fed chairman, Alan Greenspan, and his colleagues keep saying that there is no emergency � that, on the contrary, the United States economy is a paragon of strength, lacking only an acceptable rate of job creation. Yet they have kept their rate at the emergency setting, thus fomenting a real-estate boom on Main Street and a stock-and-bond boom on Wall Street.

Now the 1 percent era is fast closing, and financial markets worldwide are shuddering. As the signs of inflation multiply, the Fed finds itself in a very interesting position. It never wanted much inflation, it protests; just a whiff would suffice.

But the subjects in the central bank's monetary experiment are human beings, not laboratory mice. When people sense that prices are going to rise, they take steps to protect themselves. They buy extra inventory, invest in so-called hard assets (houses, not bonds) and pass along their rising costs as best they can. Once instilled, inflationary habits are hard to break, as the Fed exactly understands.

And the Fed will raise its rate, though grudgingly and gradually. It will act in this fashion not only out of conviction but also, perhaps, out of a guilty conscience. It knows that its 1 percent rate drove many risk-averse people into stocks and bonds because they could no longer afford to live on the meager returns of their savings. That is at one pole of the spectrum of financial sophistication. At the other, hedge funds borrowed at ultra-low rates to speculate in everything from gold to lead. Just the prospect of a slightly higher borrowing rate has brought about disturbances in the temples of high finance.

The Fed has another reason to be conscience-stricken. It knows, or should know, that by trying to make the dollar cheaper, it has precipitated even more borrowing in an economy heavily encumbered. The greater the debt, the more deflation-prone the economy. And the more deflation-prone the economy, the more the Fed is apt to try to cheapen the dollar. The truth is that the central bank of the United States is chasing its tail."

James Grant is the editor of Grant's Interest Rate Observer.

James Grant -- "Low Rates, High Expectations" in the NY Times.

Only suckers pay taxes

Alan Reynolds on Fed Chair Arthur Burns

Despite bank tightening

The Best Places to do Business in the U.S.A.

� 1. Madison, Wis.
� 2. Raleigh-Durham, N.C.
� 3. Austin, Tex.
� 4. Washington, D.C.-Northern Va.
� 5. Atlanta, Ga.
� 6. Provo, Utah
� 7. Boise, Idaho
� 8. Huntsville, Ala.
� 9. Lexington, Ky.
� 10. Richmond, Va.

Saudi royals vs. Islamic terrorists.

Inflation & the Fed.

Producer Price Index

Inflation continues to spead

Carnival Time.

Fun with rulers.

Competive vs. non-competitive America.

"What should be on an "Economics and Philosophy" reading list?"

Here are economist Brad DeLong's picks:

* Jacques Le Goff, : Your Money or Your Life: Economy and Religion in the Middle Ages.
* Thomas Hobbes, Leviathan, selections.
* John Locke, Second Treatise of Government.
* Adam Smith, The Theory of Moral Sentiments.
* Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations.
* Jeremy Bentham, Principles of Morals and Legislation.
* John Stuart Mill, On Liberty.
* Hal Varian, Intermediate Microeconomics (chs. 29-35).
* Friedrich Hayek, The Constitution of Liberty.
* Robert Nozick, Anarchy, State, and Utopia.
* James Buchanan and Gordon Tullock, The Calculus of Consent.
* John Rawls, "Justice as Fairness."
* Kenneth Arrow, Social Choice and Individual Values.
* Amartya Sen, Development as Freedom.
* David Gauthier, The Social Contract as Ideology, Philosophy and Public Affairs.
* Jon Elster, The Market and the Forum: Three Varieties of Political Theory, in Elster and Hylland, eds., Foundations of Social Choice Theory.
* Bernard Williams, The Idea of Equality, Philosophy , Politics and Society 2nd Series.
* Amartya Sen, Equality of What?.
* Steven Shavell, Economic Analysis of Welfare Economics, Morality and the Law.
* Tibor Scitovsky, The Joyless Economy.
* William Baumol, Welfare Economics and the Theory of the State.

* Alexander Rosenberg, Economics - Mathematical Politics or Science of Diminishing Returns?.
* Deidre McCloskey, The Secret Sins of Economists.
* D Wade Hands, Reflection Without Rules: Economic Methodology and Contemporary Science Theory.
* Bruce Caldwell, Hayek's Challenge: An Intellectual Biography of F. A. Hayek.
* Daniel Hausman, The Inexact and Separate Science of Economics.
* Friedrich Hayek, Individualism and Economic Order.
* Deborah Redman, The Rise of Political Economy as a Science: Methodology and the Classical Economists.
* Bruce Caldwell, Beyond Positivism: Economic Methodology in the Twentieth Century.

Productivity up. Factory orders up.

The Fed statement.

Fed will raise rates .. next time.

Skyrocketing household debt.

Charles Krauthammer.

Blogging Capitalism.

Keep the easy money party going.

Inflation changes relative prices.

The Fed rate hike.

Inflation - even Buffett feels it.

UPDATE: Buffett warns of "too low" US interest rates. UPDATE II: "Inflation Hits the Family Dinner Table".

THE COMING GENERATIONAL STORM.

In 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18 percent more workers. How will America handle this demographic overload? How will Social Security and Medicare function with fewer working taxpayers to support these programs? According to Laurence Kotlikoff and Scott Burns, if our government continues on the course it has set, we'll see skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment, and political instability. The government has lost its compass, say Kotlikoff and Burns, and the current administration is heading straight into the coming generational storm. But don't panic. To solve a problem you must first understand it. Kotlikoff and Burns take us on a guided tour of our generational imbalance, first introducing us to the baby boomers-- their long retirement years and "the protracted delay in their departure to the next world." Then there's the "fiscal child abuse" that will double the taxes paid by the next generation. There's also the "deficit delusion" of the under-reported national debt. And none of this, they say, will be solved by any of the popularly touted remedies: cutting taxes, technological progress, immigration, foreign investment, or the elimination of wasteful government spending. So how can the United States avoid this demographic/fiscal collision? Kotlikoff and Burns propose bold new policies, including meaningful reforms of Social Security, and Medicare. Their proposals are simple, straightforward, and geared to attract support from both political parties. But just in case politicians won't take the political risk to chart a new direction, Kotlikoff and Burns also offer a "life jacket"-- guidelines for individuals to protect their financial health and retirement.

Ivory tower thieves.

Shocking but perhaps not as uncommon as you might think. And it could have been worse -- in many disciplines the thief might have been a faculty member at his own university -- or even his major professor. It happens.

Durable goods orders smash forecasts.

Property rights -- the ultimate source of growth.

compared with the more traditional determinants of economic growth -- such as physical and human capital accumulation and the growth rate of the working-age population -- the impact of property rights is quite remarkable.... [I]t seems reasonable to classify property rights among the ultimate sources of economic growth ..

Fed rate hike - Bush booster shot?

History shows that the presumed rate hikes will stimulate the economy in the near-term, while promising a bumpier economic ride over the long-term. Data compiled by Boston-based economics firm H.C. Wainwright shows that industrial production initially responds positively to rises in interest rates, with growth since 1955 averaging 4.9% when rates jump an average of 171 basis points. While not predicting a specific level of growth, David Malpass appears to agree with the Wainwright view. In recent reports the Bear Stearns chief economist has said he expects a rise in interest rates to "act as an economic accelerant."

But why? The answer isn't really very surprising. Going back to when the Fed began to cut interest rates in December of 2000, a number of economists said that rather than bring rates down gradually, the Fed should do it all at once. Their reasoning was that just as knowledge of future tax cuts can cause economic actors to push activity into the future, so too will telegraphed interest rate cuts cause individuals and businesses to wait to transact/build/invest until the Fed signals rates have hit bottom ..

If investors were to be given a signal that rates are to rise sooner rather than later, we should expect the above analogy to come into play again, only this time in the reverse. David Malpass thinks that individuals and businesses will take a "get it while you can" approach to rising rates, and lock in "mortgages, as well as commercial and industrial loans" while rates are still low..

Wainwright president David Ranson wrote in the Wall Street Journal in 1981 that "loose or tight interest rate policies don't create or destroy GNP outright - they merely reschedule it." Indeed, while rising rates can certainly stimulate economic activity in the near-term, the Wainwright study shows that this comes at the expense of long-term growth, with industrial production on average plummeting to .9% 18 months after the Fed has finished increasing rates ..

Did it ever make sense that by waving a magic wand 12 "wise men" could create economic growth? It's illogical, and as the Wainwright research makes clear, factually untrue .. all should hope that those in charge recognize that there are limits to what they can accomplish. Interest rate machinations geared toward stimulating or shrinking the economy cause economic actors to game the economic system, as they shift economic activity backward or forward depending on the direction of rates ..

Assuming an eventual hike in rates is the beginning of a pattern whereby the Fed were to attempt to manage growth through interest rate movements, investors would have reason to be nervous. Markets don't like economic instability, and returning to the H.C. Wainwright Economics study, economic growth since 1955 has been very uneven when interest rates have moved around a lot. Perhaps unsurprisingly, economic growth is most impressive over the long-term when rates move the least .. ". More -- "Rate Hikes Would Help President Bush"

Kudlow channels Knut Wicksell.

A's for Everyone.

Kudlow -- there's too much money.

Baby formula vs. BMWs vs. Medicare & slot machines.

In nations rich and poor, under all forms of government, a broad social trend is absolutely clear: As more and more of the population moves to urban areas in which children offer little or no economic reward to their parents, and as women gain in economic opportunity and reproductive control, people are producing fewer and fewer children ..

In the U.S., the direct cost of raising a middle-class child born this year through age 18, according to the Department of Agriculture, exceeds $200,000, not counting college; the cost to the parents in forgone wages can easily exceed $1 million. And while Social Security and private pension plans depend critically on parents' replenishing the nation's human capital, they offer the same benefits, and often more, to those who avoid the burdens of raising a family ..

Even more sobering are the implications for modern civilization's values. As urbanization and globalization continue to create a human environment in which children become costly impediments to material success, people who are well adapted to this environment will tend not to reproduce. Many others who are not so successful will imitate them. So where will the children of the future come from? Increasingly they will come from people who are at odds with the modern world�who either "don't get" the new rules of the game that make reproduction an economic liability, or who believe they are (or who in fact are) commanded by a higher power to procreate.

Such a higher power might be God, speaking through Abraham, Jesus, Mohammed, or some latter-day saint, or it might be a totalitarian state. Either way, such a trend, if sustained, could drive human culture off its current market-driven, individualistic, modernist course, gradually creating an antimarket culture dominated by fundamentalism�a new dark ages. History records a similar shift in third-century Rome, when pagan fertility collapsed, while that of early Christians did not. If modern secular societies are to survive, they must somehow enable parents to enjoy more of the economic value they produce for everyone when they sacrifice to create and educate the next generation .. ". More "Which Nations Will Go Forth and Multiply?".

Article adapted from The Empty Cradle : Freedom and Fertility in an Aging World by Phillip Longman.

Are you pulling your weight?

For many Americans, that $21,671 spent by the Federal government would be every penny they earn.

(via Marginal Revolution).

The Bubble Economy.

250 pinhead professors vs. 250 million American shoppers.

ALSO -- WAL-MART vs The World

In debate.

The Carnival of Capitalists.

"Deflation" -- PrestoPundit gets the last laugh.

The money pump.

The Roaring 00's.

The world may enjoy "solid growth that goes on and on and on" - rather than boom and bust, adds Richard Reid, an economist in London with Citigroup, the largest American banking firm .. ". More "Worldwide economy roars ahead".

Don't you love it. The central bankers lower interest rates well below the natural rate of interest, and elite economists begin predicting the repeal of the business cycle. Happens every time.

Getting real with economic growth statistics.

Inflation Surges.

Money madness.

OC rug maker named manufacturing "czar".

Massive Asian dollar stockpile.

Beating Poverty.

Turns out, Humphrey was wrong. At the time, we really did not ``have the means to do it'' because we did not yet know how to banish poverty and hunger. Today we do.

The answer is not foreign aid, which is corrupting and often worse than useless. In many cases, it actually further impoverished an already poor country. Enriched urban elites bought luxury goods, while donated food and socialist controls drove down the local price of food, ruining the farmers on whom these subsistence economies had depended.

We now know that the secret to curing hunger and poverty is capitalism and free trade ..

.. free markets and free trade are lifting tens of millions of people out of poverty in India and China. And what has been the Democratic reaction to the prospect of fulfilling Humphrey's (and their party's) great dream? Fear and loathing. Democrats today thunder against the scourge of ``outsourcing'' ..

[What we are witnessing today is] a radical reversal of the older liberal vision of America as helpmate for the poor and suffering of the world. Interestingly, the Democrats have enough residue of this old vision that they cannot admit to having betrayed it. They pretend they are engaged in altruism. They say what they really want is for trade agreements to grant foreign workers the same labor and environmental standards that American workers enjoy ..

Unfortunately, the ruse is transparent. Everyone understands that imposing U.S. standards on Mexican or Chinese factories is a way to make them noncompetitive. They lose their one comparative advantage: radically lower costs. The factories will shut down. And their workers, rather than being helped, will be sent back to the rural destitution they had fled in hope of a better future. You can say, too bad. You can say, Americans count for more. What you cannot deny, however, is that the Democrats have given up the mantle of tribune of the world's poor .. ". More CHARLES KRAUTHAMMER.

Bill Hobbs

Productivity & America's Kick Ass Econony.

LA Times wins Pulitzers.

And these editorials on the overspending crisis in Sacramento by Bill Stall were awarded the Pulitzer prize for editorial writing.

What's your major.

This week's

America's

Are economists worth $138,000?

Wal-Mart vs. Microsoft.

Hayek vs. Stiglitz - The Economics of Bundling.

In the real world, competition is almost always messy. This leads to what I call the conflict between Hayekians and Stiglitzians. Friedrich Hayek believed that local knowledge is important, so that messy markets should be left alone. Joseph Stiglitz believes that economic theory of imperfect markets is important, so that government should intervene. Stiglitzians look for opportunities to fine tune the market whenever it departs from the theoretical model of perfect competition. In theoretically perfect markets, there is no bundling. Stiglitzians can rationalize government intervention in any situation where there is bundling. In practice, however, their choices are somewhat arbitrary. The Europeans recently decided that Microsoft is not allowed to bundle a media player with its software, although nobody stops automobile manufacturers from bundling media players (car stereos) with their products. In theory, the government could intervene everywhere it finds bundling. It could stop stores from offering two-for-one specials. It could ban frequent-flyer miles, which are a form of bundling. It could force cable TV operators to offer service by-the-channel instead of as a package, or by-the-minute instead of by-the-month. It could force cable TV operators to offer service by-the-minute, by-the-channel, for that matter. A Stiglitzian economist could come up with a theory to justify such interventions, based on analysis that fits some features of a market while leaving out others. However, it is impossible for an economist to have a complete picture of the industry's cost structure, the tastes of consumers, potential substitutes, and potential innovations -- all of which need to be taken into account in order to determine the effect of bundling. The Hayekian view is that it is better to allow local knowledge to be applied in a market with messy competition than to ask a central planner to try and dictate outcomes based on his own incomplete information .. ". More Arnold Kling.

Union Made - Rustbelt USA.

U.S. Manufacturing.

Jobs.

The Nuclear Option.

Mexico.

America 1900.

Alex Tabarrok.

Is It Hayek?

The Politics of Boom & Bust.

Planning.

Carnival of Capitalists.

Wal-Mart.

Surprise. America tops Europe.

Microsoft.

Commodity Prices & Julian Simon.

Zero Inflation -- 6.4% Growth.

U.S. Economy at Risk.

"Give a Man a Fish ..

Taxes.

Blogging Economics.

ONE GOVERNMENT ONE BANK.

Feulner on Bush.

Animation, technology & outsourcing.

Carnival Time.

Russia & Taxes.

The Economics of 18-34.

Econology.

M.I.T. & Entrepreneurship.

Capital vs. labor.

Poverty vs. Intellectual Bankrupcy.

Via AndresGentry who writes: "What seems common amongst most Western self-described leftists or socialists who I've run across in China is an excessive regard of themselves: "I'm good because I care". The second thing that's common is an inability to comprehend that non-whites, supposedly the beneficiaries of their noblesse oblige, might not agree with them or even see their supposed compassion as anything other than an unwarranted arrogance. It's thinking by rote. It's not compassion, it's feeling good about yourself. And at the end of the day, it doesn't do a jot of good for those who supposedly are the object of one's affections .. ".

Paul C. Roberts Rains on "What, Me Worry" Parade.

Spring Gas Price Spike.

Smile -- these are the good times.

Bank of Japan.

Sunk Costs.

It's not a Choice.

17-1 Democrat.

Duke economics.

Here is the current breakdown of the affiliations of the Duke economics faculty:

5 Democrats
10 Republicans
13 non-American

The American Economics Association some decades back labeled new econ grads "idiot savants" because these folks were uniformally characterizable as math wizes with little or no understanding of the economy -- either in terms of the explanatory strategy of folks like Smith and Hayek, or in terms of the everyday facts and workings of the economy. They were, in other words "idiot savants", often 2nd rate math or physics majors looking for easy entry into academic careerism. I.e. folks without a deep scientific interest in making explanatory sense of the spontaneous order of the market. And a great many of these "math jock' types -- who excel at the pseudo-science math game -- happen to be grad students from Korea, India, Taiwan, etc. (thanks to Newmark's Door for the data).

Paul Krugman.

Capitalist Bloggers of the World Unite!

Jobs.

Loser States.

Globalization.

Jobs.

Economist Brian Wesbury notes that there were more limited liability corporations established in Illinois last year than any year since this form of business was allowed in 1994. He reports that 18,600 LLCs were created in 2003, a 42 percent increase over 2002. Journalist Bill Hobbs reports similar data for Tennessee. He found that 7,412 LLCs were created in that state last year, up from 6,204 in 2002. As in Illinois, this is the largest number ever recorded.

Krugman - what's the frequency Paul?

Jobs.

Kill Trees, Get Tenure.

Shopping.

Mutual Funds.

Jobs.

Economic modeling witchcraft.

Brit Unions.

Keynes vs. the Classics.

Stats via The Inflation Calculator.

Capitalism.

Yuan China Policy.

The Age of Keynes.

The Voodoo of Economics.

UPDATE: Arnold Kling take a look at the key issue.

U.S. Economy.

American Marxism.

His initial intention in attending the London School was to work with the conservative economist Friedrich Hayek. However, in the heated debates then taking place, particularly among younger scholars, Sweezy found himself increasingly attracted to Marxism. Key influences inducing this change in perspective were lectures he attended by Harold Laski at the London School and reading Leon Trotsky�s History of the Russian Revolution ..

Corporate Governance.

Economics.

Borrow & Spend.

Economics. Politics drives NBER decision on recession dating.

The Bankrupting of America. "According to Laurence J. Kotlikoff of Boston University, the present value of the gap between promised [Social Security & Medicare] outlays and projected revenue is $51 trillion -- more than four times the nation's annual GDP. Today the household wealth of Americans -- the value of their houses, 401(k)s, cars, refrigerators, toasters, socks, everything -- is about $42 trillion .. ". more GEORGE WILL.

WORLDCOM. The corruption and incompetence Greenspan's bubble bankrolled -- the story of Bernie Ebbers. And here is CNBC's David Faber on Ebbers and WORLDCOM.

Disney. "Corporate democracy in America has most often been a lot like Soviet democracy: the votes didn't really matter .. ". more FLOYD NORRIS. And don't miss Robert Musil's continuing Disney coverage.

Jobs. "Birthing grounds of entrepreneurial activity suffer from a disproportionate share of government intervention and regulation when compared to larger corporations .. the evidence from all over the world supports the premise that the best role for government in entrepreneurial development is to provide access to education about the process, and then get out of the way! .. ".
more JEFF CORNWALL. (via Bill Hobbs).

Economics. Is there a dimes worth of difference between the new Keynesians and the old Monetarists? Brad DeLong takes a look.

And Arnold Kling strikes a blow for that old time Keynesian religion.

China. Inside the Chinese economy.

Lies, Damned Lies & Paul Krugman. "Given Krugman's history of intentional distortions, does it surpise anyone that, after ommitting any mention of Medicare when discussing the Social Security surplus, he does NOT forget to mention it as a Bush "target" for "squeezing spending". Did you get that? Something like six months after Bush passes a huge new increase in Medicare spending, Krugman has the incredible gaul to talk of Bush trying to "squeeze" Medicare spending! .. ". MORE Rkayn Knowledge

UPDATE: "Krugman is the most intellectually dishonest person I've ever known. I'm dead serious. That he has a national forum in which to spew his venomous hatred is a travesty." -- Keith Burgess-Jackson, prof. of philosophy, U. of Texas. (hat tip Luskin)

UPDATE II: "Posts responding to columns of .. Paul Von Krugman have been scarcer here recently because, frankly, it is almost impossible to find a respect in which to take him seriously, including, without limitation, as an economist, a columnist, a reporter or as a provider of political arguments. He is mostly of "interest" as a free rider, degrading the credibility, good will and other intellectual property of institutions that have allowed him access to their respective tills: Princeton, the New York Times, the regretful John Bates Clark Medal committee and, increasingly, the Democratic Party itself .. ". more ROBERT MUSIL.

RIP. Favored student of Joseph Schumpeter, economist Paul Sweezy whipped the ideas of Keynes, Schumpeter and Marx into heady leftist brew once popular among academics and intellectuals. Dead at age 93.

Double Bubble. "Rare is the economy that transitions from recession to recovery and, ultimately, to expansion without an attendant rise in interest rates. And yet 27 months into the current recovery, that�s very much the state of affairs in the United States. The Federal Reserve is the key actor in this drama. Borrowing a page from the script of the New Paradigm of the late 1990s, the Fed continues to hold the view that monetary tightening need not interfere with the rapid growth of a productivity-led economy. But the prescription of low nominal interest rates introduces a new dimension of financial market risk into the equation -- the possibility of multiple asset bubbles. In an effort to spark debate over the wisdom of this policy strategy, the following �open letter� to Alan Greenspan appeared in the March 1, 2004, issue of Newsweek International .. " more from the CHIEF ECONOMIST of MORGAN STANLEY.

Jobs. "At 5.6 percent, the national unemployment rate is now lower than the average unemployment rate of the 1970s, 1980s, and the 1990s .. ". more J. EDWARD CARTER on Bush 2001-2003 vs. Clinton 1993-1995.

Jobs. Don't miss Tim Blair on how CNN is spinning 5.6 percent unemployment rate numbers -- and the comments section is also definitely worth a look (flagged by InstaPundit).

The phony benchmark behind CNN's jobs spin is the unsustainably high employment numbers produced by the Fed-generated artificial boom of the late 1990's -- with businesses in a frenzy to anyone and everyone for jobs which had no chance of being permanent. The best explanation of this artificial Fed-generated boom and bust comes from economist Roger Garrison.

Carnival! Step right up and get your Carnival of the Capitalists.

BOOK. The Coming Generational Storm : What You Need to Know about America's Economic Future by Laurence Kotlikoff and Scott Burns. From the publisher:

"In 2030, as 77 million baby boomers hobble into old age, walkers will outnumber strollers; there will be twice as many retirees as there are today but only 18 percent more workers. How will America handle this demographic overload? How will Social Security and Medicare function with fewer working taxpayers to support these programs? According to Laurence Kotlikoff and Scott Burns, if our government continues on the course it has set, we'll see skyrocketing tax rates, drastically lower retirement and health benefits, high inflation, a rapidly depreciating dollar, unemployment, and political instability. The government has lost its compass, say Kotlikoff and Burns, and the current administration is heading straight into the coming generational storm.

But don't panic. To solve a problem you must first understand it. Kotlikoff and Burns take us on a guided tour of our generational imbalance, first introducing us to the baby boomers-- their long retirement years and "the protracted delay in their departure to the next world." Then there's the "fiscal child abuse" that will double the taxes paid by the next generation. There's also the "deficit delusion" of the under-reported national debt. And none of this, they say, will be solved by any of the popularly touted remedies: cutting taxes, technological progress, immigration, foreign investment, or the elimination of wasteful government spending.

So how can the United States avoid this demographic/fiscal collision? Kotlikoff and Burns propose bold new policies, including meaningful reforms of Social Security, and Medicare. Their proposals are simple, straightforward, and geared to attract support from both political parties. But just in case politicians won't take the political risk to chart a new direction, Kotlikoff and Burns also offer a "life jacket"-- guidelines for individuals to protect their financial health and retirement."

What others have said about The Coming Generational Storm:

"I lie awake nights worrying about the fiscal crisis described in The Coming Generational Storm. This is by far the single most important problem in U.S. economic policy. Every American should read this fabulous book."
--George Akerlof, University of California, Berkeley, Nobel Laureate in Economic Sciences (2001)

"Brilliant insights on the me generation versus the next generation. Better still, smart advice on equally vexing questions like whether to invest in a 401(k) or a second mortgage."
--Sylvia Nasar, author of A Beautiful Mind

"Among academic experts, Larry Kotlikoff has earned the title 'Mr. Generational Accounting.' His unfuzzy arithmetic decisively rebuts the Bush tax cuts, which are based on the delusion that 5 - 4 = 6, not 1. Read and judge for yourself the specter of our future: too many retirees dependent on too few working-age people. Fiscal imprudence now mandates broken promises later."
--Paul A. Samuelson, Massachusetts Institute of Technology, Nobel Laureate in Economic Sciences (1970)

The Coming Generational Storm : What You Need to Know about America's Economic Future by Laurence Kotlikoff and Scott Burns.

Question for Scott Burns:

Q: Recently you wrote about Social Security and Medicare and said that, priced in today's dollars, the shortfall was $43.4 trillion in 2003 and will rise to $44.8 trillion this year. Were you summing up over a 25-year (generational accounting) span of time? It was a sobering article, and we agree with you that the silence is deafening by both politicians and retirees such as us.

A: Good question. Generational accounting considers a time period considerably longer than 25 years. Let me tell you why. When Social Security was reformed in 1983, with a major increase in the payroll tax and a future increase in the retirement age, it was based on Social Security projections for 75 years. Completed, Social Security was supposed to be fully funded for at least that long.

What happens, however, is that life expectancies change each year. We lose people who were born long ago who had shorter life spans. They are replaced by newborns with much longer life expectancies. The average life expectancy starts to creep up, year by year. As expectancies in retirement rise, so do future Social Security and Medicare liabilities.

Today, only 20 years since the last reform, Social Security is as out of balance as it was before the 1983 reform and payroll tax increase.

As a consequence, the best way to estimate the real liabilities of government programs is to use what the Social Security actuaries call ``the infinite horizon,'' a method that looks well beyond the traditional 75-year projection period.

It may seem like a trivial matter, but it's not: Unfunded liabilities more than double. Taking the shorter measure allows the politicians to make promises that buy votes. But it low-balls future costs. With elections every two years, politicians (of both parties) have no incentive to deal with the long-term future and its costs.

You can read more about this in April, when MIT Press releases The Coming Generational Storm. I co-authored the book, my first in nearly 30 years, with economist Laurence J. Kotlikoff, the prime mover in generational accounting.

The Coming Generational Storm:

Read the Prologue (pdf).
Read Chapter 1 (pdf).

Kotlikoff on Alan Greenspan's Feb. 25 Testimony on the future of Social Security

"It's nice that Alan Greenspan is finally prodding our politicians to address the nation's long-term fiscal problems. But he's using a feather, when a cattle prod is what's needed. Whether or not Greenspan knows it, our country is in worse long-term fiscal shape than Brazil. Once financial markets absorb this fact, interest and inflation rates will soar and there will be economic hell to pay. Greenspan's proposed cuts in Social Security are trivial relative to what's needed and perpetuate the myth that we can finance the baby boomers' retirement with minor fiscal adjustments.

Senators Kerry and Edwards -- along with President Bush -- are fixated on the next election and ducking their responsibilities to the next generation. Like previous politicians who've failed to address our long-term Social Security, Medicare, and Medicaid problems, they are simply children masquerading as adults. What's needed are real statesmen to propose and enact the radical and extremely painful reforms required to ensure our nation's fiscal solvency."

"Going Critical" by Laurence Kotlikoff and Niall Ferguson (pdf):

"...the U.S. government [is] effectively bankrupt"

"...when rational gloom sets in, the U.S. economy will likely 'go critical.'"

"...the decline and fall of America's undeclared empire will be due not to terrorists at our gates nor to the rogue regimes that sponsor them, but to a fiscal crisis of the welfare state."

Thanks to Alex Tabarrack who comments: "I worry when intelligent people on both the right and left start to talk about the U.S. 'going critical.'"

Law & Neuroeconomics. "This article calls for a new approach to the study of law which incorporates the findings from the emerging area of neuroeconomics .. We argue that this research can help us understand what is occurring in the brains of the individuals and knowledge gained thereby can greatly aid both in understanding the process of creation and development of law as well as its effects on human behavior. The article discusses this research and begins the analysis of applying these findings the study of law .. ". more VERNON SMITH & KEVIN MCCABE.

Economics. Economists fail the folks who pay their bills when they take a pass on the vital task of eliminating public ignorance -- producing instead large piles of dust-gathering research. More on the importance of economists in public education from Thomas Sowell.

Wealth Creation. "If the Democrats were serious about balanced budgets, they'd speak not only of tax hikes but also spending cuts. Instead, they are using the balanced-budget argument as a means of keeping money in Washington in the belief that the indefinite expansion of government, both in scope and size, is their surest way of securing and maintaining political power .. Copious tax revenues are vital to the Democrats' strategy, so they oppose any reforms that would allow Americans to keep more of what they earn. Furthermore, in an effort to disguise their true intent, they make such nonsensical assertions as the claim that raising tax rates somehow boosts economic performance.

Fact is, most Democrats are willing to sacrifice jobs and business creation in order to keep the federal government's take of the national economy large. Their income-tax policies actually aim to swell the federal treasury at the economy's expense.

An economy depends on the availability of financial capital to fund new ventures, transform ideas into reality, and raise productivity. Pumping in investment capital thus creates new jobs, boosts real wages, and ups living standards. But Washington's tax-and-spenders ignore financial capital's crucial role. They treat this money as if it can be taxed away from individuals (and corporations) with impunity .. ". MORE William Kucewicz.

China Money. U.S. TSec Snow -- China will pull the peg on the yuan. U.S. officials are in China this week helping prepare for the float of the yuan against the dollar. More stories here.

Jobs. "We are having a ferocious jobs debate, most of it fraudulent .. ". MORE Robert Samuelson. Quotable:

But no one considers it dishonorable to blame a president falsely for job loss (or to credit him falsely for job gains). The dishonesty is so routine that it's respectable. The press abets the hoax because it must report what candidates say and because it favors campaign combat over substance. Admitting the truth is no fun .. MORE ".

Sowell. "There was a time when you could legitimately contrast the idle rich and the working poor. But that time is long gone .. When it comes to full-time year-around workers, there are more heads of households who fall into that category in the top 5 percent of income earners than in the bottom 20 percent -- in absolute numbers .. ". MORE Thomas Sowell.

Jobs vs Statistics. "We are getting a false picture of where jobs comes from 1) because the [Bureau of Labor Statistics] survey doesn't break out some of these categories 2) because these growing occupations disproportionately involve self-employment or unincorporated partners and 3) for unknown reasons, even some employees who should be picked up on the payroll surveys aren't, at surprisingly high rates that no one can explain .. " MORE Virginia Postrel.

And this:

"I know of a number of aesthetic professions where jobs are growing rapidly. I found that in every such category the BLS counts were way under or, at best, obscured in categories dominated by losses in traditional manufacturing .. Some of the undercount is accounted for by failing to count self-employed people, but not all of it. I don't, however, think that the BLS's survey errors are random and therefore unimportant if we want to understand where the economy is headed .. " Still MORE Virginia Postrel.

Economics. The government inspired medical mess is putting the wammy on small business and their people.

UPDATE: The medical mess is throwing the breaks on job creation in the U.S.. Gene Expression thinks all this might motivate a call from the business community for the complete and final socialization of medicine.

Money. China's Renminbi offers new competition to the dollar as the international money of choice in East Asia. More bad news for America's most profitable export. (via the Mises blog).

Disney. Robert Musil is all over the Disney-Comcast story. Quotable: "The real advantage Comcast enjoys is that its management comes from Disney and is familiar with Disney's problems and potentials - and knows where the bodies are buried."

It's a blogosphere Carnival of Capitalists.

TRADE WAR. Why don't we hear more about the ongoing trade war against the American worker? Free trade means the elimination of trade tarrifs -- taxes -- between people engaging in exchange. American businesses are allowed to engage in free trade with with foreign workers (either directly or via exchanged goods) -- but American businesses don't and can't engage in free trade with American workers. Why? Because the U.S. government has a huge wall erected between American workers and American business -- a trade wall of high taxation. Indeed the American government has effectively declared war -- a trade war -- against American workers and the businesses who wish to employ them.

I say "MR. PRESIDENT -- TEAR DOWN THAT WALL ".

How can anyone argue that American business should be allowed to engage in free -- untaxed --trade with overseas workers, and not at the same time advocate the complete elimination of the trade wall which exists between American workers and American employers? All of the arguments for free trade between American businesses and foreign employees and foreign goods apply no less to American employees and American goods. BUT THERE IS NO FREE TRADE BETWEEN AMERICAN WORKERS AND AMERICAN COMPANIES. A huge trade wall of taxation stands between American firms and American workers. With every American job that is "outsourced" overseas, a huge trade wall of taxation in the order of 30% and more is immediately removed between employer and employee. It is time, America, to TEAR DOWN THAT WALL and tear it down right here at home.

UPDATE: And don't miss this one on Outsourcing, Unemployment Statistics and the Black Market for Immigrant Labor.

Economics. "In a world economy, firms that forgo cheaper supplies of services are doomed to lose markets, and hence production. And companies that die out, of course, do not employ people . . ". -- More Jagdish Bhagwati.

Economics. "George W. Bush has become a master at one-sided economics. He pushed his tax cuts through Congress with the one-sided argument that reduced federal tax payments leave American taxpayers with more money to spend. When Americans spend their tax savings, more American goods will be produced. Hence, more American jobs will be created.

Bush never mentions the flip side of the tax reduction: the resulting hundreds of billions of dollars in annual budget deficits will force the federal government to borrow funds that cannot then be borrowed by American investors - and hence cannot be spent by American firms and the people they employ. The decline in demand for goods caused by the deficits can offset the rise in demand for goods brought about by the tax cuts. The net effect? Any job-creation effects of the fiscal policy will be largely, if not totally, neutralized .. ". -- Economist Richard McKenzie in today's OC Register.

Economics. "The fact is that economic forecasting is not very good in general, and all administration forecasts tend to be fairly far off. For example, the last forecast made by Bill Clinton's CEA in January 2001 confidently predicted that there would be no recession. "Let me be clear," said CEA Chairman Martin Baily, "we don't think that we're going into a recession .. ". -- MORE Bruce Bartlett

Choice Theory. "I enjoy teaching statistics in high school even more than I enjoy teaching economics. Part of the reason is that the Advanced Placement exam in statistics is so much better than the exam in economics. You can pass the economics AP just by memorizing some verbal jargon and graphical tricks. For statistics, you really need to understand the subject. Last year's statistics exam, for example, had an excellent question about decision-making under uncertainty .." MORE Arnold Kling.

Over Spending. "The most revealing factoid about the Bush administration's budget is this: After scouring the entire $2.4 trillion of federal spending, the White House found 65 programs that it deemed so unneeded or ineffective that they should be eliminated. How much do these programs cost? About $4.9 billion. Although that's a lot of money, it's only 0.2 percent of federal spending -- two-tenths of 1 percent. This qualifies as an aggressive assault on government spending?

There's the budget problem in a nutshell: Government programs are virtually immortal. Because nothing can ever be revoked, the budget becomes a perpetual motion machine for higher spending .. It will be said that Bush's budget is "irresponsible." But the irresponsibility does not lie in today's deficits .. The irresponsibility lies in the administration's unwillingness to look beyond the business cycle and present a balanced budget -- ever. It won't say: "Here's a desirable level of spending; the public benefits justify the taxes." Democrats commit the same sin." -- Robert Samuelson

Federal Spending Spree �- By the Numbers.

TheStreet's Peter Eavis -- "Bush drives the nation towards bankruptcy". Note well. Federal spending has increased $500 billion per year since 2000 -- and the country is currently running a $500 billion per year deficit. No spending increase, no deficit. It's as simple as that. But the President and the GOP Congress have been doubling and tripling budgets throughout the government -- and on top of that they've created several gigantic new spending programs.

"Two economists, Deirdre McCloskey of the University of Illinois, and Stephen Ziliak of Roosevelt University, think their colleagues do a lousy job of making sense of figures, often falling prey to elementary errors. But their biggest gripe is that, blinded by statistical wizardry, many economists fail to think about the way in which the world really works .. " MORE. (via the Mises Blog). Quotable:

In medieval Holland, it was noted that there was a correlation between the number of storks living on the roof of a house and the number of children born within it. The relationship was so striking that, according to the rules of maths that govern such things, you could say with great confidence that the results were very unlikely to be merely random. Such a relationship is said to be �statistically significant�. But the Dutch folklore of the time that storks somehow increased human fertility was clearly wrong .. A failure to separate statistical significance from plausible explanation is all too common in economics .. Ms McCloskey and Mr Ziliak looked at all the AER articles in the 1990s, and found that more than four-fifths of them are guilty of the same sin. Indeed, so pervasive is the cult of statistical significance, say the authors, that ever more economists dispense altogether with the awkward question of whether the patterns they uncover have anything meaningful to say about the real world ..

Read an earlier version of the McCloskey & Ziliak paper here (pdf).

A Hayekian Wakeup Call for the Federal Reserve. Quotable:

With the recovery well along, however, it's time to reevaluate the Administration's economic policy. In my view, Bush's tax cut policy should be made a permanent part of the economic landscape .. Federal Reserve policy is another matter entirely. Economists generally maintain that interest rates must decrease and the Fed must provide additional liquidity when the economy is in recession. Fine, the Fed has done just that. The recession officially ended more than 20 months ago, and today the overall economy is remarkably robust. Clearly, monetary stimulus is no longer necessary; indeed, if continued, it is likely to be harmful.

Real interest rates (interest rates adjusted for inflation) are at a 30-year low and the real federal funds rate (the bank-to-bank interest rate) is nearly negative. This is now spectacularly incorrect monetary policy given the current economic reality. To see why this is so it must be understood that the Fed creates low interest rates by purchasing government securities from financial institutions ("open market operations") the effect of which is to increase liquidity (credit) throughout the financial system. The "new" money created by the Fed is then lent out or invested by these financial institutions and finds its way into the economy.

As an example, here in Southeastern Florida the effects of the Fed's excess liquidity are all around us in the form of a housing "boom." Easy credit allows developers to purchase and clear land and allows builders (and their customers) to borrow and build, borrow and build. Now some home building is, of course, appropriate, but the recent vast expansion in residential housing (and the increase in prices) mostly has been fueled by "easy money" from the Federal Reserve. Absent the Fed expansion, homebuilders and developers would only be able to borrow what others had saved in savings, and interest rates would be far higher. It is time for the Fed to wean the economy back to levels of economic investment that are sustainable without Federal Reserve credit.

Higher rates will serve two purposes. First, as already argued, they will slow the pace of investment in areas where investment has been too rapid and where inflationary problems are already apparent. Second, they will increase the private savings by providing increased incentives to save. Home building will not "collapse" as the Fed withdraws liquidity; higher interest rates will encourage private savers to increase their savings, which will then fund an appropriate and sustainable amount of new investment. Further, since rates on CD's and other fixed income assets will increase, savers will be rewarded with high incomes, which they can spend or invest.

Unfortunately the Federal Reserve has pledged publicly to maintain low rates (that is, easy money) into the foreseeable future (or at least until the next national election). Bad idea. The real estate price bubble and the weakening dollar against gold and the Euro are signaling that real interest rates must increase. By continuing its anti-recession monetary policy into the recovery phase of the business cycle, the Fed risks sowing the seeds of the next business cycle downturn.

Economist Dom Armentano speaking truth to "idiot savants"1 -- the 3rd rate economists mathematician-"scientists" at the Federal Reserve.

1Anne Krueger et. al. "Report of the Commission on Graduate Education in Economics," The Journal of Economic Literature, volume XXIX Number 3, September 1991, pp. 1035-1053.

Bush Credibility Crisis. Truly disturbing analysis from Bruce Bartlett. Quotable:

Today, Congress can get all the budgetary detail it wants from CBO. Moreover, it is required by law only to use CBO estimates of the cost of budgetary proposals when considering them. Sadly, this became a loophole that the Bush administration was able to exploit to get its ill-conceived Medicare drug bill passed.

The administration knew that Congress' budget resolution provided only $400 billion over 10 years to pay for the drug benefit. Even a penny higher and theoretically the bill would have been subject to a point of order that would have delayed its passage. Any figure much larger than $400 billion would have killed it entirely.

Therefore, it was very disturbing when The New York Times reported on Jan. 30 that the Bush administration's internal estimate was that the drug bill passed by Congress would actually cost $534 billion over 10 years. There is absolutely no question that if Congress had known this figure, the bill would have gone down to defeat ..

And this:

This brings us to the most important chapter in President Bush's budget, one titled "Stewardship." Buried in an appendix volume where reporters are unlikely to notice, it paints a chilling picture of long-term budgetary trends. It shows federal spending rising from about 20 percent of the gross domestic product this year to 53 percent in 2080.

GMU economics Professor Peter Boettke on where to go to grad school if you'd like to study economics. Quotable:

If you want to be a major academic go to the best school you can go to that will pay your full way and hope that means Harvard, Stanford, Chicago, MIT --- the next 5 are good, and the next 10 are ok, and then after that all programs are equally suspect in a certain sense.

.. the key issue isn't whether I go to Clemson or Florida State or Georgia or Claremont McKenna or GMU. The key issue is whether I get into Harvard, MIT, Stanford or Chicago, and if I don't, then what niche market school best fits my needs that will pay the full way for me to go to school.

.. [George Mason University's] strength --- [is simply that it's] the best weird place to study economics in the world. If your interest is in public choice, we are a leading center for that (with a Nobel Prize to prove it and one that should have been given that we are waiting for justice to Tullock -- but not with our breaths held). If you are interested in experimental economics, well we have that too (and a Nobel to prove it). If your interest is in Law and Economics, well our law school program is great (ranked in the top tier of American law schools) and our law and economics program according to one ranking had us in the top 5 programs. And we are now estabilishing a new program in religion and economics, and of course we have the Austrian program as well.

.. the proof of the strength of the GMU program is scene in the placement of our students in good quality jobs. I define a good quality job as a tenure track appointment at a school that requires 3-3 teaching and less, average SATs around 1200, and pay at or above the national average for assistant professors in economics. Our best students consistently beat this standard and usually have multiple offers to consider for university professorships. I believe that outcompete many of our rivals in terms of student placement. There is a simple formula that must be followed to achieve this success:

PhD in hand (or close to it) + refereed publication(s) + good teaching evaluations + you are not a lunch tax == good job

Too often students fail to meet this formula and they cannot get a job and then they complain about the school they went to when in reality it is their inability to meet the standard by which the market judges you.

Bottom line --- got to the best school you can get into that will pay your full way. Getting into a top school where you pay your own way will not pan out (it is like being a walk on at a major college for sports -- sometimes it works, but it is rare. Absent that, think about law school rather than economics. If you still need to get a PhD in economics, got to the school that will pay you that you are more comfortable with and then once there work hard --- you can overachieve (e.g., John List is a great example of an overachiever in the field of experimental economics). Publish, publish, publish, when you teach be responsible and do a high quality job, and when you meet with people be decent and not a jerk. It is pretty much common sense and it works.

I should add that George Mason University has the very best representation of economists in the world who understand Friedrich Hayek, classical liberalism and the economics of the real world. Better than Harvard, better than Stanford, better than the U. of Chicago. Much better, if truth be told.

Brad DeLong

1. The Bush budget number for 2009 omits about $160 billion in costs for programs that the administration wants enacted.

2. The Bush budget limits itself to five years--to 2009--rather than the ten years of Clinton budgets because the Bush administration doesn't want journalists to pay attention to the effects of its policies in 2010-2014, and thinks that the press is so gullible and lazy that if it doesn't report 2010-2014 effects the press won't write about them.

3. Extending the Bush tax cuts would blow an annual $250 billion hole in the budget in the 2009-2012 presidential term.

4. $400 billion in 2009 and $700 billion by 2014 are better forecasts of the deficit that would be produced by the policies the Bush administration advocates.

5. Long-run budget projections show clearly that the [federal] budget is on an unsustainable path.

Some perspective on Bush's budget trial ballon from David Bernstein:

Bush's "Radical" Budget: Bush's latest budget apparently isn't as profligate as his first three, but the way the Times and Post are going on, you would think we were seeing the second coming of Grover Cleveland (whose portrait proudly hangs in my office). Here is the money quote from the Post: "In all, Bolten said, the budget would kill 65 federal programs and significantly trim 63 others. That would save $4.9 billion in the next fiscal year, which starts Oct. 1." Remember, that's $4.9 billion out of a $2.4 trillion budget; after a 20%+ real increase over three years; and after adding a new budget-busting Medicare entitlement. That Bush is really taking an axe to the budget!

Here is an outline of Bush's budget proposal. Note well. This is only a proposal. What gets promised and what gets done haven't been the same thing. Note that there are actual proposed spending cuts. Proposed.

Stephen Moore weighs in. Quotable:

The president will predictably boast that this is a lean budget that spends money judiciously on top national priorities like homeland security and not a penny more. He will try to assure conservatives that this budget limits the growth of federal non-defense, non-security spending (social programs) to less than 2 percent. His Democratic rivals will complain that this is a penny-pinching budget that under-funds education, health care, the environment, and on down the line.

They are both wrong. A federal budget that will spend more money in a single year than the entire GDP of France and three times what it cost to fight World War II can hardly be disparaged as inadequate or celebrated as tight-fisted. Uncle Sam, Inc., will spend more money in just this year than it spent combined between 1787 and 1900 � even after adjusting for inflation. Ironically enough, we are now celebrating the ten-year anniversary of Newt Gingrich's bold declaration that "we Republicans will make government smaller and smarter." It didn't exactly turn out that way ..

If you took all our government spent and divided it evenly among all families of four in America, each family would be more than $50,000 richer. This is double the level of spending in 1960 and fourteen times the amount government spent in 1900 ..

In 1940 there were 4 million Americans working for government and 11 million working in manufacturing. Today, there are 7 million more Americans working for government (21.5 million) than in all manufacturing industries (14.5 million). We have shifted from an economy of people who make things, to an economy of people who tax, regulate, subsidize, and outlaw things ..

President Bush has allowed the budget to grow by 8 percent per year after inflation in his first three budgets .. In his bloated budget for 2005, the president seeks funds to keep marriages intact, to prevent overeating, to encourage teenagers not to have sex, and to help give Americans the willpower to stop smoking ..

UPDATE: Dean's Worldprovides a critique of Moore.

Your weekly Carnival of the Capitalists.

Thomas Friedman -- Bush administration's real vulnerability is its B.M.D. � Budgets of Mass Destruction, "which have recklessly imperiled the nation's future, with crazy tax-cutting and out-of-control spending ..". Friedman asks, "Is your future better off now than it was four years ago?.. ".

A new book from the CATO Institute -- Just Get Out of the Way.

UPDATE: I found this on the CATO web site:

A well-functioning private sector is the only way to increase economic growth. Yet, to improve the business environment, development experts recommend sophisticated policies that are common in rich countries but that most governments in poor countries cannot successfully implement. Former World Bank economist Robert Anderson suggests acknowledging weaknesses prevalent in poor countries: corruption, deficient rule of law, cronyism, and so on. Simpler, market-oriented policies are more likely to produce growth and improve performance in banking, corporate governance, bankruptcy, and other areas.

Something I didn't know -- America's corporate tax rate is second highest in the developed world.

More on outsourcing here.

GE's Gary Reiner is bullish on America -- and outsourcing. What's good for GE is good for America, Reiner argues. Quotable:

On a personal basis, Reiner is intensely passionate about what he and GE are doing and says that when a country or company enjoys higher productivity, the benefits extend three ways: to the enterprises, which with higher profits have more to invest; to employees who get higher wages and then spend more; and/or to lower prices, which makes it easier for people to buy. So the way Reiner sees it, no matter which way the higher productivity cake is divided, community prosperity increases.

However, although Chinese manufacturing and Indian services are providing an enormous boost to US productivity, it means fewer highly paid jobs in affected sectors. But Reiner counters that the overall US community is a huge beneficiary with lower priced goods and services, lower interest rates and increasing wealth. Hence it will be able to afford better medical help for the baby-boomers, education for the young and increased rewards to those working in those areas .. (via the Mises blog).

See also "Outsourcing Is Good for America" by Douglas Irwin. (via the Volokh Conspiracy).

Robert Samuelson on the Chinese economy. Quotable:

.. we don't know China's effect on the world economy .. Until recently, it seemed a magnet. China has attracted about $500 billion of foreign investment -- mainly for new factories and mostly at the expense of other Asian nations ..

One fear is that China's recent growth spurt reflects a "bubble" of easy credit that, once popped, will curb imports and cause China to emphasize export-led job growth even more. Another danger is that China merely represents the last stage of Asia's supply chain and that Asia -- as a whole -- sells much more abroad than it buys, parking surplus earnings in U.S. Treasury securities ..

In 1980, China traded little and most of its people lived on the edge of subsistence. Now it's already the largest market for cell phones (269 million in 2003) and the second-largest for Internet users (78 million) ..

If Bush is going to to give us a massively larger goverment moral decency between generations demands that he give us the massive tax increases that must go with it. Simple economic sanity can hardly demand anything else (and I'm tired to death of Republicans spouting brain-dead Keynesian economics in the name of a bogus "supply side" economics that has no real world relevance to the tax rate system of 2004). I for one will not go along with the beggering of the next generation for no imaginable reason other than the political ambitions of Peter Pan half-wits in the Republican Party.

And make no mistake about it. There is not even the smallest thing "conservative" about tax cuts and spending increases as far as the eye can see. Republicans who pretend otherwise are selling a "free lunch" that wastes wealth, decapitalizes the country and burdens the next generation with a massive negative compound interest problem. All that is being done is a con job on public in which the people are fooled into thinking they and the country are wealthier than they really are -- and that govenment goodies are a costless "free lunch". Well, there is no free lunch. The classic "unseen" cost of this "free lunch" shell game is the cost which will be born by later generations who will be burdened with the massive weight of government debt, rather than advantaged by the wealth stream made possibly by private sector capital goods investment. And again, this cost is far, far more massive than any Peter Pan big government Republican can ever imagine -- (and God help us if they attempt to use their scientifically fraudulent Keynesian mathematics, or, worse, the fantasy mathematics of "supply side" economics. It ain't 1962 folks, and it ain't even 1982).

The Federal Reserve statement on interest rates. Read the last unbelievable paragraph and try to think of anything other than a bent over Jim Carrey with his hands on his ass talking out of that end of his anatomy. The Federal Reserve is something like the capstone of what has become the scientific fraud of academic macroeconomics. Simply put, using leeches to cure sick people had a great deal more sound reasoning and solid evidence behind it than does the yammerings of the Federal Reserve and its army of academic macroeconomists.

More runaway spending -- this time its an expansion of NEA spending which is being promoted by President Bush. The country is borrowing money from China -- and billing my children at interest -- in order to subsidize entertainment favored by some government bureaucrat. How stupid is that?

Earth to Bush -- you can't continually multiply government borrowing and explode government spending without destroying the wealth of the country. This is the path every failed South American country has followed. And it's a path America will find itself trapped upon if Bush & Co. continue to pretend that the laws of economics don't apply to the United States. All I can ask is, what the hay is going on in Washington? And in George Bush's head?

UPDATE: Josh Claybourn weighs in, "#*)($&*@# ... The Bush presidency can be summed up with this fill-in-the-blank: "Bush proposes $______ increase for _____." And here's NRO's Ramesh Ponnuru, "And IT'S OFFICIAL. This president is willing to spend your money on absolutely anything--and everything: drugs at home, wars overseas, quests in space, and even the National Endowment for the Arts."

UPDATE II: So why do lefties hate him? David Berstein investigates: "Huge increases in spending on education and other domestic programs that are not even within the federal government's constitutional purview; a new prescription drug entitlement for the elderly; Wilsonian rhetoric and actions in foreign policy; Kennedyesque manned space mission boondoggles; clumsy protectionism; in its appointments to high-level positions, the most affirmative-action conscious administration in American history; a proposal to legalize the status of illegal aliens; and now, a huge proposed increase in funding for the National Endowment for the Arts. Remind me again of why liberals are so hostile to George Bush? Give him a phony Haavaad accent instead of phony Texas twang, a wonky college life, a less religious persona, and an attorney general other than John Ashcroft, and George Bush, in theory, would be a dream president for many liberals". And he concludes with this: :"it's very unlikely we would have seen the kind of domestic spending increases we've seen under Bush if Al Gore was president and had to deal with an oppositional Republican Congress. Sigh! Guess I'll enjoy my tax cuts and invest in Euro-denominated stocks as the deficit explodes and the dollar declines to Canadian status."

And more Bernstein: "Krugman and others figure that the "plan" is to starve the government in the far-off future, when spending needs will grossly exceed tax revenues, resulting in a crisis that will require the gutting of government programs, without Bush having had to pay a political price. I think the "plan" is simply to get George Bush reelected, and that Bushes advisors don't give a horse's petootie .. about the size of government, so long as they stay in power. And, contra Krugman, the odds that the huge increase in government under Bush will be undone in our lifetimes is slim, indeed--as with the Social Security crisis of the early '80s, we could simply have minor reforms with major tax increases, or, as with the current Medicare crisis, we could simply ignore it and spend even more money. "

.. and the world's leading manufacturer of sombreros is -- China. Quotable:

China's trade balance is barely in surplus: it runs a deficit with some countries and may even post a trade deficit in 2004. The only country with which China enjoys a whopping trade surfeit is with America .. China's fixed exchange rate of 8.28 renminbi to one dollar has enabled its exporters to enjoy enhanced competitiveness and surging sales as the dollar has slid during the past two years. Indeed, in the year to December 2003, China's exports to the U.S. rose by 81% .. [dare we] attribute America's ballooning trade deficit with the Middle Kingdom to Washington's deficit spending or aggressive Federal Reserve monetary easing? .. Washington fails to appreciate just how important China is in underwriting its spendthrift ways .. In effect, Beijing furnishes cheap credit to finance Washington's fiscal deficit and consumer indebtedness in America ..

underwriting America's borrowing binge does not come without hazards for China itself. As the PBOC buys dollars for renminbi, it enlarges the domestic money supply, notwithstanding efforts to "sterilize" the excess liquidity by selling Chinese government bonds. As of October 2003, the annualized increase in China's broad money supply topped 21% and domestic financial institutional lending climbed by a yearly rate of 71%. Consistent with a burgeoning boom and bust sequence, property, automobile, home amenities prices, and GDP are all accelerating at a breakneck pace[vii].

Exacerbating China's economic distortions, the country's four largest state-owned banks, which together claim 61% of the country's loans and 67% of its deposits, are saddled with mounting bad debts. By some estimates, over a third of these loans are nonperforming, which is about the same for the country's financial system as a whole, meaning the nonperforming loans may amount to 45% of GDP ..

In the autumn of 2003 the PBOC tried to gently apply the brakes by lifting banks' reserve requirement to 7% from 6%. Beijing's leaders also recently injected $45 billion into two of its largest state banks to help alleviate the fetters of their numerous nonperforming loans, the third time since 1998 the Chinese state has at least partially bailed out its largest banks ..

Nonetheless, China and by extension America, are in a dire dilemma. Chinese banks will continue to lend recklessly as long as Beijing maintains its currency peg and the attendant expansion of the domestic money supply ..

With China's finances in disarray, would the country's robust purchases of American debt instruments for dollars continue at the same rapid clip? Washington may find it much more difficult to obtain cheap underwriting for its gaping fiscal deficits and rampant borrowing ..

Bush vows to "freeze" government spending at "high altitude" . Quotable:

Federal expenditures on everything from the National Institutes of Health to social and research programs were so dramatically increased [in recent years] that a year of "belt-tightening" will have little adverse effect, the [Bush administration] official said.

The so-called "freeze" is a verbal promise by the President to boost discretionary spending by 1% next year. This year the President promised to "freeze" spending at a 3% growth clip, while congress has voted to "freeze" spending at a much more robust 9% growth rate. And as most are aware, the President fell in line behind the leadership of the Congress, signing up for its 9%spending growth package rather than acting to impose his own promise. ("Read my lips, no new spending", said the President).

Google News search -- "Bush spending freeze"

NY Times -- Republicans organize to fight President on runaway Federal spending. Polls show growing national concern over a government which is spending beyond it's means. Quotable:

"the era of small government has ended for the Republican Party."

And this:

Referring to Mr. Bush's call on Tuesday night for athletes to stop using performance-enhancing drugs, the aide said, "Unfortunately, the president's ban on steroids doesn't apply to [budget busting Congressional] appropriators."

Today's Jeopardy Daily Double: One is a giant in the history of human thought. The other is a pygmy in the second-hand trade of "popular ideas" ... In a related matter, Arnold Klung takes on the topic of job outsourcing and comparative advantage, with an emphasis on the role of mathematics in thinking about such things. Quotable:

What accounts for the persistent belief that trade with poor countries will make us worse off? Recently, it occurred to me that evolutionary psychology might provide the answer. Anthropologist Alan Fiske has pointed out that there are four ways in which humans transact: on the basis of authority; on the basis of communal sharing; on the basis of equality matching; and on the basis of market pricing. In the era of small hunter-gatherer tribes in which our brains evolved, only the first three were needed. Market pricing is required once you start to interact with strangers.

My hypothesis is that people are not "hard-wired" to understand market pricing, so that they often fall back on the models of authority ranking, communal sharing, or equality matching to guide them. Thus, people interpret trade with India as if it were communal sharing with India. It certainly is true that if we share with India, we will be poorer. However, it is not true that trading with India at market prices will lower our well-being.

Play Jeopardy on the web here.

How do we explain the bond market bubble.

Reality Check. Analysts have concluded that the U.S. Government faces a 44 trillion dollar deficit in the coming years, a number derived by simply doing the math, adding up all projected obligations, then subtracting from that projected revenues. As Radley Balko points out, 44 trillion dollar is one-and-a-half times the GDP -- of the entire world.

UPDATE: Bush's budget busting State of the Union Address. Quotable:

President Bush last night proposed an ambitious package of domestic spending that will drive up discretionary expenditures far more rapidly than his recent predecessors. The State of the Union initiatives that he wants passed this year include more spending for the Department of Education, a new assistance fund to help manufacturers recover from their recession and funding for a major, long-term expansion of NASA's space budget. Early projections indicate passage of Mr. Bush's proposals will increase non-defense spending well beyond the 4 percent to 5 percent the administration has budgeted for the current fiscal year, nearly double the average annual increases of about 2.5 percent by President Clinton during his two terms. "One thing that Bush tends to do in these State of the Union speeches, which tends to be counterproductive, is that he has adopted the Clinton style of presenting this shopping list of these programs that will solve every problem that afflicts America," said Stephen Moore, who heads the Club for Growth which has cheered Mr. Bush's tax cuts while denouncing his spending increases. "That only reinforces the concern that he is a big government Republican," Mr. Moore said last night ..

"A year ago at this time, the president talked about 4 percent spending growth and we're about to finish this fiscal year with 9 percent spending growth once the omnibus spending bill passes," Mr. Riedl said .. conservative strategists here say that if he does not show some toughness on spending soon, his core conservative support is going to erode.

The White House is betting that is not going to happen because Mr. Bush has shored up his base support by delivering on several key issues of importance to conservatives .. "Our support in our conservative base remains strong because we have delivered on their issues," said a Bush campaign adviser.

Well, that seals it. I've just been read right out of the conservative "base" of the Republican party.

Oh, and there is this:

The politics of Mr. Bush's fiscal policies generally follow in the footsteps of President Reagan who also slashed taxes, sharply boosted defense spending and allowed federal spending to rise from $600 billion in 1980 to nearly $1 trillion by the end of his presidency amid soaring deficits ...

Please somebody -- anybody -- tell me what is "conservative" about any of this?

It's That 70's Show all over again. See this article by Bruce Bartlett on Bush's plan to expand taxpayer subsidies for manufacturing -- i.e. it's back to the future with "industrial policy" madness. Even Carter -- and the Carter economists -- were smart enough to reject this both dangerous and idiot 1970's fad. And don't be mistaken. This thing is straight-out of-the-dictionary fascism, and we need to kill it while it's still in the crib. Quotable:

As is so often the case, the Bush administration is approaching the alleged problem of manufacturing's decline as if no one had ever noticed it before. This results from the fact that administration initiatives are never studied or analyzed carefully before being announced. This is one area where former Treasury Secretary Paul O'Neill's criticism of the Bush administration is right on target . If anyone had bothered to check, they would have found that the federal government has been issuing detailed reports on the demise of manufacturing for more than 20 years .. The point is that the ground was already well plowed before the Bush administration decided to turn its attention to the decline of manufacturing, which it did in a new report from the Commerce Department last week. Yet at the end of this exercise, the Bush administration could do no better than propose more taxpayer money to help private businesses do their jobs. According to press reports, the 2005 budget will propose substantially increasing spending for the Manufacturing Extension Partnership -- a program it proposed phasing out just last year.

Worse than JOHNSON. Worse than NIXON. Worse than FORD. Worse than CARTER. Worse (of course) than REAGAN. Worse than BUSH I. Worse than CLINTON. GEORGE W. BUSH worst of all modern Presidents when it comes to real increases in domestic discretionary spending. The worst.

This week's Carnival Of The Capitalists takes a hop across the pond.

Robert Blumen on China's banking crisis:

Bloomberg reports on a bailout of the banking system in China. According to the article, they used 1/10th of their foreign exchange reserves to "boost the capital adequacy" of their two largest banks. "Boosting capital adequacy" is a euphemism for bailing the bankers out for bad loans under the fraudulent system of fractional reserve banking. The Chinese central bank has accumulated vast foreign exchange reserves ($450 billion according to the article, mostly in US$) because of their policy of pegging the exchange rate between their currency and the US$. This is part of the grand dollar game, a system that allows Americans to live beyond their means when the rest of the world loans us money to purchase their goods.

My suggestion is that you read the rest.

.

The share of the national debt owed by my family of four is about $100,000 -- plus interest. Thanks guys! Imagine if every American family of four owned an addition $100,000 worth of capital goods which were producing not only returns for the owners, but also goods and services for others? How frickin prosperous would the county and it's people be then? Rather than creating an additional $2.12 billion per day in capital goods, the country is going in debt an additional $2.12 billion per day -- money owed not to ourselves rich fat cats in American, but largely to people outside the country rich fat cats outside the country. This is wealth and capital which must leave the country as this debt is serviced -- and as my children grow up. Thanks Mr. President! (thanks to Joshua Claybourn for the link).

UPDATE: Don't miss the Waste Blog updated daily by Mark Carpenter or Tom Finnigan of Citizens Against Government Waste.

UPDATE II: JOHN LEO -- "Are you excited about going to the moon and Mars? Neither am I. With the nation drowning in debt and facing great peril from the Islamofascists, calling for billions to put a man on Mars can't possibly be on any plausible list of the top 500 government priorities. But politics now is mostly a matter of managing impressions. And in this game, cost-free impressions are the most highly prized. (Cost-free to the impression-maker, not to the future voters, Congresses, and presidents who would have to come up with the money.)

The president's space idea is his second questionable announcement of the week. His semi-disguised amnesty for illegal aliens will function as a strong incentive for more illegal entries. It isn't tied to any vigorous action by Mexico to slow the flow. As the nation's second broad amnesty plan, it announces, in effect, that the United States is abandoning efforts to control its borders. On the other hand, it makes a good impression, not only with Hispanic voters but also with moderate suburban white voters who tend to think of Republicans as hard-hearted immigrant-bashers.

Democrats keep saying that President Bush is governing from the right. What they mean by this is uncertain, since the Bush domestic program pretty much tramples most conservative and Republican principles. Limited government and balanced budgets, for example, are hard to square with huge tax cuts, refusal to do anything about the coming bankruptcy of Social Security, and the nearly half-a-trillion-dollar expansion of Medicare.

Vice President Dick Cheney's reported comment on deficits to former Treasury Secretary Paul O'Neill is simply hair- raising. "Reagan proved that deficits don't matter," Cheney said, according to O'Neill. "We won the midterms. This is our due." Under what theory of government does a narrow midterm victory create a right to dramatically expand the deficit? Was there any genuine concern about economic policy or long-term impact on the country? If so, either Cheney didn't express it or O'Neill didn't remember it. As the conversation is reported, Cheney apparently thinks deficits are just a political prize due for winning a few seats in Congress ... ". Read the rest.

Marginal Revolution looks at Deirdre McCloskey's The Secret Sins of Economists on the virtues -- and vices -- of today's economists.

Robert Blumen: "Gerard Jackson takes on Greenspan's insane policy of encouraging debt-funded consumption instead of allowing a liquidation of mal-investments". The article is here.

President Bush is Alfred E. Newman and America goes along saying "What, Me Worry?"-- but China and other U.S. bond holders will one day bring the MADness to a crashing halt. A well written piece on a regular PrestoPundit theme.

UPDATE: According to John O'Sullivan, George Bush is actually Mikhail Gorbachev: "Gorbachevism was a politics that "substituted daring for thought" .. George W. Bush is bidding to match [Gorbachav's record] with his proposed reforms of immigration law." Quotable:

Under this prescription hundreds of millions of workers from Latin America, Asia, and the Middle East would have the legal right to emigrate to the U.S. as "temporary" workers if American employers wished to hire them.

Not all of these millions would come, to be sure. Already, however, 14 percent of the U.S. workforce is foreign-born; between eight and eleven million workers are here illegally; and some estimates suggest that as many as 20 million new arrivals might enter the U.S. over the next decade. Even a marginal increase in such immigration, however, would exert a steady downward pressure on wages and drive low-paid Americans out of jobs.

Downplaying such forecasts, the Bush people argue that immigrants, including illegals currently here, will be allowed to take only those jobs that Americans have already turned down. But how will this prohibition be enforced? Very simply: It is not going to be enforced � at least for the illegals already here. The "senior administration official" who briefed the press on the Bush proposals stated clearly that the mere fact that an illegal immigrant was employed would be sufficient proof that no American had wanted the job.

Hard to believe? Here is the money quote: "If you're asking the question as to whether the person [the employer] needs to say, okay, well, here's Mary, and she's in this spot, do we need to hold on Mary and look for some American to fill that position, the answer is, no. We assume that by virtue of Mary's employment, that marketplace test, if you will, has been met." Several other statements to the same effect � and the senior administration official advanced no clear idea of how the government would ensure that the prohibition would be enforced for new arrivals.

The administration's next line of defense is to argue that the immigrants will be temporary guest workers who will return home after three years. Yet almost all experience with such programs in several continents across several decades demonstrates that guest workers become permanent residents in due course � very often as a result of the kind of "amnesty" that the administration is again proposing here.

But we need not rely on past experience to forecast their permanence. Guest workers will be here indefinitely because (a) under the Bush rules there is no limit to the number of times their three-year work program can be extended; (b) they can bring in their families and, if they have a child while here, they become the parents of a U.S. citizen and thus undeportable; (c) they will have greater opportunities to marry U.S. citizens; and (d) if all else fails, they can blend back into the underworld of illegal work and documentation that more than eight million of them already inhabit.

In response to this last point, Bush-administration officials assure us that, on the contrary, they will deport those guest workers who fail to leave the U.S. voluntarily when their work program is finished. But this assurance is in flat contradiction to their main rationale for the entire reform program � namely, that the alternative policy of deporting the eight million illegals here now is unthinkable.

If it is unthinkable to deport eight million illegals today, why will it be easier to deport two or three times that number in a decade or so when even more businesses will be alleged to be reliant on them and even more pressure groups will be pressing their case? Not even the Bush officials believe that either many illegals or many guest workers will go home�that is one reason why they are increasing the number of "green cards" for permanent residents ...

Paul C. Roberts and his critics are hashing out the logic of the case for free trade over at Mises Economics Blog. See also this post by Daniel Drezner.

Price Signals and the True Cost of Illegal Immigration. Let's do the math on massive illegal immigration. The math is actually quite simple. Illegal foreigners are paid far fewer dollars than they consume from the economy. If they have kids in school and/or the family visits the emergency room a few times, very quickly the family has consumed several times paid wages.

Rich folks with illegal nannies and servants are getting services without paying the true cost of labor -- in other words, illegal immigration is providing a government subsidy for the pampered lifestyles of the well to do. It is doing the same for wealthy firms of all sorts -- from agribusiness to international hotels to Walmart. The market tells us that the value of this illegal foreign labor is no more than a pittance -- indeed at the margin a good deal of this labor would be replaced by improved capital goods or simple technological innovation, if our borders were secure .. and if the government subsidy for this labor didn't exist.

Well, much more could be said. But I'll stop here and make a simple point about price signals. Perhaps the most important thing a person can learn about economics is that prices are signals.

A well-functioning economy is one where prices communicate -- signal -- costs. In that way you are not consuming more than you receive in the process of production. You are not planting 10 bushels of wheat in the fall and harvesting 5 bushels of wheat in the spring. But just this can happen when you falsify prices through subsidies or controls -- think government subsidized ethanol production, a case where more money (and energy!) goes in during the process of production than comes out the other end when ethanol is sold on the market.

What we have in the illegal labor market is case of grossly falsified prices. The true costs of illegal labor are not reflected in the dirt cheap prices rich people and businesses pay for illegal labor. They are getting a free ride, and the true costs are borne by others. But that is a story for another day.

UPDATE: And don't miss this. (Lots of wage data on income changes since the dramatic open borders policy revolution of the last 40 years).

UPDATE 2: Another angle on the true cost of massive illegal immigration.

UPDATE 3: "Based on estimates developed by the National Academy of Sciences for immigrants by age and education at arrival, the lifetime fiscal impact (taxes paid minus services used) for the average adult Mexican immigrant is a negative $55,200." And this: "This reduction in wages for the unskilled has likely reduced prices for consumers by only an estimated .08 to .2 percent in the 1990s. The impact is so small because unskilled labor accounts for only a tiny fraction of total economic output." More here.

Your weekly Carnival of Blogging Capitalists. Take a bite.

The 2004 Index of Economic Freedom. America drops to #10, trailing Hong Kong, Singapore, New Zealand, Luxembourg, Ireland, Estonia, United Kingdom, Denmark and Switzerland. "Socialist" Sweden ranks #12 on the list. The big story of the last decade is Ireland at #5 -- and with a bullet. Quotable:

Ireland is a modern, highly industrialized economy that has grown by 80 percent in real terms over the past decade. GDP per capita is now 122 percent of the European Union�s average. Newly re-elected Prime Minister Bertie Ahern .. seems certain to maintain Ireland�s markedly pro-business stance. Ireland has one of the world�s most pro-business environments, especially for foreign businesses and foreign investment. The Ahern government lowered the Irish corporate tax rate from 16 percent to 12.5 percent in January 2003, far below the EU average of 30 percent. Not surprisingly, Ireland has become a major center for U.S. investment in Europe, especially for the computer, software, and engineering industries. Although accounting for 1 percent of the euro-zone market, it receives nearly one-third of U.S. investment in the EU. GDP growth totaled 6.3 percent in 2002 ...

Ireland's Economic Freedom score has dropped from 2.15 to 1.74 since 1995 (lower numbers mean more freedom). It dipped as low as 1.6 in 2001.

Meanwhile, France -- just below Armenia all the way down at #44 --continues to be the sick man of Europe. Quotable:

France remains a relatively statist country. Public expenditure amounted to 52.6 percent of GDP in 2001, and the state employs 25 percent of the workforce�double the percentage in both Germany and the United Kingdom. France also remains awash in regulation. Most notoriously, since February 2000, the legal workweek has been a miniscule 35 hours for firms of 20 or more workers, and it takes twice as long to register a business in France as it does in any other country. France has striven mightily to preserve its overregulated politico-economic culture by adopting protectionist stances in global trading forums. The need for microeconomic reforms in the pensions system is becoming urgent given France�s demographic profile: At present, 10 workers support four pensioners; by 2040, those some 10 workers will be forced to support seven pensioners. Such realities are reflected in France�s persistently high unemployment rate (around 9.3 percent in March 2003) and the fact that France violated the European Union Stability Pact guideline of limiting its deficit to 3 percent of GDP in 2002, with similar violations likely in 2003 and 2004 ...

Alex Tararrok adds this to the great "free trade" debate:

Free trade in commodities tends to create factor-price equalization - i.e. the same prices for wages and capital of equal productivity everywhere in the world even when the factors themselves are immobile.

The source of the argument is here.

Paul C. Roberts replies to his critics on the necessary conditions for mutually beneficial free trade. Quotable:

Another widely made error is to assume that US labor displaced by outsourcing, off shore production or the Internet moves into US export industries to meet increased demand for US goods from countries whose labor is made more productive by the inflow of US capital and technology. This model assumes that comparative advantage reigns. The model does not work if absolute advantage reigns.

And this:

The downward adjustment in wages and salaries necessary to bring the US into equilibrium with the global labor market requires reductions that cannot be achieved. For example, try to imagine what must happen to existing mortgages and debts if US workers are to compete with Chinese and Indian workers employed by first world capital and technology. So many people forget that the reason that highly paid US workers could compete against lowly paid Asian workers is that the US workers were much more productive due to the immobility of capital and technology. The international mobility of factors of production has stripped away the productivity advantage of first world labor. Try to imagine the political instability in store for the US as the ladders of upward mobility collapse. The reality toward which we head is not a libertarian paradise.

But this is simply and grossly false:

the collapse of world socialism and the advent of the Internet have made factors of production as mobile as traded goods. Indeed, factors of production are more mobile. Capital, technology, and ideas can move today with the speed of light, whereas goods have to be shipped.

Capital goods are real stuff -- and the transfer of technology and ideas requires the complex development of substantial cultural and institutional "infrastructure". The truth is that e.g. India and China have been "growing" these for a long time now, and it has NOT happened overnight.

"Free trade" -- what is interesting is that we indeed do have "free trade" (essentially untaxed exchange) between America businesses and foreign workers / businesses beyond our borders, but we DO NOT have "free trade" between American businesses and American workers -- these exchanges are taxed at confiscatory rates. True "free trade" would put all exchanges on equal footing -- penalizing all exchanges at the same rate. So my call is for free trade within America between Americans -- let Americans be on an equal footing with foreign workers and foreign businesses. Americans -- American workers -- should be able to contract exchanges with American businesses at the same tax rate as foreigners. My call, in other words, is for a FLAT TAX that does not descriminate between American firms or workers and foreign firms and workers, and thus AGAINST American firms and workers. This is a tax cut for American workers and businesses that would make Bush's tax cut look like the small change that it truly is. Any takers?

EconLog: "tax cuts without spending cuts are a form of harmful economic populism".

Kling quotes an article by Ed Crane I flagged a few days ago:

The late 1980s and the 1990s also saw the rise of supply-side economics, which further undercut the GOP�s philosophical approach to governance. Don�t worry about all the nasty arguments about the proper role of government, the supplysiders argued. Just cut marginal tax rates and the economy will be spurred on to grow faster than government, thereby shrinking government as a percentage of GDP...Republicans, with a few notable exceptions, stopped talking about less government."

Joe Salerno -- Paul C. Roberts is half right about Ricardo and the argument for free trade. Unfortunately, Joe points out, he's also half wrong.

UPDATE: Michael Kinsley weighs in. Quotable:

Schumer and Roberts cling to the free-trade label and endorse the general principle while claiming it no longer applies because "the factors of production can relocate to wherever they are most productive." In fact, that makes the theory even more compelling. If the factors of production become more productive, the whole world becomes richer. If there is some explanation of how a society can get richer by denying itself the fruits of this process (and most likely curtailing the whole process itself, as others misguidedly retaliate), Schumer and Roberts do not offer or even hint at it. But the real difference between traditional trade in heavy earth-bound objects and 21st-century trade in weightless electronic blips, or in sheer brainpower, is that the losers in new-style trade are more likely to be people that U.S. senators and fancy economic consultants actually know ...

"Jobs Americans Won't Do" -- increasingly this would seem to include just about every job I've ever had, outside of academic and think tank jobs. Why? Because wages in almost every one of these jobs has been driven down by the surplus of non-native born workers lining up at the employment office. I'm speaking here of solid factory, agricultural, retail and service industry jobs. It's a simple fact that for decades non-American born workers have been driving down wages at these various businesses. I've seen it with my own eyes on "the American street" so to speak. Here is an example. It was years ago, but a packing house I once worked in had gone out and intentionally brought in foreign workers, because they would work at lower wages (they didn't work any harder than anyone else, and certainly there were more people applying for work every day than there were jobs in the plant).

(UPDATE: From Project USA -- "Here's the real problem: In the early 60s, meatpackers in Omaha, Nebraska were paid about $6.00/hr. That's about $34.00/hr in today's money. Our guess is that you could find Americans to work as meat-packers at $34.00/hr. Instead, those jobs today pay less than $10.00 and are done mostly by immigrant and illegal labor.")

All of these jobs I'm talking about were at one time jobs that Americans would do, because I've known so many of the Americans who did these jobs, and I've been one of them. But the pay has continued to decline, as the pool of non-native born labor has continued to overwhelm the employment office of these businesses.

"Jobs Americans Won't Do" now increasingly includes one of my current part-time jobs -- a position in commissioned sales at one of America's leading retailers. Not long ago this sort of job was a classic midddle income American job. Only recently has the job category been taken over (for the most part) by foreign workers. And why is that? Because foreign workers continue to drive wages down substantially in this category -- down several dollars an hour in just the short time I've been employed.

One of the sadder stories I've witnessed is the decline of the native-born construction trades worker in Southern California. As the owner of a new home I've seen and talked to the aging "last of the breed" construction tradesmen struggling to hold on despite declining paychecks in an industry now dominated by illegals. These jobs too, are becoming "Jobs Americans Won't Do". It's not because they can't do it, or aren't good at doing it. It's because they can't support their families the way their fathers could in these industries where wages are determined by the endless supply of foreign labor, usually in the country illegally.

UPDATE: Linda Chavez defends the new Bush program, in part on the grounds that there are "Jobs Americans Won't Do". I guess you know by now what I think of that claim.

ALSO don't miss NRO's Mark Krikorian on "Jobs Americans Won't Do". (Good title!)

UPDATE 2: Great quote -- "It is often said that immigrants take jobs Americans don't want. But that's only half a sentence. The complete statement is: Illegal immigrants take jobs Americans don't want at the wages that are being offered."

Movie critic David Denby -- stock bubble joyrider and now author of the "boy was I stupid" confessional American Sucker.

Why cutting taxes without cutting spendings is no way to reduce the size of government. Michael Kinsley does the math. Although it escapes Kinsley, when we borrow rather than pay our own way what we are really doing is choping down the shade trees for a one-night bonfire rather than holding on to oaks and firs we could enjoy with increasing delight for decades. This is the material reality which necessarily lies behind the "principle" of compound interest.

Paul Krugman -- wrong again. A match up between Paul Krugman and the facts is never a pretty sight. Another train wreck not to miss.

Quotable:

"Those who do not learn from history may in fact never repeat it."

-- Virginia Postrel in a quite interesting piece on economic history, reviewing Joel Mokyr's Encyclopedia of Economic History. Some nuggets: in 1850 shoemaking was the leading manufacturing employer in America; American unions went on strike 50 times in a period of 35 years to stop businesses from employing blacks; and cotton was once both very expensive and rarely used.

Pondered but left unanswered -- what explains the wealth of nations? Mokyr contends that without history, especially institutional history, the question cannot be answered.

Link via Lynne Kiesling, who wrote three of the entries in the encyclopedia, including those on Adam Smith and energy regulation. Anybody want to buy a copy and donate it to the Hayek Center?

Just for the record, the Congressional Budget Office recently issued a report telling us what everyone already knows: The federal budget is drifting into a future of unprecedented tax increases, huge deficits or both. This is no secret, because the great driving force of change is the impending retirement of 77 million baby boomers and their heavy claims on federal retirement programs. But in Washington, the CBO's irrefutable conclusion won't produce any noticeable reaction, because there's already a clear bipartisan policy concerning the future: Forget about it ...

-- Robert Samuelson. Read the rest.

Here's an odd couple. Dem. Senator Charles Schumer and Reagan economists Paul C. Roberts attack free trade, claiming that the conditions for applying David Ricardo's principle of "comparative advantage" no longer exist in today's global economy (factors of production are "no longer" locally fixed). It's an old argument given new life by "outsourcing", the Internet, and the rise of India as a free market economy.

Wia Truck & Barter who takes up the argument and explains that there are gains from trade -- and you don't need Ricardo to show it.

It's a Carnival of Capitalists!!

California Insider takes a look at Wal-Mart's health care package for employees.

Nobel economist Vernon Smith has some very interesting ideas on what to do with Iraqs government-owned assetts -- such as it's oil reserves.

Sean has the latest blogosphere Carnival of the Capitalists.

Let's play spot the economic fallacy -- generated, you guessed it, by a professor of economics:

Conventional economics teaches that gift giving is irrational. The satisfaction or "utility" a person derives from consumption is determined by their personal preferences. But no one understands your preferences as well as you do.

So when I give up $50 worth of utility to buy a present for you, the chances are high that you'll value it at less than $50. If so, there's been a mutual loss of utility. The transaction has been inefficient and "welfare reducing", thus making it irrational. As an economist would put it, "unless a gift that costs the giver p dollars exactly matches the way in which the recipient would have spent the p dollars, the gift is suboptimal".

This astonishing intellectual breakthrough was first formulated in 1993 by Joel Waldfogel, an economics professor now at the University of Pennsylvania, in his seminal paper, "The Deadweight Loss of Christmas" ... The guru Waldfogel has recently refined his calculations on Christmas's deadweight cost, using a new survey to estimate that, per dollar spent, people value their own purchases 18 per cent more than they value items they receive as gifts. (Being a rigorous scientist, the prof has carefully excluded any allowance for the "sentimental value" of gifts.)

Ok, you're right. There are multiple fallacies here. Call it a gift from our professor and the numskull economics coming out of the colleges.

But of course the law of unintended consequences in the field of ideas which has it that bad ideas -- and bad economics -- leads to good ideas -- and good economics. (Trust me on this one):

In the course of their inquiries, researchers have discovered that women are much more involved in gift giving than men. Their surveys suggest that women give Christmas gifts to more people than men (on average, 12.5 versus eight), start shopping for gifts earlier than men, devote more time to selecting the appropriate gift (2.4 hours per recipient versus 2.1 hours) and are more successful in finding a desirable gift (10 per cent of women's gifts were returned to the shop versus 16 per cent of men's).

Researchers have also stumbled on the revelation that the practice of shouting rounds of drinks arises from the pursuit of scale economies. It saves time and effort for one person to buy five drinks rather than for five people to buy their own.

Most of this enlightenment comes from a paper by Bradley Ruffle and Todd Kaplan, "Here's something you never asked for, didn't know existed and can't easily obtain: A search model of gift giving".

That snappy title is a plug for their theory, which says gift giving makes sense in cases where the giver's knowledge of where to find something the recipient wants is greater than the recipient's own knowledge. Or if the giver is in a position to get it cheaper.

So the rule is that the giver gives a gift only when her "search costs" for the gift are lower than those of the recipient.

This emphasis on the hassle involved in finding suitable presents helps explain why, even though it's regarded as poor form to give money, parents are more likely to resort to money as their children get older. The parents' search costs rise as they become less certain what their kids would like, whereas the kids' search costs fall as they become more independent. This theory also helps explain why people who go on trips return with presents. Their gifts tend to be things that are dearer or harder to find at home. Even so, it's hard to believe the theory accounts for more than a fraction of gifts.

Truck and Barter:

Arnold Kling asks: Is trying to teach economics without math a misguided project?

As a math/stat major in college, I look at the question more broadly: To what extent could I teach anything using math?

Sure, I can pretend (with a glorious hubris) that everything I see in the real world can be represented by fully specified vectors of quantities, related by specific equations, giving stochastic or deterministic answers. I can pretend that distilling concepts into functions is the key to understanding theory, and that regression is the key to understanding history. But the truth is there's no a priori reason to expect any aspect of the real world to be simple enough (or simplifiable enough) for mathematical results to provide an accurate description (or an accurate abstract model) of reality.

Frankly, from my point of view, there is no "intrinsic" relation between math and anything ...

Read the rest.

Economist Reuven Brenner on steel tarrifs and Paul Krugman. Quotable:

it is still beyond me why Krugman was ever considered to be a decent economist: I never found anything in his writings. Am still waiting to hear someone identify one insight (have you found it?). I looked into it when Washington-based Institute for International Economics (on whose board Krugman was sitting at the time), asked me to review his book, The Return of Depression Economics. I called it 'Depressing Krugnorance,' and it was reprinted around the world. Parts of it are included in my Force of Finance book. Others appeared long ago in my "Making Sense out of Nonsense" in my Educating Economists book, some 12 years ago.

Is it The Onion or is it The Fed?

The committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity. The evidence accumulated over the intermeeting period confirms that output is expanding briskly, and the labor market appears to be improving modestly. Increases in core consumer prices are muted and expected to remain low.

The committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. However, with inflation quite low and resource use slack, the committee believes that policy accommodation can be maintained for a considerable period.

We report, you laugh yourself silly.

The still falling dollar has nowhere to go but down. And gold and silver reach highs not seen in years.

Let me say this very slowly, so that even journalists and economists can understand.

THE DOLLAR IS WORTH LESS AND LESS

More dollars with less value. In other words INFLATION.

It's a world economy -- always has been. And the economic fantasies of all the thousands of academic economists who use closed national economic models can't change this fact. Politicians feed off the idiocies of academic economists because it gives them coverage for politically expedient short-term policies with harmful long-term consequences. What excuses do journalists have?

And let me say it again. With record breaking productivity growth we should be benefitting from all kinds of benevolent deflation -- our dollars should be buying more and more goods which cost less and less to produce. Only massive nominal INFLATION can prevent this from happening -- and that is exactly what we have.

In 2003 the U.S. government spent a massive $20,000 per household. Is it just me, or does anyone else sense that the U.S. government has morphed into the functional equivalent of a criminal organization? The newspaper today reported that the Congress is spending over $7 billion on earmarks give-aways to industrial park corporations and other such pork in the latest cash-for-votes appropriations package. I can't think of this in any other way than as armed theft from my wife and I and our children -- money taken by force from my family and given to some politically connected friends of the criminal conspiracy called the U.S. Congress. And I'm not sure the U.S. government in all of its infinite wisdom is protecting me any better than would John Gotti.

GMU economist Peter Boettke gives Bruce Caldwell's Hayek's Challenge Five Stars on Amazon, calling the book "nothing short of a brilliant" and "the best book in economics for 2003".

Is it 1971 all over again? Bruce Bartlett has the scoop. Quotable:

there are those who still believe that OPEC caused the inflation of the 1970s, through some sort of "cost-push" mechanism. In truth, OPEC was responding to inflation, rather than causing it. The root cause was the creation of too many dollars by the Federal Reserve. This came about because Presidents Lyndon Johnson and Richard Nixon cajoled the Fed into running an inflationary monetary policy in order to keep interest rates artificially low. They also removed many of the institutional constraints that prevented previous presidents from doing the same thing.

In short, the Fed, not OPEC, caused the stagflation of the 1970s. A recent paper by University of Michigan economists Robert Barsky and Lutz Kilian confirms this analysis. Writing in the prestigious NBER Macroeconomics Annual (2001), they conclude: "The Great Stagflation of the 1970s could have been avoided had the Fed not permitted major monetary expansions in the early 1970s. ... The stagflation observed in the 1970s is unlikely to have been caused by supply disturbances such as oil shocks."

Although the signs are nascent, they indicate that inflation is starting to show its ugly head again, the result of an extremely easy Fed policy over the last three years. Sensitive commodity prices like gold are up, the dollar is down, and OPEC is again complaining about lost purchasing power. It's like d�j� vu all over again.

It's a Carnival -- of Capitalists blogging to beat the band in COTC #10.

JOB GROWTH -- some leading indicators and what they mean.

Inflation -- it may be in our future -- but recent scare stories about coming inflation are ungrounded in either theory or fact argues economist Alan Reynolds.

Debra Saunders on the disgusting GOP spending spree. Quotable:

In his State of the Union address, [George] Bush promised a budget "that increases discretionary spending by 4 percent next year -- about as much as an average family's income is expected to grow." But as The Washington Post reported last month, federal discretionary spending grew by 12.5 percent in the last fiscal year. In two years, the government grew by more than 27 percent.

Or as [John] McCain put it, "We're spending like a family going into bankruptcy." ...

"It's like any other evil; it either is reversed or eliminated, or it grows," McCain said. "It's evil to take taxpayers' hard-earned dollars and spend them on frivolous things."

Do we already have a FLAT TAX?. Bruce Bartlett blogs the story:

According to a new Tufts University paper, the U.S. tax system is getting very close to flat. The Bush tax cuts have reduced the progressivity of the federal income tax, although it remains progressive. However, other parts of the tax system, such as excise taxes and payroll taxes, are regressive. Combining all of them together yields a tax system in which every income class pays approximately the same share of its income in taxes ..

BUSH BLINKS -- international trade war averted as Bush moves to repeal his tarriff on STEEL.

America's dependence on foreign lending to subsidize spending we can't pay for may be reaching the end of its rope as foreign investors lose confidence in America's Ponzi scheme of massive public and private debt accumulation. Quotable:

The wide range of declining currency inflows into numerous types of US financial assets makes it almost certain that the dollar, beset by global security concerns, trade-war anxiety and the crushing weight of the twin US current-account and fiscal deficits, is heading for a serious plunge against other currencies.

The declining inflows, if they were to continue beyond the current month, would ripple ominously across the globe. A substantially cheaper dollar means serious trouble for the export-led economies that have traditionally depended on the United States as importer of last resort, making their goods more expensive. It is already causing a feeding frenzy in the shark-like world of currency traders, who have the ability to wreck entire economies through currency speculation.

The latest US Treasury Department figures, released on Wednesday, show that net capital inflows into the country fell precipitously, from about US$50 billion (42 billion euros) in August to $4.2 billion in September, the lowest since the near-collapse and bailout of the Long Term Capital Management hedge fund rattled markets in 1998.

The new data are raising fears that the US may have difficulty funding its current-account deficit, which ran at about $46 billion a month in the first half of the year and is expected to reach $550 billion by year-end. The fiscal deficit reached $374 billion in the fiscal year ended in October, by far the largest in US history, although off-budget expenditures could carry that as high as $450 billion.

With crucial foreign investor confidence waning, foreign purchases of US Treasury bonds have fallen to their lowest level on a monthly basis since February. The Treasury report said foreigners bought a net $5.6 billion of treasuries in September, down from $25.1 billion in August.

Foreigners engaged in net selling of "agency" debt sold by the quasi-governmental agencies Freddie Mac (Federal Home Loan Mortgage Corp) and Fannie Mae (Federal National Mortgage Association), both of which package and sell domestic home mortgages of various kinds, for the first time since October 1998, getting rid of a net $3.2 billion after buying $8.9 billion the previous month. The lack of interest in bonds was not replaced by buying of equities. Private accounts and central banks sold some $6.3 billion of equities.

Via Robert Blumen who writes:

Due to the status of the dollar as the world's reserve currency, Americans have enjoyed decades of consumption at the expense of the rest of the world. They export, we import. They save, we spend. In return, we send them dollars that ... the Fed create with their confetti machines. And what do foreigners do with these dollars? They turn around and invest them back into US securities, forming a capital inflow that offsets the current account deficit. They are also kind enough to fund a big chunk of our Federal deficit through their purchase of Treasury securities. But this process seems to be gradually slowing. Purchases of US Treasuries have fallen ... If this trend continues the dollar must suffer a depriciation.

Bill Hobbs serves up Carnival of the Capitalists #8.

George W. Nixon? Are we reliving the economics of the early 1970s? Well, G.W. is spending to get re-elected like a Nixon And it appears the bond market may be preparing for future stagflation. I don't remember well -- was Nixon also into trade wars?

Euro reaches all-time high against the U.S. dollar. As the U.S. dollar continues to loose its value, Gold soars in value topping $400 an ounce for the first time since 1996.

Fallacious economic thinking encourages the Fed to open wide the floodgates of inflation. Bruce Bartlett has the story:

The Fed is now arguing that these [empirical] indicators [of yet more inflation] do not forecast inflation mainly because there is unused capacity. For example, on Nov. 6, Fed Governor Ben Bernanke, said this: "I believe that the current low level of inflation, the expansion of aggregate supply by means of ongoing productivity growth, and the high degree of slack in resource utilization together leave considerable scope for a continuation of the currently accommodative monetary policy without undue risk to price stability."

Last week, Michael Moskow, president of the Federal Reserve Bank of Chicago, made a similar point. "Economic output is determined by an economy's available labor and capital resources and their productivity," he said. "If actual economic output persistently lingered below its potential, which economists refer to as an output gap, inflation would decline."

Continuing, Mr. Moskow said, "In the past two years, the unemployment rate has increased and capacity utilization rates in the U.S. have declined. Both movements suggest that the level of actual output has been falling short of potential, so there is an output gap."

Translated into English, the Fed is saying that it will continue pumping up the money supply and maintaining easy credit conditions for a "considerable period," as it said in a recent statement. Its view is that the economy is like a bucket that has been partially drained. Until the bucket is full again, there cannot be inflation. Therefore, the Fed will continue stimulating demand indefinitely.

The problem with this theory is that it is not borne out by experience. In the 1970s, there was high unemployment and low capacity utilization, yet high inflation. A key reason is that labor, plant and equipment are not homogeneous. When demand is stimulated, it may require workers with different skills in different places to satisfy. Similarly, producers may not have the right equipment to make the things people want. Therefore, new investment must take place first before production can rise.

Although the Fed's capacity utilization index may be at a historical low of about 75 percent, much of that unused capacity is worthless. It is malinvestment that simply must be written off. This means that inflation could easily reemerge well before capacity hits 82 percent, generally considered the tipping point. It also means that unused capacity is no barrier to new investment.

I believe that the message of markets, which is showing signs of inflation, is a more accurate indicator of future prices than the capacity utilization index or the unemployment rate. If the Fed continues easing, it runs the risk letting the inflation genie out of the bottle. A little tightening now would be prudent, forestalling more severe tightening later.

Jim Puplava on good inflation, bad inflation and the current trade cycle. Great stuff, lots of handly graphs. (via Mises Econ Blog)

Get your hot, juicy Carnival of the Capitalists hosted this week by Professor Bainbridge.

A highlight of this weeks Carnival -- Steve Verdon on The Theory of the Second Best.

George Will on steel tarriffs and Bush's Trade War. Quotable:

Thirteen months after winning an excruciatingly close election, Bush proved himself less principled than Bill Clinton regarding the free-trade principles that have fueled world prosperity since 1945 ...

Since then various studies, not all of them disinterested, have reached the same conclusion: By raising the cost of goods manufactured from steel, the tariffs have cost more jobs than they have saved. Duh.

It's Bruce Bartlett vs. the IMF on Russia and the flat tax. Bartlett provides lots of good links, as usual.

Consumer spending down, inflation surges. So much for "the Federal Reserve's fears about deflation, an economically dangerous and widespread price decline". Note well how dubioius economic theory has become economic fact in the reporting of this AP writer.

Once again with feeling: when productivity rises, and the money supply is not devalued, prices will and should -- quite harmlessly -- fall. More goods produced for less cost -- purchased by the same dollars. This is "deflation" and there is not a thing in the world "dangerous" about it.

Larry Kudlow is channelling interest rate theorist Knut Wicksell. Quotable:

Interest-rate futures markets are signaling a higher Fed policy rate next year, perhaps a fed funds rate as high as 2.5 percent. But there is no need for the Fed's policy rate to be set at a deep discount to the economy's natural rate.

The combination of the Fed's successful easy-money program and the Bush tax cuts have pushed real investment returns, real profits, real wages and real economic growth nicely upward. Hence, the so-called natural (or real) interest rate is likely to rise in the period ahead. The Fed should follow this and gradually shift its policy rate from highly accommodative to neutral.

Look for the central bank to begin this process in March or April of 2004. Assume a Greenspanian gradualist approach: one-quarter-point at a time.

And now back to the worrywarts: As Fed rate-hiking proceeds, economic activity will accelerate, not decline. Working Americans will make use of higher after-tax returns by spending and investing ahead of future financing rate hikes. This is the reverse of what happened in 2001 and 2002, when falling rates caused folks to defer activity until they could capture the lowest possible financing costs for homes, businesses, or personal use.

Interest-rate jitters seem to have infiltrated the stock market sometime in late June. But rising interest-rate expectations have not inflicted any real damage on the market's optimism. Importantly, rate rises will come from higher real returns, not higher inflation.

Sure, some will argue that faster economic growth is inflationary, but this is a classical demand-side view. Supply-siders know that more people working, investing and prospering cannot possibly be inflationary. In fact, more goods chasing the available money supply will actually hold inflation down. So will rapid productivity gains and low unit-labor costs. So will lower taxes, which are also counter-inflationary.

Strong growth at a time of more normal interest-rate levels is a very prosperous outlook that will carry share prices higher. Periodic market corrections will occur, but smart investors will buy on the dips.

And the markets will thank the Fed for following the Wicksellian paradigm. As Greenspan & Co. bring the policy rate into balance with the economy's natural rate (probably about 3 percent over the next 18 months), the dollar will stabilize and inflationary fears will be minimal.

At least that's what Knut told me when we last spoke.

Robert Samuelson rips Bush's needless trade war. Samualson has some interesting data on the improved productivity of the U.S. steel industry. Quotable:

In 1974, industry employment exceeded 500,000; at the end of last year, it was 124,000. But it's untrue that the United States is leaving the steel business. In 1970 American mills shipped 91 million tons of steel, and imports supplied 14 percent of U.S. demand. Since 1996 U.S. mills have shipped an average of 103 million tons annually and imports have averaged 21 percent of demand. Bigger, more labor-intensive mills have gradually closed, to be replaced by smaller, more efficient mini-mills ...

Plants of bankrupt steel companies have been purchased at low prices by healthier firms, including the new International Steel Group (ISG). For example, ISG bought the mills of bankrupt Bethlehem Steel. In 2002 these mills employed 12,100 people. ISG renegotiated the labor agreements. Job classifications dropped from 30 to five; by June 2003 the mills were run with roughly 30 percent fewer workers.

The WSJ explains why Bush must abandon his economically disastrous anti-free trade policy.

More on the Bush generated TRADE WAR.

The Economist:

"Another hangover in the making?"

America's spurt in growth is being fuelled by a dangerous cocktail ... Early last century, economists such as Ludwig von Mises and Friedrich Hayek argued that, if interest rates were held below their "natural rate" (at which the supply of saving from households equals the demand for investment funds by firms), credit and investment will rise too rapidly and consumers will not save enough.

Sound familiar? America displayed many of those features in the late 1990s. Faster productivity growth raised the natural rate of interest, but because inflation was low (and because Austrian economics had long been out of fashion) the Fed failed to lift interest rates by enough. Investment and borrowing boomed.

Strict Austrian-school disciples would argue that, because America's recent downturn was due to overinvestment and overborrowing, slashing interest rates to encourage yet more borrowing was wrong because it delayed the need for households to save more. Central banks can postpone a downturn only by injecting more and more credit. The inevitable downturn is then deeper or longer ...

(via Mises Econ Blog)

Step right up for Carnival of the Capitalists FIVE.

David Friedman takes the are you an Austrian? -- or are you from the Chicago school? economic theory quiz.

Marginal Revolution has more on Roosevelt and the Great Depression, including a truly disturbing quote from Roosevelt's first inaugural address. No wonder liberty lovers like H.L. Mencken genuinely loathed FDR and what he represented for America.

Despite jobs growth "spurt" and massive GDP growth business executives The New York Times remains downbeat on the economy.

Bruce Bartlett on his Talking Points blog snags this good bit on estate taxes from Greg Mankiw:

N. Gregory Mankiw, Chairman of the Council of Economic Advisers, recently gave an excellent speech on why the estate tax should be abolished. He made two key points. First, the presumption that the tax falls on the rich is wrong because it assumes that the burden of the tax falls on the deceased, which is obviously wrong. In fact, taxes can only fall on the living, namely decedents, who are almost always less well to do.

Second, the estate tax is a direct tax on capital, which not only punishes the thrifty while relieving the profligate, but hurts workers and others far removed from the direct effects of the tax by reducing capital formation and, hence, productivity and living standards.

Mankiw concludes: "The estate tax unfairly punishes frugality, undermines economic growth, reduces real wages, and raises little, if any, federal revenue. There are no principles of good tax policy that support this tax, and I support the President's calls for its permanent repeal."

Employment is up and unemployment is down -- a graphical and statistical analysis.

The Great American Job Machine. Quotable:

A century ago, 40 of every 100 Americans worked on farms to feed a nation of 90 million. Today, after one of history's most brutal downsizings, it takes just two agricultural workers out of 100 workers to supply an abundance of food to a nation more than three times as large. Suppose we'd kept 40 percent of our labor on the farm. Absurd, yes, but if we had, we wouldn't have had enough workers to produce the new homes, computers, movies, medicines and the myriad other goods and services of our modern economy .. the telecommunications industry employed 421,000 switchboard operators in 1970, when Americans made 9.8 billion long-distance calls. Thanks to advances in switching technology, telecommunications companies have reduced the number of operators to 78,000, but consumers ring up 98 billion calls .. To handle today's volume of calls with 1970's technology, telephone companies would need 4.2 million operators, or 3 percent of the labor force. Without the productivity gains, a long-distance call would probably cost 40 times what it now does ..

Even with the net decline in jobs over the past three years, during the past decade total United States employment has risen to 130 million from 91 million since 1980, a net gain of nearly 40 million jobs. Productivity, measured by output per worker, increased a staggering 56.2 percent.

What sort of economics makes sense to you?

A quarter million new jobs created in the U.S. economy. The economy finally begins to re-coordinate after the artificially generated boom and inevitable bust created over the the last few years by the Federal Reserve. The worry now is that the Fed Reserve and the Fed government have thrown so many artificial -- and unneeded-- "stimulus" monkey-wrenches into the natural operation of the price system that there are no genuinely solid and sustainable price signals left in those markets which take us across and though time -- such as the money and capital markets. Phony-baloney economic thinking generates nothing but phony-baloney price signals -- of the sort that make economic coordination completely unreliable over and across time.

Bruce Bartlett on the flat tax. If it's good for Iraq, Russia, Estonia, Latvia, Ukraine and Slovakia, perhaps it might be good for California, America -- or a Democrat candidate for President. And is China next?

VIRGINIA POSTREL on the monetary legacy of Milton Friedman.

Saudis fear sand shortage reports the BBC. I kid you not. (via the Adam Smith blog).

Bernanke vs. Kohn -- Robert Novak on inflation targetting and the politics behind the war for control of the Federal Reserve.

Alan Reynolds on the economics of the cross-border prescription drug trade. The bottom line?

Drug companies are and should be free to offer big discounts only to foreigners if they wish. But U.S. consumers are and should be free to shop the world for a better deal.

Brad DeLong posts this interesting bit on the significance of reputation in economic coordination -- an important theme from Hayek:

Abstract: Under central planning, many firms relied on a single supplier for critical inputs. Transition has led to decentralized bargaining between suppliers and buyers. Under incomplete contracts or asymmetric information, bargaining may inefficiently break down, and if chains of production link many specialized producers, output will decline sharply. Mechanisms that mitigate these problems in the West, such as reputation, can only play a limited role in transition. The empirical evidence suggests that output has fallen farthest for the goods with the most complex production process, and that disorganization has been more important in the former Soviet Union than in Central Europe.

Olivier Blanchard and Michael Kremer (1997), "Disorganization," Quarterly Journal of Economics 112:4 (November), pp. 1091-1126.

The Federal Reserve has set out to measure the Natural Rate of Interest -- Bruce Bartlett links and reports. Funny, I haven't noticed that the Fed in recent years has though one wit about the natural rate of interest.

When I was a young economist working in the forecasting section of the Federal Reserve Board, one of my most memorable experiences was when Governor Lyle Gramley sat down at our table in the staff cafeteria (the only time I ever saw a Governor sit down in the cafeteria rather than the executive dining room) to dispute our forecast for a tepid economic recovery.

"When a recovery comes, it really comes," Governor Gramley said, sternly. "You don't see 1 or 2 percent growth. You see much stronger growth." He turned out to be right.

My instinct is that the third quarter growth rate of GDP of 7.2 percent is an instance of recovery coming on strongly. I would bet that the recovery is real.

-- Arnold Kling

Bush's "recovery" feels more than a bit like the "Roosevelt recoveries" of the 1930s. Jim Puplava of the Financial Times has a must read on The 'OK' [unbalanced and at risk] Economy". Don't miss Puplava's "Economic Recovery Model". Great stuff -- lots of data, interesting analysis.

Carnival Of The Capitalists #4

The flat tax -- first it transformed the Russia economy -- now it will transform the Iraqi economy. (via Calblog).

The Forbes China Rich List. The Guardian suggests that the corrupt Chinese system requires businessmen to engage in criminality if they hope to make such a list.

A bit of remedial economics for Larry Kudlow and Paul Krugman:

Larry Kudlow has greeted this little bit of statistical news with great enthusiasm. He sees a 'barnburner recovery' in this data. This, he thinks, is a true recovery. What is the source of this recovery? Capital expenditures rose 11%, up from 8% from the last quarter. A combination of tax cuts and expansionary monetary policy from the fed spurred an investment boom. As Kudlow writes, with the Fed accommodating investment with "15% growth in the basic money supply" and lower taxes increasing profitability investment will spend more on capital goods. Consumer confidence will improve also, but it is investment that drives the economy.

Kudlow has a dismissive tone towards demand side Keynesians, but his reasoning is not all that different. Kudlow views public policy as a means to stimulate the economy by stimulating investment spending. He does mention incentives hear and there, but he also fails to realize that it is consumer demand for final goods and services that are ultimately �driving the economy�. Economic efficiency does not derive from increasing investment spending and GDP. It derives from aligning the plans of consumers and entrepreneurs. This point warrants great attention. To see its importance, we should look at how a true Keynesian reacted to the announcement of higher growth.

Paul Krugman reacted cautiously to the latest news on GDP. This is somewhat odd, because the Bush Administration has been running huge deficits- exactly what Keynes prescribed for recessions. However, President Bush belongs to the wrong political party, so Krugman must invent some kind of problem pertaining to recent events.

Krugman reports that there was a significant pick up in investment spending. More importantly, consumer spending picked up as well. Consumer durables rose at an incredible 27% rate. Housing sales grew at 20% as well. What prompted this? "Consumers took advantage of low interest rates led to accelerate purchases that they would have made latter".

Krugman correctly recognizes that this cannot go on forever. Consumer expenditures cannot exceed consumer income, so consumer demand must fall. This boom may be temporary.

Paul Krugman has a unique talent for stumbling near the truth. It is quite true that low interest rates raise investment. Both consumer and investor spending cannot grow simultaneously for long. With increasing demand unemployment will fall. However, a general increase in spending- prompted by the fed expanding the money supply and decreasing interest rates- will increase prices in general. In other words, it will lead to inflation. This inflation will, as past episodes of inflation have, lead to another economic contraction and financial crash.

Krugman's penchant for bashing the Bush administration has led him close to the correct interpretation of the statistics in question. The current surge in demand cannot last indefinitely. There is, however, an important lesson that neither he nor Kudlow have yet learned. Economists Ludwig von Mises and Friedrich Hayek developed an explanation of how inflationary booms lead to busts. When central banks drive interest rates down, as the Fed recently has, business investors will invest in projects that they previously saw as unprofitable when the financial cost of repaying loans falls. They will think longer term. Consumers will act upon low interest rates to increase their consumption. Lower interest rates decrease the returns to deferred consumption (savings money is really just deferred consumption). They will think short term. With households revising their expectations in one direction and businesses revising their expectations in the other direction, we will witness increasing discoordination in the economy.

The problem we face is not in stimulating the supply side or the demand side. The problem we face is in coordinating the plans of all individuals on the demand and supply sides of markets with each other simultaneously. Prices in competitive markets bring us close to this coordination. Order emerges in society as an unintended consequence of private competition. Deliberate efforts to stimulate, or otherwise manipulate, the economy causes discoordination. Inflationary boom bust cycles are an example of this.

Things are not always as they initially appear. Strong surges in GDP growth appear to be a treat for all of us. Larry Kudlow and Paul Krugman appear to many as expert interpreters of economic data. Despite these appearances, inflationary monetary policies and deficit spending are tricks that lead to economic discoordination, and these experts have much to learn about economics.

7.2% GDP growth? Karen DeCoster is not impressed:

It seems everyone is going gaga over the latest GDP figures. I'm not. I'm still seeing the same household debt-to-income ratios, an all-time high of bankruptcies, the same housing bubbles, the same paper asset bubbles, the same unemployment rates, and the same growth in the money supply. It seems that few are willing to say that this GDP growth (read: consumer spending) is financed by debt, but this is how it goes in this easy-credit time we are in: if you have a pulse, you can get a loan.

Jeff Tucker:

The Economist offers an interesting commentary on the GDP boom: "While America�s corporations have been strengthening their balance sheets, the same cannot be said for households. According to Thursday�s figures, consumer spending rose at an annual rate of 6.6% in the last quarter. Pre-tax incomes, however, grew by much less. Part of the difference was filled by borrowing, which was growing at an annualised rate of over 5% in the summer months. Borrowing at such a rate seems unsustainable but, for the moment, households seem happy to add to their debts because they are easier than ever to service. Interest rates recall the fifties not the nineties. On Tuesday, the Federal Reserve voted to keep its target interest rate at its lowest level since 1958 for a 'considerable period'. Rates on mortgages, personal loans and car loans are at the lowest that most borrowers can remember.... Borrowing from the future is made even easier when the government does it for you. The federal government ran an unprecedented deficit of $374 billion in the fiscal year just ended�and this record is unlikely to stand for long."

Optimism might also be tempered by the money supply data offered by Frank Shostak: 8% increases through the summer months can create an impressive boomlet.

U.S. economic growth rate -- 7.2 percent -- and the inflation rate quadruples. Here's the U.S. gov's official press release.

And Paul Krugman reverts to anti-Keynesian economic logic 101:

First, while there was a significant pickup in business investment, the bulk of last quarter's growth came from a huge surge in consumer spending, with a further boost from housing. These components of spending stayed strong even when the economy was weak, so there shouldn't have been any pent-up demand. Yet housing grew at a 20 percent rate, while spending on consumer durables (that's stuff like cars and TV sets) � which last year grew three times as fast as the economy � rose at an incredible 27 percent rate last quarter.

This can't go on � in the long run, consumer spending can't outpace the growth in consumer income. Stephen Roach of Morgan Stanley has suggested, plausibly, that much of last quarter's consumer splurge was "borrowed" from the future: consumers took advantage of low-interest financing, cash from home refinancing and tax rebate checks to accelerate purchases they would otherwise have made later. If he's right, we'll see below-normal purchases and slower growth in the months ahead.

This is what Friedrich Hayek or Roger Garrison would call burning the candle at both ends -- it's a classic unsustainable Keynesian funny-money boom generated by a false system of prices imposed on the market by the government, with false interest rates coming from the Federal Reserve and false tax rates coming from the Federal government. The market is being pushed further from sustainable coordination through time by these false prices. The market has been fighting to re-coordinate after the Federal Reserve screwup of the last seven or eight years. Rather than helping the process, the false prices of the Fed Res and the Fed Gov have only delayed things, and have assured that the yo-yo of economic fluctuations will continue to gyrate rather severely. Buckle up for another bumpy Fed sponsored rollercoaster ride.

The Fed -- why we kept the Fed Funds rate at 1%.

UC Riverside economist declares "stimulative effect" due to fire destroyed housing in Southern California could "be a lift to the economy". But will enough houses be destroyed to assure a Bush re-election? Hmm. Does any economist want to put this bit of "predictive science" into a mathematical equation, thus giving it the economist's official seal of approval as real "science"? (Via Jeff Tucker, who identifies this as the classic economic fallacy exposed most famously by Bastiat and popularized among "scientists" by the crank JM Keynes).

Alan Greenspan's professional competency rating is lowered to junk bond status by central banking rating service.

Americans could increase their standard of living by 20 percent if the government simply collected today's aggregate tax revenue from a flat-rate tax system -- Bruce Bartlett reports new empirical research on work, taxation and income.

The (neuro) science of tastes, preference and choice. It turns out that high brain cognitions can decisively shape lower brain tastes. Quotable:

In the series of TV commercials from the 70's and 80's that pitted Coke against Pepsi in a blind taste test, Pepsi was usually the winner. So why, Montague asked himself not long ago, did Coke appeal so strongly to so many people if it didn't taste any better?

Over several months this past summer, Montague set to work looking for a scientifically convincing answer. He assembled a group of test subjects and, while monitoring their brain activity with an M.R.I. machine, recreated the Pepsi Challenge. His results confirmed those of the TV campaign: Pepsi tended to produce a stronger response than Coke in the brain's ventral putamen, a region thought to process feelings of reward. (Monkeys, for instance, exhibit activity in the ventral putamen when they receive food for completing a task.) Indeed, in people who preferred Pepsi, the ventral putamen was five times as active when drinking Pepsi than that of Coke fans when drinking Coke.

In the real world, of course, taste is not everything. So Montague tried to gauge the appeal of Coke's image, its ''brand influence,'' by repeating the experiment with a small variation: this time, he announced which of the sample tastes were Coke. The outcome was remarkable: almost all the subjects said they preferred Coke. What's more, the brain activity of the subjects was now different. There was also activity in the medial prefrontal cortex, an area of the brain that scientists say governs high-level cognitive powers. Apparently, the subjects were meditating in a more sophisticated way on the taste of Coke, allowing memories and other impressions of the drink -- in a word, its brand -- to shape their preference.

Pepsi, crucially, couldn't achieve the same effect. When Montague reversed the situation, announcing which tastes were of Pepsi, far fewer of the subjects said they preferred Pepsi. Montague was impressed: he had demonstrated, with a fair degree of neuroscientific precision, the special power of Coke's brand to override our taste buds.

Bruce Bartlett -- look out for the Bush tax increases.

Carnival Of The Capitalists #3.

"Public Choice" theory -- Nobel winner James Buchanan explains it all for you -- historical development, philosophical foundation, explanatory siginificance. Quotable:

The essential wisdom of the 18th century, of Adam Smith and classical political economy and of the American Founders, was lost through two centuries of intellectual folly. Public choice does little more than incorporate a rediscovery of this wisdom and its implications into economic analyses of modern politics.

Wages continue to inch upwards. Median hourly wages edge toward $14 an hour -- and average hours worked dips below 34 hours per week.

Gary Becker challenges Milton Friedman to endorse competitive currencies, Tyler Cowen reports from the Friedman conference in Dallas. I'm pretty sure Friedman has endorsed competitive currencies, as reported some months ago on this blog. Let me check that out ..

How free trade was good for Mexico's official refrigerator monopoly.

Adam Smith vs. Bill Gates, Sr..

Can former Enron adviser Paul Krugman get any nuttier?

Le Monde on Ludwig Mises and the Mises Institute.

William Anderson, tell us what you really think about Paul Krugman.

The Commanding Heights -- Hayek vs Keynes, the market vs the state -- "the battle of ideas that still divides our world". The full three part PBS special is now available for viewing on the web. Here is part one. And here is the full broadcast transcript of episode one.

The power outage -- a teachable moment. Watch for the "ratchet-effect" of bigger government in operation through course of the crisis. Government regulation and intervention is a central underlying source of the crisis causing problems in the electrical energy business -- And the soluton widely offered to correct the current mess? Yet more government regulation and further government intervention into the business of producing electricity. This time-tested process is the one Friedrich Hayek labelled The Road to Serfdom.

PrestoPundit -- fisked by Brad DeLong:

Give Credit Where Credit Is Due

Greg Ransom raves against what he sees as a Federal Reserve devoted to "reducing the value of money":

PrestoPundit.com: The Fed moves to continue its ongoing devaluation of the currency, voting to keep interest rates artificially low. The major worry of the Fed is that there may be some slowing in its highly successful policy of reducing the value of money. Behind all this is the Krugman/ "Keynes" theory of "deflation".... Further evidence in my view that the Fed -- and the economics profession generally -- is overrun by witch doctors and astrologists, not scientists or even competent dentists (reference here to a famous line from Keynes).

Leave to one side the fact this is not a Federal Reserve devoted to reducing the value of money: the inflation rate under Greenspan has been less than under any Fed Chair since the days of Herbert Hoover.

Focus, instead, on the fact that it is definitely not the "Krugman/'Keynes' theory of deflation." The theory is Irving Fisher's (analyzing the impact of a falling price level on the real interest rate and investment), Milton Friedman and Anna Schwartz's (analyzing the effect of a falling price level on the banking system and the money multiplier), and Ben Bernanke and Mark Gertler's (analyzing the effect of a falling price level on interest rate spreads).

Bernanke and Gertler may well get Nobel Prize's someday for their work on deflation and the "credit channel." Paul Krugman won't--he'll get his Nobel Prize for his work on imperfect competition and international trade. He's been pushing the line that deflation is greatly to be feared in his columns, yes. But this is the first time I've ever seen anyone say that it is his theory.

Why slight Bernanke and Gertler--and Fisher, and Anna J. Schwartz, and Milton Friedman? Is it because Ransom doesn't want to explicitly call Ben Bernanke and Milton Friedman "witch doctors"? Is it because his core audience knows little economics and less about the history of economic thought, but breaks into hives at the mention of "Paul Krugman"?

Whatever the reason, a bad move: it is good to give credit where credit is due.

I'd meant all day to remove my rhetorical drive-by-shotting of Krugman and "pop" Keynesian econ -- too late! Among other issues involved in all this is the fact that productivity has been going up at a brisk pace -- a fixed supply of money chasing an increasing pile of goods means lower prices. I'll add some helpful articles on the multi-dimensional issue of "deflation" when I get the time.

UPDATE: Let me begin with a little reminder from Lionel Robbins on the topic of deflation .. "the belief that there is nothing detrimental to the smooth working of the economic machinery in the changes which result in a consumers' goods price index falling with increased productivity, is not the esoteric creed of a handful of 'sadistic deflationists'as is sometimes suggested nowadays. It is the view which has been held by the majority of the men who have made modern monetary theory in English-speaking countries what it is -- Marshall, Edgeworth, Taussig, Hawtrey, Robertson, Pigou. That a belief that prices cannot fall without causing depression should be able to co-exist with the overwhelmingly convincing demonstration of the contrary proposition in nearly all the standard works on the subject is a most disquieting revelation of the gulf which still exists between scientific knowledge and popular opinion."

And let me recommend the following: "Deflation" by George Selgin; "Hayek versus Keynes on How the Price Level Ought to Behave" by George Selgin (PDF); Two Cheers for Deflation by Joe Salerno (PDF); Deflation: The Biggest Myths by J.G. H�lsmann; Learning to Love Deflation by Ramesh Ponnuru; A little bit of deflation can be a good thing by Kathleen Pender

The Fed moves to continue its ongoing devaluation of the currency, voting to keep interest rates artificially low. The major worry of the Fed is that there may be some slowing in its highly successful policy of reducing the value of money. Behind all this is the Krugman/ "Keynes" theory of "deflation", defined by CNN this way:

Deflation is an unstoppable drop in prices that hurts corporate profits, leading to more layoffs, which saps demand, hurting prices even further.

Further evidence in my view that the Fed -- and the economics profession generally -- is overrun by witch doctors and astrologists, not scientists or even competent dentists (reference here to a famous line from Keynes).

More:

Though the fed funds rate is at its lowest level since 1958, longer-term interest rates have risen recently, spurred by a selloff in the bond market, anticipating that the economy is poised for a rebound and that the Fed will have to raise interest rates soon to fend off inflation. The Fed has tried to indicate it will keep rates lower for longer than usual in an environment where inflation and the labor market are slow to recover.

But the Fed has lost some of its credibility with bond markets, after raising and then dashing expectations for more-aggressive bond-buying and rate-cutting, leading to wild swings up and then down for bond prices.

"In crafting today's FOMC statement, we believe Fed officials were undoubtedly influenced by the perception that mixed signals from the Fed, and possibly some loss of credibility, accounted for some of the recent surge in bond yields," said UBS Warburg chief economist Maury Harris.

The volatility has led many analysts to call for the Fed to be more specific about its goals for inflation, to eliminate much of the guesswork in handicapping Fed policy. But most Fed officials, including Chairman Greenspan, would prefer not to engage in so-called "inflation targeting" ..

U.S. productivity is climbing at a 5.7% rate. If our money was simply retaining its value, prices would be going lower. The fact that prices aren't lower means that we continue to suffer from chronic inflation. This ain't rocket science, but the math here seems to be over the head of the Federal Reserve.

"Economics" as randomly targetted intellectual junkfood -- the story of a master of the craft.

Let's discuss Free Trade.

George Bush borrowed $400 from the Chinese and then sent it to me. He did this he says because I have a kid. Thanks for small favors George. My kid no doubt will have to pay off this debt plus interest, or course. This is not what I want for her, but I'm sure George and the other politicians behind this "gift" couldn't really give a flying **** about my kid.

ECONOMIC BULLETIN: This is a MAJOR economic story:

The Federal Reserve is taking no half measures in its efforts to stimulate economic recovery in the US. To ward off the spectre of deflation, it is prepared to generate inflation and reflate the asset bubble. China is a silent but active partner in the Fed's pump-priming. It would not be possible for US Treasury bond yields to be at current levels were China not a willing and able supplier of savings to the US. Combined annual purchases of Treasury securities from China and Hong Kong have reached $290bn - more than those by any other creditor nation. Both China and the US are having fun at this game. The flow of Chinese savings has enabled Americans to borrow more and spend more ...

And a great deal of this spending is on CHINESE GOODS. Industrial production for export in China is experiencing double digit growth, in large part because of exports to America. Go to Sears. Take a look at where the majority of what is sold there is produced. Follow the circle of money -- and ownership in capital and money instruments -- and it's plain for anyone to see that the Federal Reserve and the Bush government are playing a deeply destructive fools game. In the long run China owns the wealth and our children own some broken toys and one giant pile of foreign debt they'll be paying off for the rest of their lives.

But we have not only the Federal Reserve, the President, and the Congress to blame for this massive act of collective financial suicide -- we can also justly blame the Keynesians (of left, right and center) who rule the roost throughout all of our major institutions. They've told us that the way to wealth is to borrow our bread and eat our seed corn, and through the magic of "consumer demand" our breadbasket will refill itself. As Hayek pointed out several generations ago, this is nothing but a lie, built on a conception of the economy which can't explain how the market could ever work, or why it would ever be broken.

Read the rest of the article. There is a good deal more to the story.

UPDATE: Here's Roger Garrison on Keynes:

... It was not difficult to establish that Keynes saw no way for the market to work. Increased saving, for instance, would not finance increased investment but rather would send the economy into recession. The attempt to save would be aborted in the face of decreasing incomes. Keynes's Paradox of Thrift was a profound denial of even the possibility that the market might coordinate the plans of producers with the decisions of savers. Hayek showed just why Keynes "saw no way": he had no capital theory. We have to add Bohm-Bawerk's capital theory, allow for differential interest-rate effects within the capital structure, and acknowledge the existence of real, live entrepreneurs. These are the amendments that make Keynesianism morph into Austrianism. With this audience, putting the Hayekian graphics through their paces as the story was told had the intended effects. It was easy to come down on the side of Hayek. The economy is sent into recession not by some ill-fated attempt by workers to save more but by an ill-advised attempt of the central bank to stimulate more growth than savers are willing to finance. Further, the central bank's attempts to re-ignite the boom after the bust has come is more likely to postpone a genuine recovery than to hasten it. If Keynes won the day against Hayek, it was because of the political popularity of his policy prescriptions and not because of the cogency of his theorizing.

Futures markets are betting that Fed interst rate hikes will hit in 2004.

Stephen Moore and Phil Kerpen talk some uncommon good sense about a deeply dishonest term of art intentionally used by economists to bamboozle the public -- and themselves -- "Gross Domestic Product":

The headline number of 2.4 percent growth � immediately applauded throughout the media as strong � is about double the real rate that the private economy grew. While the private economy grew near a 1.3 percent rate, the federal government component of GDP increased by a staggering 25 percent, the largest quarterly increase in more than three decades. The increase was due almost entirely to the high cost of the war in Iraq.

The important word there is �cost.� Wars are a cost not an asset. You fight wars because you have to � because there are bad people in the world. But to suggest that the war was good for the economy would be as dimwitted as to suggest that Saddam Hussein deserves a medal of honor for helping revive the U.S. economy ...

And a modest proposal:

The conventional GDP numbers should be replaced with private-sector GDP. Private-sector GDP would omit government spending from the calculations. This would allow us to measure how much the market-based economy is expanding over time. By excluding government spending, no longer would economists and policy makers automatically assume the Keynesian theory that increasing government spending increases economic output.

Let�s measure GDP correctly. Activities that add to wealth should be included; expenditures that reduce wealth excluded. Sorry to say that when we calculate economic growth correctly, our performance is still underwhelming. We would make the case that the single most productive thing that Congress could do to revive prosperity and jobs would be to cut government spending by as much as possible. By all means, bring a chain saw.

But this advice is exactly the exactly the opposite of what the GDP calculators would tell us to do. The New York Times just published a front-page story arguing that the reduction in state and local government spending this year is having a contractionary effect on the U.S. economy. Here we have the perfect example of how statistics lie, and liars figure.

Chart of the Day

(via Jeff Tucker)

Joseph Stiglitz provides some arguments against a terrorism futures market. One wonders, however, how much of this is really about Stiglitz getting psychic income from his cheerleading against markets and "the Bushies"? The tone of the article and the substance of the arguments makes one wonder.

Behavioral economists go to the ball park. (via Just One Minute) It looks to me like economists are continuing to confuse the limits of knowledge problem for a rationality problem.

James DeLong on the economics of intellectual property rights.

Roger Garrison's account of his important lecture series at the London School of Economics can be found in HTML format at Garrison's Auburn web site. Here is a cut from the article:

On the day after the Hayek Memorial Lecture, I received a number of e-mails, some with questions about Hayek's macroeconomics and some just expressing appreciation. Most surprising and gratifying, however, was a message from Derek Scott, who had listened to the lecture from the balcony. Mr. Scott is an LSE alum and now economic advisor to Tony Blair. I was unaware that he was in the audience. He was clearly taken by the Hayekian ideas, describing the lecture as "a breath of fresh air." "I only wish that more people looked at the world through similar eyes," he wrote. The Prime Minister's advisor inquired about further lectures in the same vein and about the possibility of meeting with me at LSE. As an alternative, he invited me to pay a visit to No. 10 Downing. I phoned him immediately and arranged for a meeting on the following Thursday morning. As plans developed, Toby Baxendale was included in the visit.

Toby and I arrived at the Whitehall gate to Downing Street just before 10 o'clock on the morning of June 12. We were admitted through the gate and then passed through a security checkpoint. Walking from security towards No. 10, we noticed a rather large gathering of photographers postioned just opposite the Prime Minister's front door. The presence of the media reminded Toby that June 12 was the day of Blair's cabinet "reshuffle"�which added a little excitement to our visit and, as things turned out, marked a significant change in the organization of the British government (SEE INSERT). Just inside the shiny black door, we waited for our host to come and collect us. He appeared shortly and led us to a spacious room on the second floor. There Mr. Scott served coffee and the three of us talked for the better part of an hour. The primary focus was on current economic conditions in the US and the aggressiveness of the Federal Reserve. The artificial quality of the Fed-led boom that characterized the late 1990s had been made clear in my lecture at LSE. But what was the Federal Reserve doing now? And what would be the likely consequences?
I had hinted in my lecture that trying to re-ignite an artificial boom is not a winning strategy. The US economy is still trying to recover from the excesses of the previous expansion. Some needed liquidation has taken place; more liquidation is undoubtedly in order. But the Federal Reserve's interest-rate aggressiveness retards the liquidation process: If a business firm has expanded his operation or otherwise committed capital to a venture that in retrospect seems marginal or even sub-marginal, why should it actually liquidate the investment if it has the option of carrying it forward at exceedingly low interest rates? The small interest costs may be more than offset by hopes�even by slim hopes�for improved market conditions. Toby could easily supply a reinforcing perspective from the business world: "Many businesses are overextended and just trying to hold on."

Given the uncertainty about future market conditions and the compounding uncertainty about Federal Reserve policy, business firms are unlikely to commit themselves to still more investment projects. Keynes's idea that businessmen don't respond to a reduction in the interest rate, though not a general truth, is actually true during a period of liquidation. Hangovers are not cured by the imbibing of more spirits. Hence, it does no good to provide more spirits at bargain-basement prices. The injections of credit by the Federal Reserve, not surprisingly, are stimulating consumption spending instead of investment spending. Cheap credit in the current circumstances also bolsters the demand for housing, creating a bubble in real estate. Homeowners refinance their mortgages and spend the windfall largely on consumption goods. (Ironically, some critics of the Mises-Hayek theory have seen this development as evidence against the Austrian view�since it seems to be consumption and not long-term investment that's getting a boost from low interest rates. Of course, the consumption binge, induced by the Federal Reserve in vain hopes of re-igniting the boom, is neither a refutation of Hayek nor a symptom of genuine recovery.)

What struck me during the visit at No. 10�and I hope it struck Mr. Scott, too�is that the story as told by an academic economist and as told by a real live entrepreneur/businessman were in perfect harmony. I've become aware over the years that this is a characteristic of Austrian economics that cannot be matched by other schools of macroeconomic thought. Hayek's ideas ring true in the financial and business community in ways that the "rational expectations" of new classicism or the "menu costs" of new Keynesianism do not. Credit expansion gives us an artificial boom. Rock-bottom interest rates after the bust forestalls a genuine recovery. The Federal Reserve's near-phobic resistance to any price or wage decreases reflect its resolve not to repeat the blunders of the 1930s. But avoiding a deep depression has gotten translated into precluding a timely correction. The Fed, in effect, is trading depth for duration. The shallow recession drags on.

We made it clear that in the final analysis the Austrian theory suggests banking reform and not just some alternative policy prescription for adjusting interest rates. The reform measure currently on the table in Britain would be a dramatic one. Britain could join the Eurosystem, the Bank of England relinquishing key powers to the European Central Bank. Mr. Scott put into perspective for us the recent choice by Tony Blair to postpone for now making any decision to abandon the pound for the euro. The implications of Austrian theory about the advisability of Britain's adopting the euro are mixed. Generally, Austrian economists favor reform in the direction of decentralization. Clearly, expanding the Eurosystem to include Britain would be a move in the opposite direction.

But, Austrian economists also favor putting monetary decisions in the hands of those least likely to use it for narrow political purposes. In recent years, the Bank of England has constrained itself to rule-following behavior�certainly more so than has the Federal Reserve. But in the past it has not been above using its discretionary powers to serve the interests of an incumbent administration. Nor is there any firm institutional check against such politicisation in the future. It is worth pointing out that relinquishing control of monetary matters to the European Central Bank would effectively eliminate political business cycles�or, at least, ones with British origins. And without an accommodating central bank, the British treasury, like the treasuries of the other euro-using countries, would be put on a shorter leash. The down side of Britain adopting the euro is the inherent problems of centralization. As is well known by seasoned Fed watchers, blunders committed by a central bank can have dramatic and far-reaching consequences. So, while the European Central bank is relatively well insulated from the narrow political interests of its euro-using members, those member nations are continuously exposed to the potential ineptness or miscalculation that tends to characterize any organization not subject to the discipline of the marketplace. In the end, this consideration, an implication of socialist-calculation debate, may be an overriding one.

A breakfast meeting between Toby Baxendale and Derek Scott subsequent to our June 12 meeting at No. 10 and after I had departed for the United States evidenced a continuing interest in Hayekian ideas and their implications for policy prescription and institutional reform.

10 Questions for Roger Garrison, America's leading macroeconomist.

An interesting analysis from Institutional Economics:

Alan Greenspan�s record is the subject of a feature in the AFR Magazine by Peter Hartcher. The article is mostly a recycling of some increasingly tired Greenspan anecdotes and factoids. But it also argues that Greenspan is responsible for America�s most recent boom and bust. The article implies that Greenspan kept policy too easy for too long, in contrast to the view that he tightened policy too aggressively, too late. Of course, these views could be reconciled by arguing that monetary policy was systematically mistimed.

There is a much bigger story here, one that most journalists miss because of their preoccupation with personalities at the expense of processes: the US operates an almost entirely discretionary monetary policy regime, unconstrained by a formal inflation target or other policy rule. But there is no suggestion amongst all the criticism of Greenspan that perhaps US monetary policy should be made subject to the rule of law. Instead, Hartcher effectively argues for an even more discretionary and activist Fed that would target asset prices:

But probably the most important reason for Greenspan's ability to drive into a $US6.5 trillion car crash and walk away unscathed is that when he erred, it was an error within the prevailing orthodoxy. The economic orthodoxy said that the only danger that a central bank should confront with restrictive monetary policy - higher interest rates - was inflation. And this refers to inflation in the commonly understood sense of inflation in consumer prices. The US was not suffering an inflationary outbreak, so, according to the prevailing wisdom, there was no need to act. There are early signs the orthodoxy is now being rethought.

The view that asset prices should be a target of policy is gaining ground, partly because of a misinterpretation of the work of the behavioural finance school, which confuses individual irrationality with informational inefficiency. But the view that any single authority or personality could determine an appropriate level or growth rate for asset prices effectively revives the wrong side of socialist-calculation debate from the 1930s. A rule-bound nominal anchor, in conjunction with other rules designed to promote market efficiency and integrity, would minimise the risk that monetary policy might destabilise asset prices. An activist monetary policy that sought to target asset prices would be a recipe for disaster.

"Why Africa is poor" by Douglass North and friends.

America's leading macroeconomist reports back from the London School of Economics -- and No. 10 Downing Street.(pdf file).

Why do folks like NRO waste so much space on the nonsense of folks like Paul Krugman when there is such solid macroeconomics coming out of the Hayek-inspired economists?

The Bush administration will never win any prizes for it's understanding of how a successful economy works. This is bad news for Iraq, which is dependent on the economic thinking of those put in charge of Iraq by the Bush people. For any economy there can't be anything more important than good money. Steve Hanke explains how confused American monetary policy has been in Iraq, and what might be done to get things back on track -- if anyone in the government ever comes to realize how important such things are to the development of Iraq as a nation.

It's worth recalling how badly the Allies bungled in Germany in the years immediately after WWII -- until Ludwig Erhard outsmarted the Allies and removed a destructive scheme of price controls imposed by the economic illiterates in the occupying command. Magically, seemingly overnight, the German economy came back to life. Read short versions of the story here and here.

On second thought .. the much hyped Boskin "windfall" story explodes. Bruce Bartlett gets credit for setting some of the charges in this unusually public academic demolition.

Tyler Cowen on Paul Krugman.

One of the classic fallacies built into the failed "science" of Keynesian macroeconomics is the fatal assumption that a national economy is somehow a closed economy -- it isn't, never was. It's a world economy, and national moneys and American producers and consumers are simply elements coordinated within that larger spontaneous economic order. Here's an example of what can go wrong when your leading shamans preach the witchcraft of Lord Keynes:

The various arms of the government continue to accumulate massive debt and pump out truckloads of inflated dollars, and meanwhile American's pump those dollars overseas. Bush and Greenspan are fueling double digit industrial growth -- in China.

The good news is that all those dollars overseas will increasingly be worth less. The bad news is -- well, the bad news always comes down the road, for someone else (our children), and in the real lost of the far better conditions of wealth that we are now sacrificing. I.e. the bad news is always relatively invisible to those who don't know sound economics. If you borrow and spend instead of invest in production goods, down the road you will have an empty bowl of grain and debts to pay, rather than crops coming in as the bounty returned from your wise use of your seed corn. It's a old story-- once taught to children -- which fraudulent economists and selfish politicians deny at the cost of our future economic well-being.

A good history of the various attempts to include money within a understanding of an open global economy is International Monetary Economics, 1870-1960 by June Flanders. Another classic on this general topic if Monetary Nationalism and International Stability by F. A. Hayek, which is going for about $400 used from Amazon. (Wow, I'm rich!).

Two cheers for deflation (pdf) from economist Joe Salerno.

The new age of inflation is upon us:

We've known it was coming for a while. The shift in Fed policy from promoting disinflation to fanning the flames of inflation, the outsized tax cut by Washington, the easing tensions in the financial markets were clear enough signals.

The effects of this stimulus [sic] are beginning to show up in the Federal Reserve's weekly report on the nation's money supply. Northern Trust chief U.S. economist Paul Kasriel points out that M2 (money held in currency, travelers checks, demand deposits, savings accounts and retail money market funds) has been growing at a compound annual rate of 11 percent over the past three months.

Money, it's a gas by Justin Lahart, CNN. (via Mises Econ Blog)

And here Paul Kasriel explains the Fed's wacky obsession with combating falling inflation.

Economic historian Charles Kindleberger has died. Here's the EH.NEWS posting:

Charles P. Kindleberger was born in New York City in 1910. He received his B.A. at the University of Pennsylvania in 1932 and his Ph.D. at Columbia University in 1937. He came to economic history after distinguished careers in public service (including the Federal Reserve and the Office of Strategic Services during the Second World War) and teaching international trade at M.I.T. He made his entry into the field with a book on Economic Growth in France and Britain, 1851-1950 (Cambridge, MA, 1964). Kindleberger surveyed the extensive literature on these two countries and concluded that there was no single convincing explanation for the differences between these two countries. He ended the book with the following famous words: "Economic history, like all history, is absorbing, beguiling, great fun. But, for scientific problems, can it be taken seriously?"

This ironic comment set the tone for Kindleberger's future work in economic history. His books and papers are distinguished by his command of the previous literature. His reasoning is informed by an intelligent, if skeptical, use of economic theory. His prose is sprightly. And his conclusions are clear, forcefully presented, and always worth debating.

Kindleberger's impact on economic history comes primarily from two books published in the 1970s. The first, The World in Depression, 1929-1939 (London, 1973; revised edition, Berkeley, 1986), provided a comprehensive narrative of the Great Depression from an international perspective. Instead of seeing the Depression as a succession of national stories, Kindleberger argued persuasively that it was the result of a failure of the international economic system. The economic structure built around the gold standard had allowed the pre-war industrial economies to weather various economic shocks in the late nineteenth and early twentieth centuries, but it proved unable to contain or offset the shocks arising in the period after the Great War.

Why not? Kindleberger argued that the inter-war economy lacked a hegemon, a dominant leader. The hegemonic power in the pre-war period was England, more specifically the Bank of England, which acted to contain crises wherever they started. But England was exhausted by the effort to defeat Germany in the Great War, and the Bank of England was in no shape to continue this role. Although the United States was the obvious candidate to pick up the baton, Americans were isolationist after their wartime efforts, and the U. S. declined to act. In the shortest summary: No longer London, not yet New York. Without a hegemon, the shocks to the world economy in the late 1920s were allowed to drag the world into the Great Depression.

Kindleberger generalized this argument in Manias, Panics, and Crashes: A History of Financial Crises (New York, 1978; 4th edition, 2000). He surveyed financial crises in the past two centuries that were important enough to have macroeconomic effects. He described the various irrationalities that preceded crises, as suggested in his title, and synthesized a vast literature in a small and engaging book. He concluded that stability was promoted when a world lender of last resort existed and followed the recommendations of Walter Bagehot a century earlier to lend freely at punitive rates during a crisis. This is what a hegemonic power should have done in the 1930s in Kindleberger's view; it is what the International Monetary Fund should do today.

Kindleberger was a wonderful scholar, teacher and friend. He remained active professionally as he aged, responding to letters on his ancient manual typewriter up to just before his death. Even in his nineties, Kindleberger could and would give you rapid and sharp comments on any paper you sent him. He lived a long, full life, and we will miss him very much.

Peter Temin, MIT

I've suggested here more than once that most economists are -- deep down -- pretty terrible economists, folks who just don't understand their subject matter in all sorts of areas, especially where it matters most -- like capital theory. (Definition of modern "math jock" economics -- the economics of capitalism absent any understanding of, oh dear, capital.)

Recent Ph.D Robert Murphy illustates the problem:

I would like to conclude with a personal anecdote that illustrates the relevance of [economist] B�hm-Bawerk's critique. After I had reconciled the verbal logic of B�hm-Bawerk with the mathematical models of the mainstream, I wrote a first draft of one of my dissertation essays in which I explained away the apparent conflict by pointing out the tremendous importance of the mainstream's assumption of a single-good world. I handed in my draft to a renowned mainstream economist, just to make sure that I hadn't misunderstood neoclassical theory.

When I got my draft back, I was quite surprised to find that the professor had clipped a single piece of paper to the front. On it he had written something like, "This is the only interest theory that I, and just about everyone else, understand." Below he had drawn a simple diagram, with C(t) (i.e. consumption in period t) on the x-axis, and C(t+1) on the y-axis. There was a semicircle connecting the two axes, which denoted the production possibilities frontier (PPF) for present and future consumption through tractors.

The professor had drawn two dots on the PPF. The dot that was higher on the circle represented the tradeoff that was available through saving: By moving to the left on the x-axis, a person reduced current consumption in order to invest in tractors. By moving up on the y-axis, a person increased future consumption because of the marginal output of the tractors.

And now the crucial step: Because of the shape of the PPF, and because he had chosen points on the right side of the curve, it turned out that the leftward shift in present consumption was smaller than the upward shift in future consumption. Therefore, my professor thought that this simple diagram had shown a technological cause of interest: Because of the productivity of tractors, my professor was claiming that a small reduction in present consumption would cause a great increase in future consumption, i.e. a positive rate of interest.

What was so frustrating about this diagram was not that it was wrong per se, but that it completely overlooked B�hm-Bawerk's critique! My professor had completely overlooked the problem of pricing the tractors! Yes, the technological facts allow us to say that a given increment in future consumption (i.e. the gap on the y-axis) will require the present investment in a definite number of tractors; this is an engineering problem that does not involve subjective preferences.

However, just because we know how many tractors we need to buy in the present, we do not know how much such an investment will reduce our present consumption. In order to know this, we need to know the market price of tractors in terms of present consumption. By drawing the gap on the x-axis, my professor had just assumed that the tractors would cost less in terms of present consumption than their future output. In other words, my professor had assumed a positive rate of interest.

After several minutes of discussion, I finally got the professor to realize that he had been assuming away this difficulty. But he still refused to concede that physical facts alone could not explain a positive interest rate. No, instead he proclaimed: "Assume we can turn tractors into bananas one-for-one."

In conclusion, B�hm-Bawerk's critique of the na�ve productivity theory was a brilliant leap forward for subjectivist economics. Unfortunately, its lessons are as relevant today as they were in the 1880s.

Samuel Brittan cuts through some of the deflation non-sense. Quotable:

Apart from Japan, the industrial world has not seen deflation for 70 years. Once there is a single currency and a single monetary authority, inflation and deflation refer to movements of the price level of the whole area. To raise the alarm about possible German deflation, because the rate of inflation in that country has fallen to 0.6 per cent - against a euro area rate of 1.9 per cent - is simply to ignore the advent of the new currency. To talk about German deflation makes as much sense as to talk about deflation in Texas or Cornwall, unless you believe monetary union is premature or still immature.

In any case it seems inherently absurd to believe that a � per cent annual increase in prices is satisfactory, while a � per cent decrease spells catastrophe. Very often the difference between these low rates of inflation and deflation will depend mainly on the price index used. A � per cent rate of deflation based on the European Union's Harmonised Consumer Price Index usually translates into a � per cent rate of inflation on the British Retail Prices Index.

(via Institutional Economics)

More bad advice for Japan from American economists.

The Japanese government bond auction is a dud. What the rise in Japanese bond prices might mean for Americans.

Jobless rate rise to 6.4% -- employers cut 30,000 jobs.

When will economists admit that Keynesian economics is a fraud? Keynes + the kitchen sink -- and all we get is more bad economic news, even as the economists keep forecasting good economics news, based on the failed and utterly unscientific "models" of Keynesian economics. It's time to call them what they are -- witch doctors, not social scientists. But here and there, you find glimmers of common sense and sound reasoning -- when the economists abandon their witch doctors reliance on the astrology of Keynes:

"Business spending is the Achilles heel of the economy," said Sung Won Sohn, chief economist at Wells Fargo & Co. "The economic baton needs to pass from consumers to businesses."

Edmond Phelps is still a bonehead and he still doesn't know his field of research -- i.e. he gets the ingredients -- and the history -- all wrong on the Hayek-Mises explanation of the boom-bust cycle.

Gene Callahan is inspired to make this short reply:

Phelp's response is very strange. He writes: "If solid old-economy investments were being crowded out in the late 1990s, corporate interest rates net of inflation would have been elevated, which they were not." Well, they would have been elevated, unless, of course, someone in the economy was artificially holding rates down, heh? And it's clear that he still doesn't get the malinvestment idea, and can only think of capital as an aggregate.

Brad De Long fisks Lawrence Kudlow not once but twice, using this helpful graffic showing month-to-month base money growth rates:

Straight from the horses mouth -- a Keynesian crank on how the Fed blew it.

Deflation is like cholesterol ..

.. says Sung Won Sohn, chief economist for Wells Fargo Bank. There's the good kind and the bad kind, and a little of the good kind can be healthy.

Oh, and this -- America is not Japan. Common sense and good economics. Don't you love it.

It's sweeping tax cuts for Germany.

More socialism. Bartley endorses Mundell's madness -- and provides the bonehead remark of the week:

A world money would be an extraordinary boon to international stability.

Anybody ever heard of competition? It's the thing markets are for, and the market for money and time needs competition perhaps more than anywhere else.

Here is the mathematical economics on this: Central Banking + World Government = idiocy squared, then cubed.

Kudlow -- that maniac Keynesian -- wants Mo' Money. And he's using words with no meaning, borrowing technical terms from the academic economists:

the lagging economy has created a growing �output gap� between potential and actual economic activity.

Business Week rationalizes it all for you -- how the Fed fine tuning economic growth and the bond market via the black magic of Keynesian inflation. Quotable:

the Fed isn't particularly worried by the risks of a bond bubble. If anything, it wants to cultivate a sky-high market.

Noam Scheiber takes Greenspan to school:

And yet, just because the prices of many goods are falling--and may continue to do so for the foreseeable future--doesn't mean the country is anywhere close to the kind of economic catastrophe that keeps central bankers up at night. Such fears confuse the cause and effect of a deflationary crisis. As James Grant, editor of Grant's Interest Rate Observer, points out, economics giants such as Ludwig von Mises and John Maynard Keynes understood deflation as a condition brought about by a scarcity of money and credit in the financial system. If, for example, there was too little money relative to the amount people needed to transact their day-to-day business, then people might start rationing and even hoarding it, which would cripple economic activity. True, prices would fall under these circumstances, since fewer dollars makes each one worth more. But those falling prices would only be a symptom of the real problem, which was a collapse in the money supply.

As it happens, we can be pretty confident that today's downward pressure on prices isn't the result of too little money. For one thing, while average prices are indeed increasing at a slower and slower rate, individual prices are all over the map. Prices for many services, such as cable television and child care, are increasing by 5 percent per year. Meanwhile, prices for many manufactured goods, such as stereos and televisions, are falling by 5 to 10 percent per year. On average, these price hikes and price declines are roughly canceling each other out, hence the drift toward zero inflation. Second, the Fed has been aggressively lowering interest rates for almost two and a half years now, which it does by expanding the money supply. According to one broad measure, the money supply has been increasing by about 7 percent annually throughout the last few years.

There are two key reasons the prices of certain goods are falling, neither of which has to do with the money supply. First, all the equipment and information technology that companies invested in during the last 20 years--particularly during the late '90s--has dramatically increased productivity, enabling companies to produce the same amount of goods more cheaply than ever before. Second, that investment has led to excess capacity, meaning companies are able to produce more goods than the market can absorb. According to The Wall Street Journal, for example, the global-production capacity for automobiles stands at about 80 million per year, while global demand is about 60 million. Companies that overproduce tend to cut prices to move all their extra goods.

he Fed's confusion of cause (a contraction of money and credit) and effect (falling prices) arises from a misreading of the two historical episodes upon which today's conventional wisdom about deflation is based ...

Well, you'll have to read the rest here.

Institutional Economics notes that Gerald O'Driscoll -- a leading authority on the macroeconomics of Hayek -- "is beating the inflation drum in the wake of this week's Fed easing". And he posts this from O'Driscoll:

In the end, financial markets may negate the beneficial effects for economic activity of the Fed's expansionary monetary policy. If markets are in fact turning their attention to the possibility of inflation, long-term interest rates will rise. Higher interest rates offset the effects of monetary stimulus. Perhaps that will yet give Fed policy makers pause. For now, however, higher inflation is in store for the US economy. Global investors take note.

The Fed's next move -- crank the printing presses?

The boom - bust cycle.

Must reading -- Alan Reynolds on the Fed:

After the Fed cut the fed funds and discount rates a quarter of a point, the usual pundits offered the usual opinions about the brilliance or foolishness of that move. To think sensibly about what the Federal Reserve does, however, it helps to start with reasonable (low) expectations about what any central bank can do.

Congress gave the Fed enormous power to mess things up but no mandate about what the central bank's goal should be. Lacking any legitimate job description, the dozen members of the Federal Open Market Committee (FOMC) came to think of themselves as expert central planners in charge of fixing whatever problems they could dream up. At this moment, the FOMC central planners proclaim that the economy "has yet to exhibit sustainable growth."

From the fourth quarter of 2001 through the first quarter of this year, the economy grew at an annual rate of 2.7 percent. That was slow, but there is no evidence to suggest it was not or is not "sustainable." By saying the economy's growth is not "sustainable," did the Fed mean growth would grind to a halt were it not for this miraculous quarter-point dip in the interest rates on bank reserves?

In reality, the headline statement about growth not being sustainable meant nothing at all. "The committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal." That is, the FOMC thinks the economic growth -- which has heretofore been unsustainable -- is nonetheless likely to be sustained. And it boldly forecast a 50-50 chance that things could get better or worse.

The Fed started issuing such absurd "balance of risk" statements a few years ago -- implying Fed policymakers alone could achieve the perfect balance between too little economic growth and too much. The hidden assumption behind that balancing act is that inflation supposedly arises from excessive real growth. Unfortunately, that assumption makes inflationary recessions conveniently impossible, by definition, which also makes dangerous nonsense of the whole ritual.

The latest FOMC missive takes this foolhardy Keynesian trade-off even further, predicting that "the probability, though minor, of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation ..." A "substantial fall in inflation" is now officially "unwelcome." Why? Because lower inflation is assumed to be associated with slower economic growth, and vice-versa.

Perhaps the FOMC meant to say that a broad-based decline in prices (deflation) would be unwelcome. But that is not what it said. What it said was that lower inflation would be unwelcome. For the year ending in May, the broad deflator for personal consumption was up 2.3 percent and the CPI was up 2.1 percent. Excluding food and energy cuts that to 1.6 percent. Would it really be so unwelcome if inflation fell to 1 percent, as it has in China?

The FOMC says the risk of substantially lower inflation is "minor," yet it says that minor risk is nonetheless greater than the risk of higher inflation. Since substantially lower inflation is unwelcome, that seems to suggest it might welcome higher inflation. Yet the FOMC went on to say that "the latter concern" (about a pickup in inflation) "is likely to predominate for the foreseeable future." For the foreseeable future, the Fed is more likely to be concerned about a pickup in inflation, but for the moment it is more concerned about a "minor" risk of lower inflation.

All the big monetary policy questions come down to what targets the Fed should aim at and what instruments it should use to hit those targets. The Fed is sometimes criticized for treating interest rates as a target, but that is not quite fair. When the Fed says it will now keep the fed funds rate close to 1 percent, that means it will buy more Treasury bills whenever that rate tends to move above that level. The Fed pays for those T-bills by writing a check on itself. Those checks end up being credited to some banks' reserves at the Fed. With more reserves, banks can make more loans or buy more securities, putting new money into checking accounts (which require the extra reserves).

The distinction some draw between lowering the fed funds target and providing more liquidity (bank reserves) is normally misleading. The only way the Fed can keep interest rates on bank reserves lower than before is to provide more reserves to the banking system, most often by monetizing more federal debt.

It is sometimes said the Fed can only affect short-term interest rates, not long-term rates. That, too, is usually misleading. Long rates almost always move in the same direction as short rates, although not as much. If the Fed tries to keep short rates too low for too long, however, the market will gradually sense that this is an unsustainable policy and widen the spread between short and long rates.

The Fed now tries to target some mix of "sustainable" real growth and "welcome" inflation mostly by using information about the real economy (it rarely mentions prices) that is inherently backward-looking. Trying to fine-tune the economy's past performance has often contributed to instability, partly because even schoolchildren can figure out the Fed's game. Because consumers and firms rightly expected the Fed to keep pushing interest rates lower so long as the economy looked sluggish, for example, it made sense to postpone interest-sensitive purchases until rates seemed to have bottomed. And it will likewise make perverse sense, given the Fed's lagged reactions, to rush to borrow and spend after rates begin heading up.

Another problem with reducing the fed funds rate because of a perception that past economic growth has been inadequate is that it virtually invites the Fed to raise the fed funds rate after growth improves, even if inflation remains very low.

The Fed has given itself too many chores over the years, which makes it less likely that it will do any of them very well. It is up to Congress, not the Fed, to reduce tax and regulatory obstacles to economic growth. That will make the Fed's job easier because additional supply, innovation and productivity help to hold inflation down, contrary to Fed dogma. It is also up to Congress to give the Fed a clear assignment -- to keep some acceptable measure of inflation within a narrow range.

When Fed officials start fretting about lower inflation being unwelcome and assigning itself the arrogant task of creating "sustainable" economic growth, it is clear it cannot be trusted to even make sensible statements, much less sensible policy.

Text of the Fed statement.

The light slowly dawns on a young economist:

I guess this post is about meaning. Two years ago, when I first learnt calculus (yes, i was that bad) My wonderul quantitative techniques lecturer, Tony Humm, explained why economists use calculus. It was wonderful--it all became clear. I understand and like differential equations and their resulting phase diagrams, but I can't help but feel something is missing.

Read the whole thing. It begins this way: "Professor David Begg .. once told us that in the 1970s phase diagrams were the rage in economics ... "

Keynesians at the Fed want more air in the bubble.

The Fed decides tomorrow -- half point or quarter point?

A good analysis of what the Fed is up to -- and what it means for the bond markets. Quotable:

The Fed's aggressive efforts to steer the economy away from deflation will be conducive to mini-bubbles in a range of asset markets. The Fed does not necessarily want more bubbles to grow but they are seen as an acceptable price to pay.

But there's much more, with lots of good details.

What does Volcker think? Sean Corrigan of the Mises Economics Blog posts the following important remarks from Paul Volcker:

Hitting the professional Bloomberg wires were the following quotes from Greenspan's predecessor, the still-influential Paul Volcker, speaking at the LSE ... "We have a record current-account deficit and we're living off the munificence of strangers. The only reason we're getting enough to fund the deficit is that Asian central banks are vigorously buying dollars."

"We have an amount of stimulus beyond anything I've heard of in history," he also marvelled, before giving his verdict on the current financial market obsession:

"If I were setting odds on deflation in the U.S. the probability wouldn't reach 0.1 percent. I see no prospect of real deflation like we had in the U.S. and other countries in the 1930s."

Posted by Greg Ransom / Permalink | Comments (0)

Brad DeLong defends Milton Friedman in response to Paul Krugman's less-than-subtle dismissal of Friedman's monetarism. But note to Brad, Friedman has repeatedly endorsed free banking. [Ed. note -- In an earlier version of this post I unfairly characterized Krugman's short remarks on Friedman as a "hatchet job". It wasn't -- see comments. Krugman uses a much blunter instrument -- and a softer one. Call it a "rubber mallet" job.]

Martin Feldstein's class notes, "What Should the Federal Reserve do Now" from April, 2003 (pdf). (Voodoo will increase my traffic, right?)

Poor and Stupid's Krugman Watch uses the way-back machine to expose how clueless Paul Krugman was about the macroeconomic situation at the top of the bubble in 2000:

Here's what Krugman was really saying then about the market and the economy. On January 5, 2000, just nine days before the Dow Jones Industrial Average topped out at the never-seen-again level of 11,723 Krugman wrote in his still brand new New York Times column,

"...current stock prices already have built in the expectation of economic performance that not long ago we would have considered incredible; performance that is merely terrific would be seen as a big letdown. So which will it be -- terrific or incredible? We all have our opinions -- being a pessimist by nature, I think that things will be merely terrific..."

"Merely terrific"? You can't make this stuff up. This classic top-of-the-market epiphany for Krugman came after a decade of singing in a Greek chorus of Ivy League economists who were forecasting that Japan and Europe would take over the world economy and leave American industry in the dust (see Krugman's The Age of Diminished Expectations). Several weeks later, on February 27, after the Dow had drifted lower while the NASDAQ and the S&P 500 were still climbing toward their March 2000 peaks, Krugman said to ignore the falling Dow, and offered this apologia for the economy in his Times column:

"The social and psychological hallmarks of a bubble -- like the fact that the TV in my local greasy pizza place is now tuned to CNBC, not ESPN -- are plain to see, but so is the spectacular pace of technological progress. I'm not sure that the current value of the Nasdaq is justified, but I'm not sure that it isn't. In any case, the fall in the Dow is not a verdict on the economy as a whole. As long as we have full employment and low inflation, I say let the blue chips fall where they may."

Good thing there's that little institution call tenure -- and that most other macroeconomists are just as lost in the woods.

The "behavioral economics" of time preference and sugar pills -- it seems that candy eaters lose the will to delay gratification. File this under "studies shows that teen-aged boys are attracted to girls". But note well, this bit of "science" studies what people say, not what they actually do -- and then the whole thing is hyped as if they'd done the latter, and not the former.

Will the Fed party like it's 1958?

Uncompetitive America -- the cost of workers comp insurance continues to skyrocket.

"By the end of the year, we will see growth above potential". What the h*ll does that mean? It sounds a lot like what lawyers call "talking out of one's a**". Gregory Mankiw might have aimed too low with is new post at the Council of Econ Advisors -- he seems a natural for the Fed.

Incredibly encouraging news:

But nearly half of the [67 economists surveyed by USA Today] � 44% � said that if they were on the Fed, they would vote to keep interest rates where they are. They say the economy is already showing signs of improvement, and cutting rates to the lowest level since 1958 could put too much stimulus into the pipeline and generate undesirably high levels of activity and inflation.

I'm sorry to say that I'm amazed that there are so many sound heads in the economics profession today. And more good news -- though much less surprising:

95% [of these economists] said deflation was "not very likely" to happen.

With the money supply racing ahead in May, this is a no-brain call.

Brad De Long is back from counting bears in Canada and fighting bugs -- and he's blogging about corporate control, interest rates, and the National Tourist Board of Canada midge conspiracy. De Long flags this quote from the Washington Post's John Berry:

to the surprise of economists and policymakers, the recovery has been halting and "jobless" despite huge doses of monetary and fiscal stimulus...

If your "models" are un-scientific math playthings -- and your explanations are incompatible with any plausible causal mechanism (e.g. one which would include capital structure through time and real world relative price mechanisms), you shouldn't be surprised by what happens, because you have no sound justification for anticipating anything. And in my considered judgment, that is just the situation that modern macro finds itself. It's fantasy football without a football, players, or ball field. It's fake science. And you can quote me on that.

Worth quoting from Richard Bernstein of Merrill Lynch:

What Japan has shown us is that the way to fight deflation is to get rid of overcapacity as fast as you can. The Fed is doing the exact opposite now. What the Fed is doing is keeping the oversupply situation intact by lowering the cost of capital.

It's another "Is it Hayek?" moment, as folks all over the place are independently rediscovering many of the basics of Hayek's account of money and the the boom - bust cycle, and the central role which capital investment plays in that process. This is from The Capital Spectator:

Avoiding Japan's economic slump has been the Federal Reserve's obsession for some time now. We know that because the usual list of speakers from the central bank have been talking up the powers of the printing press on the subject of money supply. And it's more than just talk.

The latest money stock figures confirm what everyone already knows: the Fed's liquidity-injecting machine is pumping out greenbacks at a healthy clip. The M2 measure of money supply climbed a seasonally adjusted annualized rate of 8.4% for the three months through May. That's more than triple the expected growth rate of the GDP for the U.S. this year. In a plan to juice the economy and at the same time fend off any deflationary threats, Greenspan and company are clearly intent on putting more money into circulation than the economy otherwise requires for normal operations.

The assumption is that if the consumer can be induced to spend more, the economy will recover, and all will be right with the world. For much of the post-World War Two era, the assumption has proven itself a practical, though hardly magical strategy. But the economic dynamic of the 21st century to date is nothing if not different from the preceding decades. Front and center is the issue of the consumer. In particular, Joe Sixpack isn't the problem; rather, his employer has stumbled and can't get up.

The capacity utilization for the U.S. is a prime example of what ails the U.S. A measure of how much, or how little, spare capacity resides in the nation's factories, mines and utilities, the capacity utilization rate is a barometer of traditional economic activity. On that score, there is no mystery to the metric's message: business activity is a shadow of its former vigorous self. The latest number from the Fed puts this measure at 74.3%. That's down from nearly 84% three years ago, and additional declines can't be ruled out.

Such bearish trends in the business world convince some to worry that excess capacity is the gremlin harassing the forces of economic revival. Foremost in that camp is Merrill Lynch's Richard Bernstein, who's recently warned that additional interest rate cuts won't do much to promote recovery, and may even be counterproductive. Arguing that the key problem is excess supply, rather than weak demand, Merrill's chief investment strategist says the solution is reducing corporate debt and trimming the glut of unused equipment on the market, both refugees from the previous decade's boom. Loosening credit only makes this job tougher, he posits, because it delays the inevitable restructuring that looms for American companies. The same challenge faces Japan. In fact, the challenge has been front and center in the land of the rising sun for the better part of a decade now, and the nation by most accounts has failed miserably in cleaning up the mess.

Is the U.S. poised to make a similar mistake? Or to quote the Globe and Mail's Mathew Ingram from his piece yesterday, "Is Greenspan reinflating the bubble?"

Robert Blumen flags this analysis of the recent boom-bust:

The seeds for the subsequent drop in investment were actually sown during the boom years of the late 1990s.

Much of the surge in business investment during the late 1990s was linked to computers and information technology. During these years, measured productivity growth picked up, inflation remained low, and the unemployment rate declined. Such observations were often cited as evidence of a permanent structural change-one that portended faster trend growth in the years ahead. Widespread belief in the so-called "new economy" caused investors to bid up stock prices to unprecedented levels relative to earnings (see Lansing 2002).

It is now clear that the investment boom of the late 1990s was overdone. Firms vastly overspent in acquiring new technology and in building new productive capacity�with an attendant increase in employee headcount�in an effort to satisfy a level of demand for their products that proved to be unsustainable.

In a recent paper, Caballero and Hammour (2002) present the view that the stock market bubble and the investment boom were mutually reinforcing phenomena. In particular, rapidly rising stock prices provided firms with a low-cost source of funds from which to finance their investment projects. The resulting surge in capital accumulation served to increase measured productivity growth which, in turn, appeared to justify the enormous run-up in stock prices. Figure 4 shows that the trajectory of the S&P 500 stock index, both before and after the 2001 recession, is strikingly similar to the trajectory of investment.

About two quarters after the bubble burst in March 2000, firms started to cut back sharply on new investment as it became clear how much excess capital had been accumulated. Rather than investing in new technology or capacity, firms started to make better use of the technology and capacity they already had. Firms also began to undertake the painful but necessary steps to bring their cost structures into line with the post-bubble demand environment.

The article is by Kevin Lansing at the San Francisco Fed, and I might suggest reading the whole thing.

Cool new article by Virginia Postrel (did I just say that?) on corporate vertical disintergration -- it's a Alfred Chandler vs. Richard Langlois knock-down, drag-out over whether or not "the visible hand of managerial coordination [has] replaced the invisible hand of the market". Langlois is a Hayek-inspired market-process economist. Chandler comes out of a business history and management studies background.

UPDATE: The Knowledge Problem has some thoughts on Postrel's article, including this:

The move away from vertical integration is an indication that transacting through markets has gotten easier.

Virginia also has new blogging up, including this request:

My blogroll is woefully out of date. Instead of my usual haphazard update, I'm soliciting reader input. If you read and like a blog that isn't on my current list, please send me an email with the subject line "Blogroll nominee" and explain in a sentence why this site's blogroll should include that blog. Do not nominate your own blog. I'm always happy to hear from bloggers themselves, but this process is designed to elicit input from blog readers. The deadline for nominees is midnight Friday, June 20, Central time.

Like a broken clock telling the correct time, Krugman manages to get one right.

Richard Stroup's new book is out, titled Eco-nomics: What Everyone Should Know About Economics and the Environment. Walter Williams has a review here. As usual, Williams cuts through to what's important.

State tax increases hammer families twice. Worth quoting:

Higher taxes reduce economic growth over the long run, and thus impose a second loss on family incomes. This can be seen by ranking the 50 states by their overall tax burden and comparing state income growth from 1980 to 2000. Real personal income increased an average 96 percent during this period for the 10 states with the lowest state/local taxes (measured as a percent of income), but just 52 percent for the 10 highest-tax states. New Hampshire is notable as the lowest-tax state in the country and its 117 percent real income growth during the period.

Prices are up -- you are paying higher prices this month for food, housing, medical care, and recreation. Gasoline prices are down, but natural gas prices are up. So much for the "deflation crisis".

Give the Nobel Prize in economics to Andre (pdf).

Economist John Cochran has a very useful primer on the current economic situation -- and the crucial role of money and capital in the trade cycle. Oh, and he says a thing or two about Professor Phelps and Governor McTeer.

Phony-con Larry Kudlow is high with the sort of glee only a true Keynesian crank could have at the prospect of massive increases in government borrowing and spending -- and a promised giant new dose of funny money from the Fed. We've basically had a double-dip recession -- and now folks like Kudlow are cheering for a double-bubble stock explosion .. and inevitable implosion. Is there no-one anymore but these silly Keynesian cranks on the Republican side of the aisle?

What up with the bond market? Arnold Kling shares Huston McCulloch's view that:

the long-term expected inflation rate that is implicit in Treasury bonds is implausibly low.

One mystery, why aren't people buying inflation-indexed securities instead?

Robert Solow pops the deflation scare bubble.

Paul Cwik at the Mises Economics Blog posts this telling reminder of what economics teaches -- and what the Keynesian cranks in the media need to learn:

Lionel Robbins writes concerning deflation .. "the belief that there is nothing detrimental to the smooth working of the economic machinery in the changes which result in a consumers' goods price index falling with increased productivity, is not the esoteric creed of a handful of 'sadistic deflationists'as is sometimes suggested nowadays. It is the view which has been held by the majority of the men who have made modern monetary theory in English-speaking countries what it is -- Marshall, Edgeworth, Taussig, Hawtrey, Robertson, Pigou. That a belief that prices cannot fall without causing depression should be able to co-exist with the overwhelmingly convincing demonstration of the contrary proposition in nearly all the standard works on the subject is a most disquieting revelation of the gulf which still exists between scientific knowledge and popular opinion."

More deflation scare hype.

Will the Fed cut rates? An anticipated cut is already factored into many market prices. Which tarot cards fall in this week's econ data will be decisive for the Fed, analysts believe -- and these numbers will move financial markets even before the Fed reads their meanings, and then makes its stab at manipulating the market. Which happens a week from Wednesday.

Hyping hydrogen:

Under Tolan's pedal-to-the-metal scenario, the country could completely wean itself off imported oil by 2015 by flooding the market with fuel-cell vehicles. Most of the hydrogen needed to power the cars would come from plentiful North American natural gas piped to existing filling stations, then processed into hydrogen. Imagine: In little more than a decade, half the cars on American highways would run on clean-burning hydrogen costing 40 percent less per mile than gasoline. Yes, Tolan agrees, some unusual things would have to happen first: You'd need annual federal subsidies of $10 billion to $20 billion in the early years to make the cars affordable and to scale up production. Oil and gas companies and utilities would have to plow some $280 billion into hydrogen infrastructure in the United States alone.

Explain to be again how this could cost less than gasoline, yet still requires the heavy hand of government and confiscation of other peoples property? If it's a good idea -- i.e. if it's one that will prove itself through the price signal of PROFITS -- you shouldn't have to steal my money with a Federal agents gun in order to get it done. And why don't folks realize that this is just what they are proposing -- forceably taking other people's money in order to prove the "efficiency" of their own "I'm God" for a day scheme? It isn't moral and it nearly always creates waste, not gains to economic efficiency.

Economics ain't rocket science, but as David Bernstein points out, for the business journalists at the NY Times, it might as well be astrophysics:

This article in the NY Times about rent decontrol in Boston and Cambridge shows typical reportorial ignorance of economics. For one thing, the article harps on the vast increase in rents in those two cities since the end of rent control. What the article fails to mention is that housing prices in Boston and Cambridge have also skyrocketed during the same period. It's hardly a market failure for rental prices to go up at a similar (though, from the data I've seen, somewhat lower) rate than real estate in general. Also, the article notes admonishingly that most new construction has been of luxury apartments, not low income housing. Counterpoint: That's irrelevant, it's the total number of units relative to demand that's important. If new luxury housing gets built, older luxury housing becomes less desirable, and so on down the line, so that building luxury units makes things more affordable for those at the bottom of the housing pyramid.

BusinessPundit is reading Final Accounting: Ambition, Greed, and the Fall of Arthur Anderson. Quotable:

The book goes from a story about Anderson himself standing up to a railroad giant over a depreciation issue (they fired Anderson over it, but he was right), to stories from the late 90s about internal bickering, client overbilling, and large errors being labeled immaterial. I don't know how anyone with a conscience could have worked in such a place. I guess to me, capitalism is like a religion. I want to get ahead by having the best idea, being the most efficient, and producing the highest quality product or service. Lying, cheating, overbilling, and manipulating the system is fraud, not capitalism ..

Count me a member of the same church.

Has the cost of health care actually declinded? Truck and Barter makes the case.

Japan has courageously and selflessly sacrificed its national wealth in one gigantic "experimental test" proving that the Keynesian theory is false. Isn't it time now to put a fork in it? Come on guys, get the journal article written, and then get back to saving capital and producing goods. Worth quoting:

You'd think that after 10-plus years of economic recession, despite having forced interest rates down to near-zero levels in their never-ending quest to pump new money into the economy, the central banking Samurai at the Bank of Japan would show the good sense to admit defeat and fall on their swords. Instead .. the BOJ has announced a new policy of buying corporate debt, including some with a junk-grade rating, as though loose money policies will finally have the effect they were supposed to have the several times they were implemented throughout the 1990s.

Deflation -- The Biggest Myths

Arnold Kling answers the Weekly Standard on the political economy of SPAM and the technology of the internet.

An "economic conservative" who believes in Keynesian crankonomics is -- predictably --unreliable as an advocate of the free market or limited government. Why? Because the deep failure of economic understanding represented by the belief in the psuedoscience of Keynes can alway be counted on to over-rule the sound principles of limited government liberalism when bad government has created serious economic problems. Today's exhibit -- Andrew Stuttaford at National Review:

Is Bush spending too much money? Possibly. It may be heresy to say so (at least around here), but there is one area where the Feds may not be spending enough, and that�s in helping the states through their current fiscal crises. There�s no doubt that the states went on an irresponsible spending binge in the 1990s, and there�s no doubt that repeated federal bail-outs of the states run the risk of creating a significant moral hazard, but government is about facing matters as they are � not as they should be. There must be a significant danger that any chance of a sustained recovery will be choked off by a forced contraction in the states� spending and/or tax increases at the local level as the states confront their budgetary shambles. Raising taxes and cutting spending at this stage in the economic cycle makes very little sense and may well offset the stimulative effect of tax cuts at the federal level. The administration, however, doesn't seem too concerned. It should be.

It's always sad to see "economic conservatives" dishing up Keynesian recipes for rewarding -- and sustaining -- horrendous budget irresponsibility. This is part of the reason why Friedrich Hayek called Keynesian economics disastrous for liberal (limited government) societies.

BW transcript -- Osvaldo Rosales on the Chile-US free trade agreement.

Production firms to money lenders -- we don't want your stinkin' money.

Economists are still confused about what might cause growth in undeveloped countries.

Japan and the non-paradox of being non-thrifty. Perhaps there are better explanations for what has happened in Japan than Krugman's Keynesian nonsense. (Via the Mises Econ Blog, where you'll find additional commentary).

You can have a negative interest rate. This from Nikkei:

Overnight call money transactions are believed to have declined Tuesday. Also, the market saw a transaction with a negative 0.03% rate. As a result, the weighted average rate was zero percent for the second straight day.

Transactions carrying negative rates -- an abnormal situation in which a lender pays a borrower interest -- are being conducted in the call market entirely by foreign banks. They can take yen funds procured through currency swaps at even lower negative rates, so these banks are able to lend out their excess funds at negative rates in the money market without taking any losses.

"Foreign banks are able to increase their transactions at negative rates as much as they want. Therefore, so it is not hard for the weighted average rate to fall into negative territory," according to an official at one foreign bank that is lending its funds at negative rates.

(via Institutional Economics)

Finally, stainable growth based on increasing wealth and rising profits or another Fed. generated stock bubble without corresponding real increases in wealth? A look at some fundamentals.

An AP piece on the complexities of the Euro includes this incisive comment:

"The German economy is not lacking low interest rates,'' said economist Michael Schubert at Commerzbank in Frankfurt. "It's lacking structural reforms.''

Another Feddie comes out in favor of targetted inflation.

Do we really need a rate cut? There's some reason to think we don't. Snippet:

Merrill Lynch chief investment strategist Richard Bernstein argued a cut could actually let economic weakness linger, since the economy's problem has been too much supply, rather than a lack of demand. What needs fixing, according to Bernstein and some economists, is not consumer demand, which has been surprisingly resilient, but corporate balance sheets. Only when companies trim down a glut of debt and unused equipment, the hangover from the 1990s investment orgy, will they be willing to spend again, according to this view. Making credit increasingly easier only delays the painful restructuring necessary to get the economy healthy again, Bernstein believes -- making the United States look suspiciously similar to Japan, the world's second-largest economy, which has struggled for years to escape deflation. "Policy makers seem to continue to believe that they can boost demand enough to alleviate the oversupply situation. They now talk of extraordinary monetary measures and huge tax cuts to stimulate demand," Bernstein wrote. "Although their timing was admittedly very poor, Japanese policy makers attempted the same thing."

And there's more:

Other economists worry Fed policy is only encouraging more 1990s-style speculation. "Artificially low interest rates change people's speculative behavior in ways we may all come to regret," said James Grant, editor of Grant's Interest Rate Observer. "It's already incited a great burst of speculation in the bond market."

Sure enough, in the past two months -- during which the Fed has been "jawboning" about how it might be forced to use unconventional warfare to fight deflation, including driving long-term rates lower -- the yield on the 10-year Treasury note, already at extremely low levels, has plunged another 18 percent. The yield on the two-year note has fallen a whopping 31 percent, below the level of the Fed's key short-term rate.

Bond prices and yields move in opposite directions; the plunge in yields means bonds are extremely pricey right now, and some economists have grumbled they could be overinflated. A sudden drop in price could soak investors, and the coincident jump in interest rates and inflation might sucker-punch the economy.

Speaking of bubbles, other economists are worried that another flood of cheap, easy money could reinflate that relic of the 1990s, the stock-market bubble. "I'm not worried about inflation per se; I'm worried about inflation in asset prices," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "When the Fed has been aggressively easy in the past, it's ended up having to come in and aggressively raise interest rates and cause a lot of unnecessary dislocation."

That "unnecessary dislocation" could include another popping of another stock-market bubble, such as the one that occurred after the Fed started jacking up interest rates in 1999 and 2000 -- not a rosy time for stock investors, by any stretch.

Brian Wesbury, chief economist at the Chicago investment firm Griffin, Kubik Stephens and Thompson, pointed out several other possible negative repercussions of ever-lower rates, including;

--lower returns for lenders
--lower purchasing power for people on fixed incomes
--lower earnings power for insurance portfolios, putting upward pressure on --insurance premiums

"By cutting interest rates too far...the Fed is using the monetary equivalent of a corked bat," Wesbury said. "The end result will be more damage from lower rates, more volatility in future interest rates and more confusion about what monetary policy can and cannot do."

Friedman flips! Money -- money -- quote:

"The use of quantity of money as a target has not been a success."

Of course, there is more to the old man than merely money, and Uncle Milton is always good for a strong shot of crystal clear commentary:

"The second President Bush appears to have inherited the free-spending tendencies of the first," he says dismissively. What, then, of the tax cuts that the president recently signed into law? "His insistence on tax cuts is good," he concedes. "That is the only real way of bringing pressure on Congress to hold down spending. In my view, the size of government is determined much more by how much they can raise in taxes than by any ideological theory." The entrees arrive very, very hot.

"To go back to your original question, the tide of public opinion has continued to go against government. People are as suspicious as ever of government - big or small. Unfortunately, the slowness with which public opinion affects policy has not changed."

His favourite example of the mismatch between public opinion and public policy is school vouchers. Such a scheme, he says, would unleash market forces in the education sector by giving parents the right to choose which school their child attends. Funding would be granted in the first instance to the child, not the school. Schools would then have to compete for business by raising standards or pleasing parents in other ways.

"There is no doubt about public opinion," he says, tucking in to his eggplant. "Everyone knows that the public school system is lousy. The solutions proposed are all ineffective with one exception: a greater degree of parental choice - more competition. The majority of the American public is in favour of child-centred financing. But the teachers unions exercise such strong political control that it is very, very difficult to make any progress."

A great and important man. What is that line about a man who increases the will to live?

Here is the FT summary of the various Treasury reports on British Euro membership.

Former Bundesbank director Liam Halligan trashes the Euro. His argument convinces me the Euro might be a good thing. Money quote:

euro membership has played a major role in limiting [German] policy-making room for manoeuvre. [Furthermore] euro zone rules have cut back public investment to an extent we haven't seen since the war."

The upshot of the piece is that the Euro is bad for Keynesian monetary nationalism. And in my view, that is a good thing for both Germany and Europe. (via Institutional Economics)

Ford's new F-150 pickup rolls out today. The F-150 is America's favorite vehicle and Ford's big money maker. This time the truck is bigger, better and more costly than ever. What you have is pickup truck as status symbol, sexuality token, and luxury item. Oh, and it actual serves as a utility truck as well. I don't know how it can miss -- as long as it's actually a better truck. Can't wait for the Kaus gearbox review.

Uncertainty over how to fight deflation big issue at Fed.

Why are California gas prices so much higher than in the rest of the country? The Knowledge Problem has located the answers. The upshot:

policy decisions and not price gouging are the fundamental root of higher and more volatile gasoline prices in California.

What is Greenspan afraid of and why?:

The Fed is concerned not about "the issue of deflation in the sense of falling prices per se, but the issue of corrosive deflation, that is, a deflation that essentially feeds on itself, creates falling asset prices, which in turn brings down levels of economic activity," the Fed chairman said .. he also said that the Fed knows so little about what would happen in a deflationary environment .. that monetary policy has to be "extraordinarily cautious."

(via Brad DeLong)

Do "prospect theory" and "the house-money effect" trump "efficiency theory" when it comes to stocks? Dirk Olin reports for the NY Times. Snippet:

.. most of us find losses roughly twice as painful as we find gains pleasurable. This radical precept subverts much of ''utility theory,'' the longstanding economic doctrine that says we weigh gain and loss rationally. When combined with the reality that some market winners display the same recklessness as some victorious gamblers .. the market is often revealed to be downright loony. Indeed, the findings of ''behavioral finance'' in recent years have increasingly challenged the fundamental rationality assumed by.. Eugene Fama's famous dictum that prices ''fully reflect available information.''

Just a little note. Although Hayek's work inspired the literature on prices and information, he himself neither believed nor argued that prices fully reflect all available information. In fact, quite the contrary. It remains true, however, that his famous essays "Economics and Knowledge" and "The Use of Knowledge in Society" contain important seeds from which the idea of "efficient markets" eventually arose, however different this conception might be from the specifics of Hayek's own work.

The article includes this bit from Robert Shiller's The New Financial Order: Risk in the 21st Century:

Despite the volatility we observe in speculative markets, no one should conclude from any of my or others' research on financial markets that these markets are totally crazy. I have stressed only that the aggregate stock market in the United States in the last century has been driven primarily by psychology and fads, that it has shown massive excess volatility. But many markets for subindexes relative to the market do not show evidence of excessive volatility, and the market for individual stocks shows substantial evidence supporting the notion that prices in these markets do carry genuine information about future fundamentals.

What was that thing McTeer was saying about the fallacy of composition?

Thomas Sargent comes to NYU economics -- the story of the drive for Top 10 status.

UPDATE: Institutional Econ has this comment on the article: " Jeffrey Sachs' $8 million townhouse also gets a mention. Who said there was no money in development economics?"

Who is Ben Barnanke? And what does he want? Well, what he wants is this:

One of his most controversial ideas is inflation targeting .. the idea that the Fed should announce what inflation level it wants and adjust interest rates to make that happen.

Call it the new post-Volcker monetarism. Friedmanism with an extra helping of Keynes.

Truck and Barter has a headup on the new Chile-USA free-trade agreement. The good news:

All tariffs and quotas on all goods will be eliminated immediately or after a four year transition period--without exception

The bad news, well, go here for T & B's summary.

Samuel Brittan has a simple solution to the Euro debate -- freedom. Money quote:

Why not then shelve the euro issue indefinitely by declaring that British residents are free to use whatever currency they like and let the euro make its way on its own merits?

Bruce Bartlett fisks the $44 trillion debt story.

The witches brew recommended by Keynesian crankonomics isn't working. The market continues to shake out misallocated capital and labor from the Fed. induced bubble of the late 1990s. U.S. factory orders are down in the biggest drop since 2001, unemployment claims are up, and:

The yield on the benchmark 10-year note dropped to a low of 3.24 percent, its lowest level in 45 years.

From a Reuters report.

Economist John Cochran's latest on Phelps & McTeeter:

At the heart of Phelps�s misrepresentation or misinterpretation of Austrian business cycle theory is his capital theory and a lack of an appreciation for the important role of saving in the wealth creation process. Robert D. McTeer, �The Dismal Science? Hardly! (WSJ, June 4, 2003) makes a similar error in his defense of Keynes�s paradox of thrift, which he uses as an example of the fallacy of composition, �Individually, most consumers need to save more. But if all or many consumers start trying to save more, the economy will be in deep trouble.� McTeer, President of the Federal Reserve Bank of Dallas, fails to recognize that the paradox of thrift is just the broken window fallacy, which he does an excellent job of explaining, in a more subtle guise.

A reply to McTeer. Snippet

McTeer�s endorsement of Keynes�s concept of the Paradox of Thrift is most troubling and a setback to economic education. Economy wide saving is not bad for the economy; it is the engine of economic growth. Saving does not cause recessions, it is a cure-all for economic ills. The economic problem is that Americans have not saved enough, largely because the Fed has kept rates too low, driving savers into the stock market where they were clobbered. Some have tried to refill their savings and to protect themselves from the recession, but by and large Americans continue to spend like a drunken Congress. President McTeer implores us to avoid the Luddite fallacy of keeping jobs for jobs sake�a good point. However, he has long advocated the Fed driving interest rates down to keep consumers buying more than they can afford, businesses investing in sub-marginal projects, and the propping up of businesses and investments that need to be liquidated before a real recovery can begin.

So much for the strong Euro -- as the European Central Bank slashes interest rates. Money quote from the BBC.

The new level of 2% .. is lower than at any time anywhere in Europe since World War II.

Some excellent remarks from Steven Kates, Chief Economist of the Australian Chamber of Commerce & Industry (Hayek-L posting):

"My intent was not to argue that the world has changed so much since the 1930s that the theories developed then are no longer relevant. My intent was instead to argue that the theories that have developed since the 1930s are vastly inferior to the ones that were current at the time and before.

My point was basically that pre-Keynesian models of the cycle that were based on misdirected production are superior to the models which have come since, virtually all of which have a large demand-side component. And while Martin Wolf may think that these are theories that were developed during the 1920s and 30s, they have a much longer provenance than that. As just one example from the hundreds that might be culled, let me quote briefly from Walter Bagehot writing in Lombard Street published in 1873.

In Chapter VI Bagehot specifically deals with the business cycle, and notes that with the division of labour, one must anticipate what others will be willing to buy with the ever-present danger that producers will miscalculate. He wrote:

'A produces what he thinks B wants, but it may be a mistake, and B may not want it. A may be able and willing to produce what B wants, but he may not be able to find B - he may not know of his existence'.

If miscalculation occurs on a large scale, the consequences spill across the economy: Bagehot therefore continued as follows:

'No single large industry can be depressed without injury to other industries; still less can any great group of industries. Each industry when prosperous buys and consumes the produce probably of most (certainly of very many) other industries, and if industry A fail and is in difficulty, industries B, and C, and D, which used to sell to it, will not be able to sell that which they had produced in reliance on A's demand, and in future they will stand idle till industry A recovers, because in default of A there will be no one to buy the commodities which they create.'

This was written without any reference to money, but then with the introduction of credit, it is still miscalculation on the part of producers which leads to recession:

'The state of credit is thus influential, because of the two principles which have just been explained. In a good state of credit, goods lie on hand a much less time than when credit is bad; sales are quicker; intermediate dealers borrow easily to augment their trade, and so more and more goods are more quickly and more easily transmitted from the producer to the consumer.

'These two variable causes are causes of real prosperity. They augment trade and production, and so are plainly beneficial, except where by mistake the wrong things are produced, or where also by mistake misplaced credit is given, and a man who cannot produce anything which is wanted gets the produce of other people's labour upon a false idea that he will produce [what other people want].

To this form of miscalculation Bagehot adds the greater potential for catastrophe which occurs through large-scale speculation, which is usually induced and encouraged by inflation, very similar to the argument on bubbles put by Martin Wolf. According to Bagehot, higher prices encourage a false optimism which eventually is overtaken by the actual facts of the situation. Higher prices induce misjudgements, the ultimate outcome of which is an economic crisis and recession. Nor is Bagehot describing a process which is in any way ephemeral or without pain. He wrote that 'it takes two or three years to produce this full calamity, and the recovery from it takes two or three years also'.

The interesting aspect in reading Martin Wolf's article is to see that such theories are coming back into use, undoubtedly because current models based on AS/AD or ISLM are so incompetent to deal with current economic conditions. Such models, built on demand considerations, assume that the answers lie in higher levels of spending and that deficits can contribute to growth. No classical economist would have made this mistake."

Hal Varian explain it all for you -- deflation, that is. Varian, I'm guessing, has never read Hayek or Garrison or Selgin:

Today we have some of the excess supply pressures of the 1890's along with the weak demand pressures of the 1930's, albeit in a far milder form.The big difference today is that the Fed is pursuing active monetary growth and has made it clear that it will be aggressive in dealing with any further economic deterioration. The excess supply we see today comes from two related forces: the investment binge of the late 1990's and the strong productivity growth in recent years. Because of these two factors, businesses have had little inclination to make new investments, leading to slack demand and downward pressure on prices. The Fed has responded appropriately by loosening monetary policy to stimulate aggregate demand. Consumers have responded to low interest rates by refinancing their mortgages and continuing to buy, keeping aggregate demand stronger than it would have been under a tighter monetary policy. Prices aren't increasing, but they aren't falling, either. The worry is that the loose monetary policy won't be effective indefinitely. If economic activity stays slow, and unemployment rises, consumers will become more cautious, making them more reluctant to spend. As John Maynard Keynes put it, "You can't push on a string," meaning you can give people more dollars, but you can't make them spend them. To pursue the medical analogy introduced earlier: the symptom is deflation (or, at least, soft prices), the diagnosis is weak aggregate investment demand, and the recommended treatment is money supply growth. But the critical question is, as always, will the patient recover?

Productivity is up strongly. Prices should be dropping just as strongly ..

Instapundit endorses deflation.

Why is this man smiling? Well, perhaps its because he's an employee of the Federal Reserve Bank, living fat and happy off the profits earned every time the Fed. inflates the currency and depreciates the value of your savings. How dumb is this man? Well, he's suppose to be the one Fed. bank president who's a great and true believer in the free market. But it turns out he doesn't believe in the very best thing which capitalism provides us -- the accumulation of capital goods through investments savings. I.e. the thing which makes our wealth possible. Unbelievably, McTeer seeks to illustrate the value of an economics education using perhaps the most damaging fallacy every brewed up out of the witchcraft of Keynesian crankonomics:

Economics training will help you understand fallacies and unintended consequences. In fact, I'm inclined to define economics as the study of how to anticipate unintended consequences. Most fallacies in economics probably are fallacies of composition: What's true of the individual may not be true of the whole. You may be able to see better if you stand up -- but not if everyone stands up. John Maynard Keynes' paradox of thrift provides a currently relevant example: Individually, most consumers need to save more. But, if all or many consumers start trying to save more, the economy will be in deep trouble.

From today's Wall Street Journal, subscription required. The original speech.

I can't resist this. A fine letter from Mark Thorton to Jude Wanniski:

Thanks for sending out the Wall Street Journal editorial by Professor Phelps. Some good points to be sure, but he presents an incorrect view of the Austrian school's theory of the business cycle. The Austrian theory is not an overinvestment (i.e. "too much") theory, it is a malinvestment (i.e. "wrong ones"). Naturally, his analysis that follows is flawed.

Austrian economists rarely speak favorably in terms of aggregates, or like an accountant or historian might. They speak and write in terms of prices, economic decisions, and resource allocation--real life "price theory." They are concerned about the structure of production (the economy from natural resources to consumer goods) and the structure of production was completely out-of-whack in 1999 despite rosy statistics and record breaking stock markets. You don't need much "extra" investment to change the structure of production and entrepreneurs were doing just that--radically changing the structure of production--under the influence of Alan Greenspan's monetary policy.

Many of these investments have now been shown to be bad investments (hence malinvestment theory). The recession need not be a long one, as Professor Phelps wrongly attributes to the Austrians, if the investments are allowed to liquidate quickly. So-called stimulus policy (monetary ease and loose budgets) only make things worse and drag out and worsen the correction-recession-recovery.

Don't miss Thorton's kicker punchline at the end of the full letter.

Some of the myths of deflation are exposed by economist Jacek Rostowski. (via Mises Econ Blog) Money quote:

There are five ways in which deflation is supposed to plunge the world into a spiral of economic contraction. First, once deflation has started, falling prices will make people put off spending, causing prices to fall further. Second, with prices falling and the value of debt fixed in nominal terms, the real indebtedness of households and firms will grow, acting as a drag on the market, as in Japan since 1990. Third, nominal interest rates cannot fall below zero because companies and households always have the choice of holding cash, which gives a zero return. Banks cannot therefore offer interest rates below zero to depositors so cannot charge negative nominal interest rates on loans. The demand for loans will fall, shrinking the banking sector and the economy with it. Fourth, because nominal interest rates cannot turn negative, central banks will be powerless to offset the effects of deflation. Finally, with prices falling and nominal interest rates stuck at zero, real interest rates will keep increasing, turning the deflationary screw.

In fact, all of these supposed effects either do not matter much, or are the result of inflation being lower than expected, or happen because institutions have not yet adjusted to a potentially deflationary world. They are not the inevitable result of falling prices.

Economist John Cochran has another response to Phelps:

Edmund Phelps�s "False Hopes for the Economy-and False Fears" (WSJ 6/3/03) attempt to undermine the current resurgence of interest in Austrian cycle. He states, "One of the most unreasoning fears, yet pervasive, is the nightmare of interwar Austrian cycle theory: 'overinvestment'. But in truth, what should be real is the fear of the consequences unsustainable boom and what is blatantly false if Phelps's characterization of the Austrian cycle theory.

The Austrian cycle theory is a theory of the misdirection of production-malinvestments-which may be accompanied by overinvestment and overconsumption. Most 'Austrians' would agree with Phelps that "world markets would react to the addition of capital with a sharp drop of interest, a skyward jump of capital goods prices, and immediate lift of real wages and jobs."

But Phelps, unlike the Austrian, fails to realize that a sudden addition of capital is not heaped on the world; it comes from increased saving. The boom-bust cycle develops because credit creation through central bank intervention in the economy causes markets ro respond as if more 'capital' was available when in fact it is not. The bust and necessary readjustments develop when the misdirections of production of the economy and the relative scarcity and possible consumption of capital are discovered.

Glenn Reynolds is loving life, eating pizza and coining cool new expressions like "Horizontal Knowledge": Killer cut:

Just try this thought experiment: Imagine that it's 1993. The Web is just appearing. And imagine that you - an unusually prescient type - were to explain to people what they could expect in the summer of 2003. Universal access to practically all information. From all over the place - even in bars. And all for free!

I can imagine the questions the skeptics would have asked: How will this be implemented? How will all of this information be digitized and made available? (Lots of examples along the line of "a thousand librarians with scanners would take fifty years to put even a part of the Library of Congress online, and who would pay for that?") Lots of questions about how people would agree on standards for wireless data transmission - "it usually takes ten years just to develop a standard, much less put it into the marketplace!" - and so on, and so on. "Who will make this stuff available for free? People want to be paid to do things!" "Why, even if we start planning now, there's no way we'll have this in ten years!"

Actually, that final statement is true. If we had started planning in 1993, we probably wouldn't have gotten here by now. The Web, Wi-Fi, and Google didn't develop and spread because somebody at the Bureau of Central Knowledge Planning planned them. They developed, in large part, from the uncoordinated activities of individuals. Why can you find all sorts of stuff, from information about the Hephthalite huns to recipes for brewing beer and even recipes for cooking squirrel, on the Web? Because people thought it was cool enough (to them) to be worth the effort (on their part) of putting it online. We didn't need a thousand librarians with scanners, because we had a billion non-librarians with computers and divergent interests. Wi-Fi is springing up the same way: not as part of a national plan by the Responsible Authorities, but as part of a ground-up movement composed of millions of people who just want it.

There are two lessons here. One is that the skeptics, despite all their reasonable-sounding objections, would have been utterly wrong about the future of the Web, a mere ten years after it first appeared. And the second is why they would have been wrong: because they didn't appreciate what lots of smart people, loosely coordinating their actions with each other, are capable of accomplishing. It's the power of horizontal, as opposed to vertical knowledge.

"It is too early to get any real fix on the American economy in the period ahead .. There are indications that we are stabilizing, and there is some indication of a return [sic] but it is at this stage not by any means clear .. The best that we can judge is that the acceleration has not yet begun".

These are the remarks of: 1) a stock analyst faking an understanding of the economy in order to impress his clients 2) Alan Greenspan. He also said this:

We have concluded ... inflation was not something of significance for the Federal Reserve to be concerned about, which means that we would be far more inclined -- as we have had over the last several years -- to be taking out insurance against economic weakness.

Alan Greenspan is going to be taking out some insurance for you. A little fire protection plan, perhaps. Doesn't that make you feel all safe and warm?

Limited government Republicans are missing in action, and Larry Kudlow is as confused as Paul Krugman. James Antle goes on a rant. Snippet:

Many economic conservatives have also bought into the fallacy that the Federal Reserve is pursuing an overly tight monetary policy. Rather than allow bad investments to liquidate themselves and the free market to undertake its internal cleansing process, they propose more liquidity, more growth in the money supply, more private debt and government interventions to forestall the inevitable. On these issues, Larry Kudlow makes scarcely more sense than Paul Krugman. Near-zero interest rates and monetary growth have failed to induce recovery in Japan; these same conservatives would recognize the error of these policies if their delivery mechanism was instead direct federal subsidies to uncreditworthy businesses.

According to Bill Jamieson in The Scotsman we are at point with Fed policy where the tide of history is decisively shifting:

Economist Stephen King at HSBC believes that the Fed, with the knowledge and support of the US government, is already in the middle of a "five stage strategy" designed to prevent the emergence of deflation and to cure deflation should it actually arrive. The first and second stages - lower short term interest rates and looser fiscal policy - have already been enacted, with mixed results thus far. The third stage, potentially imminent, lies in manipulating the yield curve. The fourth stage, not yet discussed by the Fed but a growing possibility given the high level of private sector debt, is a debt bail-out involving protection against deflation. The fifth stage is the creation of future inflation expectations through any one of a number of options: printing money, price level targets, and incredibly large budget deficits. For a generation of economists and commentators driven by the inflationary crisis of the 1970s into the arms of the Austrian school of economics, this is high heresy. The prime role of central banks was the control of inflation and the very first step was the halting of the printing presses. We are indeed at an historical inflection point, where the established wisdom of the past 30 years is already half way to the incinerator.

(thanks to Jeff Tucker)

In a major embarassment for the editorial page of the Wall Street Journal, the Journal op-ed page carries an opinion piece by economist Edmund Phelps which in content is something like a biochemists raging against evolution -- but with the evolutionary theory completely mistaken. Imagine, for example, if the Journal opinion page ran an editorial by a biologist which dismissed the theory of natural selection because the author believed that the theory of natural selection was a theory of the inheritance of acquired characteristics and was incompatible with modern genetics. The Journal and that biologist would be laughed off the stage of serious scientific commentary. And this is just what should happen to the Wall Street Journal and Edmund Phelps when it comes to economic commentary.

False Hopes for the Economy -- And False Fears
By EDMUND S. PHELPS

The towering investment boom of 1996-2000, now over, was a huge lift -- and not just for wages, profits and employment. There may never been a time in U.S. history when innovative activity was more engaging and working life more rewarding. The task now is not to create artificially a replacement boom by assorted stimulants, which would be hard at best to do anyway. It is to maintain and improve the vitality and creativity of the economy so that high performance is the norm rather than the exception.

The public, though, is not in a frame of mind for talk of fundamental reform. The loss of the boom has left people uncertain, uneasy. They know that after the 1920s boom came the Great Depression. Some know that the '50s boom was followed by the '60s boom. There is a cacophony of opinion on the economy's prospects and recent policy interventions. Conflicts among dormant theories have broken out in the open. We cannot get to the deep issues until we dispel the more unlikely Cassandra scenarios and Pollyanna theories that plague present discourse.

The False Hopes

The most mindless optimism speaks ritually of "recession" from which we can expect "recovery" -- in labor, product and capital markets. But what recession? Standard interpretations of the usual charts estimate that in 1995-96 the economy was at or close to its long-run normal state -- with monetary disturbances in abeyance and no big nonmonetary disturbances either. (The core inflation rate was steady, averaging the same rate as in 1993-94.) Of course, what is normal is always evolving. Yet, impressively, the period's unemployment rate (5.5%), the share of GDP going to labor (65.8%), and stock-market wealth relative to the GDP (about 115%), were on the whole not far from their levels in two other pretty normal periods, 1987-88 and 1971. In the next four years the economy boomed, posting records in all these respects and others. Since 2000 it has fallen back: labor's share to its 1995-96 level, the stock market to its 1997 level and the unemployment rate -- at 6.1% -- to its 1994 level. So we're more or less back to normalcy. It was the boom that was abnormal.

Yet some take the view, many unconsciously, that there is no normal state to which the economy tends to return, even given current institutions, tax rates and welfare rules, and entrepreneurs' spirits. The normal level of employment, they say, is a statistical artifact that moves up if the government takes any of the straightforward measures to raise the level of economic activity -- if the Fed gives support with low interest rates and ample liquidity or Congress does by spending more money.

Behind that view is the "aggregate demand" fallacy: the government can deliver high employment simply by pumping up high aggregate demand -- by easier money or bigger budgetary deficits. A.W. Phillips sensed the mistake here, arguing in 1958 that a pumped-up employment level typically brings a higher rate of inflation (illustrated with his famous curve). Milton Friedman and I corrected Phillips, explaining in 1968 that, to keep on doing the pumping trick, the rate of inflation would have to be driven higher and higher -- until the payments system broke down or the policy was halted. Unemployment cannot be kept forever below its "natural" rate or path, along which the rate of inflation is neither rising nor falling. In natural rate thinking, a tax cut boosts employment, as supply-side economists knew, only through its effects on incentives to work and to save, the cost of labor and the cost of capital -- not its effect on demand.

There is much overconfidence too that depressions cannot happen, now that proper monetary policy is understood. For one thing, natural rate thinking has a role for aggregate demand. ("It's a question," to paraphrase Humpty Dumpty, "of who is the master, that's all.") For actual employment to home in on the natural employment path, market mechanisms have to drive demand up or down, as needed, to tailor it to the GDP producible at natural employment. But economists don't know accurately where the natural rate is, so how can the market? The gyrations of the dollar show the markets struggling with uncertainty. If the natural rate is again 5.5%, its mid-'90s norm, the fall of unemployment to the natural level would seem to require that exports get back to the share of GDP they had in 1995-96. That would appear to require the dollar to fall to its mid-'90s level -- about $1.35 to the euro.

Moreover, bad things can happen to the natural unemployment rate. If CEOs, seeing more difficulties or risks for profits ahead, cut back budgets for new business assets, the natural rate will go up. There can be structural slumps -- with or without disinflation.

The False Fears

One of the most unreasoning fears, yet pervasive, is the nightmare of interwar Austrian cycle theory: "over-investment." Wall Street gurus say that the investment boom, with its extra purchases of capital goods (and extra jobs to make them), caused capital stock to get "ahead of itself," with the result that capital-goods spending (and output) will for years be below its normal path -- to give wear & tear and obsolescence the chance to work off some of the excess capital and to permit the economy to grow into the rest. If that is right, employment will also stay for years below its normal path. A slump after the boom.

But, first, what if only a small part of '90s investment is proved to be overinvestment? No slump should follow an investment boom inspired by new expectations of some outsize future productivity gain if they prove correct -- a sort of rational boom. The capital stock surges up only in proportion to the expected rise of productivity, and when the productivity gain is realized annual investment drops back to its normal ratio to (increased) output -- never below its trend-path -- and employment falls back to normal.

On overinvestment, the Austrians really had no argument. Imagine a sudden addition of capital was heaped on the world. The growth rate of capital stock would have to drop. But, for that, it would be more than enough that gross investment not increase as a ratio to the (increased) capital stock; it wouldn't require a decrease of investment or of jobs, let alone collapse. Indeed, a model of mine says world markets would react to the addition of capital with a sharp drop of interest rates, a skyward jump of capital goods prices, and an immediate lift of real wages and jobs! The saving point for the Austrian contention is that if the overinvestment is concentrated in the U.S., the U.S. alone cannot achieve the full drop in interest rates required because it is just one part of the world economy. But that won't wash if overinvestment was not much less important in Europe and Asia.

Before finishing with overinvestment, consider a related fear. It is that, with the capital stock pushed far higher in the last decade than will be justified by productivity gains in this one, expected rates of return on business assets must have fallen, so the rates of interest required for unemployment to attain and stay at its natural rate must have fallen similarly. The worry is that, if a recession were to arise, the economy would be faced with the need for interest rates of close to zero, even below zero. Should that come to pass, vast parts of the financial system would go under, unable to provide a return competitive with that of good old cash. Then disinflation would pick up and lead to deflation, intensifying the problem.

But the present overhang of '90s overinvestment appears far too small to have caused a decline in rates of return large enough to put us close to that interest-rate trap. From 1996 to 2000, the extra investment going on was 2% of GDP. So the increase in the capital stock in those five years was about 10% of annual GDP. That would likely have boosted the capital-GDP ratio by about 5% -- from, 2.0, say, to 2.1. Hardly enough to push us to the edge of the interest-rate trap. Besides, while we never want to get too close to the trap, fear that the risk of falling into it has greatly increased seems overblown. Medium- and long-term interest rates today are like those in the '50s.

The question du jour is what the information revolution means for jobs now. Since the boom ended, the result is not just that the extra jobs created in the capital-goods sector are gone. It is that the newly installed software embodying the new information technologies seems to have opened a Pandora's box of cost savings that are now destroying old jobs in the consumer goods sector -- in securities, airlines and communications.

Mistakes have been made on productivity by several economists. I will say this: It has been a terrible mistake to see productivity increases as creating jobs. Distinctions are required. It is new expectations of future productivity increases that are a strong job creator. The left was dead wrong that dynamism spells wide joblessness. Actual increases in productivity are different. An unanticipated economy-wide increase could be approximately neutral for employment, raising wages and nonwage incomes about equally.

The lesson of rational booms is that realization of a long-anticipated productivity gain -- hence long reflected in the value CEOs put on a customer, an employee, an office, so it has already largely generated the extra investments that the gain justified -- brings a cut in investment activity, causing employment to decline. (The productivity gain raises the cost of acquiring more assets.) The gain represents an increase in the cost of keeping employees off production to train new employees; so that is the time to stop hiring, so jobs decrease and output increases. Such anticipated gains are why booms end, not how they are created.

But this gloomy outlook is not the only tenable one. Recall that current expectations of future productivity gains not already anticipated in past investing serve to boost current investment activity, which generally lowers the natural rate. The decade could yet see a revival in expectations for future productivity growth.

A real fear is that CEOs have turned sour on the prospective returns on investment or have hiked the risk premium on what they see to be their cost of capital. If they have, the causes of this loss of confidence must be identified and addressed. Another real fear is that maybe our economic institutions and government policies are subtly tilting toward old capital, entrenched management and CEO pay ungeared to results. We need to guard against European corporatism and old-fashioned cronyism. The real hope is that the enterprising spirit is so strong here that, even if the system is not tuned up for best results, there will continue to be enough upstart entrepreneurs and established ones that will hit upon ideas for new products and methods worth developing and trying to market. With just our accustomed dynamism we can look forward to normal times, with their ups and downs.

Mr. Phelps is McVickar Professor of Political Economy at Columbia University.

Columbia University should be embarrassed as well.

What does the "Austrian" theory really say? Go here to find out, and check out this for a bit of irony.

UPDATE: Hayek-Ler John Cochran has a response to Phelps. And Casey Khan response as well.

The Dallas Fed has a primer on deflation and its cures -- for those who worship at the Golden Calf of the very dead Lord Keynes.

Arnold Kling explains the Economic Attribution Error:

That is when someone attributes the behavior of key macroeconomic indicators, such as the exchange rate, the Budget deficit, or the unemployment rate, to the fundamental character traits of government officials, such as the President or the Chairman of the Federal Reserve. In fact, the values of these variables depend mostly on the context provided by the private sector - the influence of fiscal and monetary policy tends to be vastly overstated.

But there are some things you can hold a politician accountable for:

I want to make clear that while I am arguing against making the economic attribution error, I am not giving President Bush a "pass" on economic policy. The Bush economic policy can be evaluated on its own merits. I would give the administration a bad grade on trade, because of the steel tariffs. I would give the administration a bad grade on fiscal policy, because it is making no attempt to identify and implement spending reductions, and because it has not pursued any sort of "exit strategy" for Medicare, which threatens to capture a huge share of GDP for the government. I would give the administration a bad grade on energy policy, because the proposal to subsidize hydrogen fuel cells shows a failure to understand Oil Econ 101. I would give the administration a bad grade on education policy, because it continues to undermine local control of schools.

Imagine if magically every dollar bill in your wallet turned into two dollar bills -- and every 20 dollar bill turned into two 20 dollar bills. This, essentially, is what has happened to your money since Alan Greenspan joined the Fed. Reserve in 1987. We continue to live in the Great Age of Inflation. M-3 has grown from $3.6 trillion 16 years ago to $8.6 trillion today. As Doug French esplains, this means that:

In his almost 16 years on the job Greenspan has created more money out of thin air than ever had been created in all the years leading up to his appointment.

Steve Forbes -- inflation cheerleader.

EconLog is ruminating on deflation & the "liquidity trap". The verdict:

The fact that there are many interest rates in the economy, and that most of them are well above zero, makes it difficult for me to accept the liquidity trap as a description of reality. To me, the liquidity trap ultimately seems to rely on the textbook simplification of a single interest rate ..

Truck and Barter has scanned and posted the classic "Roofs or Ceilings? The Current Housing Problem" by Milton Friedman and George Stigler.

Chile's Ten Step Program for Prosperity The flat tax works again. (via Paul Harvey, uberblogger)

Paul Volcker is dead, long live Ben Bernanke:

"There is no immediate threat of deflation in the U.S. economy," Fed Board Governor Ben Bernanke told reporters in Tokyo after a speech at an academic gathering. "The concern is that inflation may become uncomfortably low .. It's an issue of making sure that the inflation rate stays within an appropriate range," he said.

And Bernanke on Japan .. that old-time Keynesian snake oil will do it this time:

Bernanke said the BOJ should aim for reflation -- a period of rising prices above the long-term preferred rate of inflation that would eventually bring prices to where they would have been if there had been modest inflation in recent years. "A period of reflation would also likely provide a boost to profits and help to break the deflationary psychology among the public, which would be positive factors for asset prices as well," he said.

Bernanke's Japan speech gets catcalls from Institutional Economics. On the money quote:

The LDP old guard see reflation as their best chance of avoiding reform, which is why they too are so keen on monetary and fiscal stimulus. So Bernanke is keeping some pretty poor company.

It's the income mobility, stupid -- it's also the rising real income and affluence of those currently either "poor" or "middle class". Drezner has the data.

Ponnuru on Selgin on deflation. Money quote from Selgin:

One of the things that keeps coming up is this knife-edge view of deflation � [this idea that] you get to zero inflation slowly, then suddenly it drops like a cliff and you spiral down. The arguments . . . to sustain that image of things make some sense if the deflation is caused by a decline in purchasing power. They make absolutely no sense if what's causing prices to fall is a greater abundance of final goods. Prices can keep falling gently.

Deflation .. it's a good thing.

The Flat Tax is working .. in Russia. (via BusinessPundit). My understanding is that Hayek was the first to advocate the flat tax. Is that right? The comments section is open. I'd like to hear some of the background on this from folks who know something about the history of the flat tax.

Winterspeak is blogging Thaler, Sunstein, and behavioral economics. Quotable:

When I spoke with Thaler, he was pretty adamant that pro-central planning arguments that draw on behavioral ec. were getting it wrong.

Institutional Economics weighs in on Krugman and the "liquidity trap":

I think the main problem with Krugman�s (non-populist) work on this issue is that he seems to have walked away from what was a promising attempt to give modern micro-foundations to the traditional Hicksian idea of a liquidity trap and reverted back to an IS-LM framework that it is hopelessly ill-equipped for the task. As Luskin has sometimes shown, the more popular renditions of his ideas leave much to be desired too.

Don't miss Arnold Kling on Krugman and the "statism trap". For a more technical treatment of some of the issues involved, see Dugger and Ubide (pdf file).

Krugman and the "liquidity trap" debunked.

As America's most insufferable generation retires, America's deficit will be ..

roughly equivalent to 10 times the publicly held national debt, four years of US economic output or more than 94 per cent of all US household assets.

Luskin on the latest Krugman.

Alan Reynolds introduces a dose of good sense into the conversation on deflation and devaluation. Choice cut:

Given the forecasting record of the IMF, Fed and Krugman, when they start worrying about deflation, investors start betting on inflation. An executive at TIAA-CREF tells me their most popular fund is inflation-protected bonds, and gold is up about 16 percent over the past year. Deflation scares for the United States are quagmire quackery ..

A gov. official accepting responsibility for gov. actions? Yes, it's true. Fed. Reserve Governor Ben Bernanke accepted Fed. responsibility for the economic slump -- not the current one, mind you -- but the little downturn we had some 70 years ago: "Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it." So spoke the Fed. Reserve Governor at Milton Friedman's 90's birthday party in Nov. Quoted in Frank Shostak's analysis of the "deflation" excuse for expanding the size of government and increasing the burden of inflation. Dont' miss Shostak's nice little chart mapping of the continued rapid expansion of the money supply. And there is this:

If Friedman's way of thinking is correct, why hasn't it worked in Japan, which for over a decade now has been struggling to stage a meaningful economic recovery? In fact according to the latest Bank of Japan report on the economy, the economy is continuing to deteriorate. The usual response from the adherents of monetary pumping is that the Bank of Japan (BOJ) has not done enough�it hasn't been pumping enough money. But how can this be, if in July 2001 the yearly rate of increase in monetary pumping, as depicted by the BOJ balance sheet, stood at over 44%? If one allows for lags from rises in monetary pumping to economic activity surely by now the Japanese economy should have been booming.

In truth, the Japanese episode is one further nail in the coffin of both Keynesian economics and Friedmanian economics. How many times do these theories need to be disproven in the court of real life before the economics profession accepts responsibility for teaching theoretically and empirically failed "science".

Well, this is just crazy. Now some in the press are calling a real increase in prices (in the midst of real increases in productivity) nearly the same things as "an outright decline in prices". And white is black, war is peace, etc. .. (via Instapundit) (The story is about German "deflation". German productivity is up 1.8 percent, prices are up 0.7 percent. Folks, this is inflation. Do the math. Greater output per unit of input should mean lower prices. Only inflation could possibly be giving you higher prices in an environment with increased output per input.)

Paul Krugman is back on his "liquidity trap" hobbyhorse. And he looks rather silly with that coonskin cap on.

John Makin of the AEI come out in favor of inflation. The great battle against inflation initiated in October of 1979 by Paul Volcker, has in Makin's view, properly come to an end. It looks like we are all Keynesians .. again. (Well, not me, but you already knew that). What next, stagflation? Then wage and price controls?

James Grant points to one giant pitfall in the Feds inflation strategy:

What ballasts the millennial U.S. monetary system is debt, and its weight is palpable. In the 1960s and 1970s total nonfinancial debt (corporate, government and individual) was around 140% of GDP. In the junk-bond revolution of the 1980s, the portion leapt to 180% and never looked back. Today it stands at 195%. The Fed lives in mortal fear of a system so debt-clogged that not even a 1% bond yield could coax overextended debtors to consume or invest. The purpose of the Fed's May 6 pronouncement is to roll out the welcome mat for growth--and, by way of a higher inflation rate, to lighten the burden of debt. But the dollar is the world's currency, and the non-U.S. portion of the world has a vote on dollar interest rates. Because the U.S. consumes much more than it produces and owes abroad much more than it owns abroad, torrents of dollars pour into the world's payment system. The holders of these dollars have Bloomberg terminals, too, and some fine day they might wake up and sell bonds. Who could blame them?

And the Fed is hard at work:

the Fed is creating credit. It is purchasing government securities with dollars it mints for the purpose. Through these purchases the Fed is bidding up bond prices and pressing down interest rates .. One year ago the Fed owned $582 billion of Treasury securities; today it holds $647 billion, 11% more. Not much in this slow-moving, post-bubble economy is growing at double digits..

Hayek-Ler and all-around nice person Virginia Postrel has a New York Times piece on deflation. I've got to go with my brain on this one and my brain tells me that Postrel is wrong about deflation. Consider. If you have growing productivity in a great many sectors in the economy -- and if the stock of money grows slower than this productivity increase, then you do have deflation. Your dollar does have a "general" higher worth. It buys more.

If more goods are being produced at lower cost across industry after industry, effectively you have a case were "the value of each dollar, regardless of how it is spent, is rising". And this is a good thing, and it does imply anything about unexpected changes in the value of money. When productivity goes up, a dollar should buy more -- you can expect it. What you have is perfectly benign deflation, using Fed gov Ben Bernanke's definition of deflation as, "a general decline in prices, with the emphasis on the word `general.'" Productivity increases are never exactly the same industry by industry, but a confluence of enough of them will give you what economists would call collectively a "general" increase in output -- with your non-inflated dollar buy much more "in general". Again, this is a good thing, and a completely harmless thing.

Now, it's easy to start talking mysterious talk about a phantom such as "the nominal prices of all goods and services", something which is "independent of underlying relative values". It is easy to take the next step, piling one phantom on top of another with talk of a change in the phantom entity "the overall price level". Of course, the substance behind the shadow is nothing but a collection of various relative prices, including various prices for money and credit. What Postrel goes on to say about the ill-effects of unexpected prices changes is true enough -- but none of this has any necessary connection with perfectly-to-be-expected increases in the purchasing power of a dollar in an economy with massive productivity increased coming from all side. (the numbers were given a week or two ago on this blog).

Postrel's article ends with supposed good news:

"[the] prospect [of Japanese style deflation] isn't likely in the United States. If anything, trends are moving in the opposite direction. The falling dollar raises the cost of goods, while the growing federal deficit creates inflationary pressures. "I've never known an economy � I doubt that there is one � that has a falling exchange rate and a large and rising deficit and that has deflation," said Allan Meltzer, an economist at Carnegie-Mellon University ..

If productivity increases mean greater output -- and we aren't seeing our dollar buy more, this can only mean that we are currently experiencing rip-roaring inflation in the form of a growing money supply .. and indications are that we will see only more and more of the same as far as the eye can see.

Keynes reigns in the Bush Whitehouse. Here is new CEA chief Gregory Mankiw from last weeks Senate hearings:

What we need to do is increase aggregate demand, increase spending to get rid of excess capacity and the high unemployment we now have.

The RINO's who control the U.S. gov. are up to the job -- spending your money like drunken .. well, politicians. It seems that Republicans and Republican economists have mastered every specious arguments ever advanced for increasing the control of your money by a very tiny group of people in the nation's capital.

D-squared trashes "conservatives", but sneaks in a rather understated punchline:

the quest of conservative thought throughout the ages has been "the search for a higher moral justification for selfishness". Some rightwingers are not hypocrites because they admit that their basic moral principle is "what I have, I keep". Some rightwingers are hypocrites because they pretend that "what I have, I keep" is always and everywhere the best way to express a general unparticularised love for all sentient things. Then there are the tricky cases where the rightwingers happen to be on the right side because we haven't yet discovered a better form of social organisation than private property for solving several important classes of optimisation problem.

And then there's this:

one of the biggest problems with the psychological politics of left and right is the need that people feel to think of themselves as not just having made what looks like on balance the best decision given the things they regard as important, but as morally good people themselves. People in general seem to be horribly uncomfortable with the idea that, by the standards they use to judge political situations, they themselves don't come out as moral heroes. At base, this is a fairly childish and decidedly illiberal attitude; childish because it demands a sort of moral perfection which everyone intellectually knows can't exist outside fairy stories (unless you count the way that parents appear to their children) and illiberal because it suggests that you're only prepared to have normal social interactions with people who pass your own personal moral examination (a rather prominent political philosopher has told me to my face on a couple of occasions that he regards me as morally beyond the pale because of the job I do; I've nonetheless been made to feel very welcome at his house).

D-squared, ever read Shelby Steele?

Brad DeLong confirms my belief that the primary role of the economist in government is to act as a kind of witch-doctor -- using make-believe "science" to give cover, comfort and confirmation to whatever decisions the Leader has already made. I.e. the economists job is to use fancy math and fake science to read chicken entrails and come up with the "forecast" that was required by political reality, not "science" or causal reality. Here is DeLong:

The hard-working Max Sawicky reports that the Bush Administration's forecasting "Troika"--the Council of Economic Advisors, the Treasury, and the Office of Management and Budget--are projecting that, with the president's proposed policies enacted, payroll employment in the United States will grow from 132,130,000 in July of 2003 to 137,640,000 by December 2004--a net increase of 5.51 million payroll jobs in eighteen months. Now the U.S. economy's level of employment has grown that rapidly twice--in 1977-1978, and again in 1983-1984 (with huge numbers of baby-boomers entering the labor force in the first case, and with an extraordinarily rapid 2.1 percentage-point decline in the labor force in the second). But those increases in employment came with 5.5% and 7.3% annual rates of increase in real GDP. No one is forecasting such rates of increase in real GDP over the next year and a half. [This is what must have happened]. Some high politician has reached down into the innards and guts of the forecasting process, and has said "employment in 2000 averaged 136.9 million. We cannot forecast that in December 2004--at the end of President Bush's first term--fewer Americans will be at work than in Clinton's last year. We cannot. We do have a history of Republican administration's economic forecasts being off in the gamma quadrant. The most famous example is the Larry Kudlow-Paul Craig Roberts-Murray Weidenbaum "rosy scenario" of 1981 that convinced Ronald Reagan that he really could cut taxes massively and still balance the budget, a rosy scenario forecast that was, as Marty Feldstein politely put it at the time, "not consistent with the tenor of Federal Reserve policy." But it's not alone: I remember the incoming Clinton administration looking at the last forecast made by Richard Darman of OMB, and howling with laughter.

Bruce Bartlett goes a bit over the top cheerleading for the tax cut bill. I agree that there can be few things more important than reducing disincentives on capital investment -- capital investment is the very foundation of our wealth. And, yes, we do want the day-traders on board the political bandwagon .. Anyway, here's Bartlett:

we will have a significant cut in taxes on corporate dividends, which will lower the cost of capital and give a huge boost to the stock market. Lower capital gains tax rates will greatly improve the investment climate and be a major stimulus to venture capital and other high-risk investments.

A brilliant piece of economic analysis from Paul Kasriel:

The dollar is bound to depreciate. The rest of the world advances us approximately $1.5 billion a day. Private global investors are beginning to question how we will be able to pay them the interest and dividends on these advances. To see why they might now be concerned about this, consider two corporations. Corporation 1 uses the proceeds from its stock and bond sales to invest in plant and equipment and research and development. These investments increase the odds of it earning higher profits in the future. Corporation B uses the proceeds from its stock and bond sales to throw a party for its employees every Friday afternoon. Although Corporation B may have temporarily happier employees than Corporation 1, in the longer run, both Corporation B's stock and bond holders and employees will be unhappy because it will not see higher earnings growth. Investors will stop advancing funds to Corporation B if it continues to use those funds for employee parties. In effect, we are throwing parties with the $1.5 billion the rest of the world advances us each day in that we are using these funds to buy bigger cars, bigger houses, and cruise missiles. These purchases are not the stuff that will allow us to grow faster in the future. Moreover, Fed Chairman Greenspan has effectively said to investors in U.S. Treasury securities that he will do all in his power to insure that the coupon payments they receive will be worth less. That is, Greenspan has indicated that he will conduct U.S. monetary policy so as to increase the U.S. inflation rate. This is not exactly what the creditors to the world's largest net debtor want to hear. So, these creditors, at least the private ones, would be expected to cut back on their demand for U.S. dollar-denominated assets. This is the "necessary" part of the dollar's depreciation.

The "evil" part is that a depreciating dollar impoverishes Americans. A depreciating dollar means that we have to give up a greater quantity of goods and services to the rest of the world in order to get the same quantity of goods and services from them as before. A depreciating dollar means a decline in (or slower growth in) Americans' standard of living. In effect, we will be working harder but enjoying it less. So it goes.

Get out the (inflation) pump. Greenspan details Fed contingency plans for combating deflation.

Brad DeLong has some intelligent things to say about the stupid things a U.S. Sec. of Treasury must say.

Company owners tell GSK's head and his corporate board to go to hell on his proposed golden parachute package. A rare win for the actual owners of a major corporation.

The liquidity trap .. myth. Someone send Krugman a memo, "The evidence is conclusive�Japan hasn't been caught in a liquidity trap", so writes newly minted Ph.D in economics Richard Johnsson, who's run the (Keynesian) numbers, decisively refuting Krugman's favorite hobby-horse of the last 10 years (hobby-horse -- a constructed child's toy for playing pretend).

IMF is the latest stoking deflation fears, this time it's Germany, Japan, Hong Kong and Taiwan who are "at risk".

Update: The IMF report can be found here (pdf). The U.S. is not seen "at risk".

Will New York City ever recover? Robert Bartley on "the most efficient technique presently known to destroy a city -- except for bombing".

America's greatest wealth producing export -- money -- faces stiff competition from a currency that is gaining, not losing, value. An example of the problem:

From 1995 to 1999, according to Professor Ferguson's research, 53 percent of all corporate bonds were issued in dollars, and only 20 percent in the currencies of the 12 European countries that now use the euro. In the four years since the common currency began trading, however, 44 percent of new global bonds have been issued in euros, nearly equaling the 48 percent issued in dollars.

Meanwhile .. industrial production for export in China is up a whopping 28.8% from a year ago ..

Germany, the new sick man of Europe.

Speaking of double taxation, if people were serious about eliminating double taxation, wouldn't they eliminate the sales tax, properties taxes, and a host of other taxes levied when I use of my already taxed income? The George Bush tax revolution has a long way to go if this is suppose to be some sort of principled tax doctrine.

The Volokh Conspiracy is trashing the Senate tax bill -- and for good reason.

Michael Dell says that his firm will start giving dividends if the tax on dividends is removed, but won't if is isn't (on Fox's Neil Cavuto show). What's that about?

Is this economics? I'm not sure. But it is an account of what Paul Glimcher is doing with monkeys and Berry Berry Fruit Juice. (Nothing illegal). The story is taken from Glimcher's Decisions, Uncertainty, and the Brain : The Science of Neuroeconomics

Labor shocker. No to the Euro.

Dow Jones, fanning the flame of deflation fears.

With all due respect to Chairman Greenspan, his forecasting record is unenviable whether it comes to inflation (remember WIN buttons in late 1974?), to the economy (how long did it take him to figure out we were in a recession in 1990?), to personal recommendations (is Chuck Keating out of the pen yet?). So, when Greenspan starts to worry that inflation might be too low, I start to think that we may be near a bottom in inflation.

Paul Kasriel via Jeffrey Tucker. (Lots of good charts).

The IS/LM macroeconomic model should be history, but it isn't. Historians of economic thought chart the fate of the textbook Keynesian thinking of the 1950's which still dominates the imagination of the econobabblers -- the herd of economists, journalists, politicians, and Fed Board members who generate the idiot talk which passes for macroeconomic conversation in America. A highlight -- tracing the "liquidity trap" from Hicks to Krugman. The classic book on how the IS/LM model became "Keynesian economics" is David Laidler's, Fabricating the Keynesian Revolution, which was a the topic of perhaps the most successful Hayek-L email seminar ever.

It's democracy vs. the mob -- in France, as Europe's cultural war against economic reality advances.

UPDATE: More on the economic contradictions of European culture.

Deflation? What deflation? A group of Canadian economists weigh in.

You want a conventional wisdom primer on deflation? Robert Samuelson obliges.

How would you describe Paul Krugman. Unprofessional. Phony. Something of an ass? Neil Cavuto thinks so too.

UPDATE: Donald Luskin has Krugman's ragdoll bashed into tatters on Cavuto, interest rates and government controlled information (via Instapundit).

"Price stability doesn't mean zero inflation," so says San Francisco Federal Reserve President Robert Parry. The science of chicken entrails gets stranger and stranger.

Is it economics or some fun math? You decide.

Mathematician John Allen Paulos's new book A Mathematician Plays the Stock Market is out today.

His analysis of electricity deregulation in Britain and the botched privatisations in Russia in the 1990s lead him to the same conclusion: that markets cannot be imposed, but are instead the sum of evolution and adaptation. They thrive within a society's laws and cultural norms; without them they fail.

From a review of John Kay's The Truth About Markets: Their Genius, Their Limits, Their Follies.

Evidently Kay's assessment of the confused Becker/Chicago approach to "economics" is about the same as mine.

Jeffrey Tucker has been doing an amazing job at the Mises Institute. Check out his new Mises Economics Blog

Jason Soon is contemplating the relation between economics and Darwinian biology, and thinking about Paul Krugman's remarks on this matter. Let me do a little Fisking of Krugman here. Krugman is just wrong about what economics is about. Economics is not about individual behavior. Economics is about explaining something, a pattern, just like Darwinian biology is about explaining something, a special sort of pattern in our experience of the biological world (I'll reference some of my writings on this in a later post). This pattern is a social pattern. Smith had it right when he pointed us to an undesigned division of labor and social coordination of interactions which produced great riches. As Hayek points out, the "rationality hypothesis" is not essential to economics (and note well, it is twice false -- it is no hypothesis, and it doesn't define rationality).

If you pretend that Krugman is right about what economics is about, Alex Roseberg has done the hard work of showing how the maximization strategy of the "rationality hypothesis" economists and the maximization strategy of the population biologist are at base insuperably different, not the least because the economists are working within an intentional framework, while natural science is inherently non-intentional (for details see Rosenberg's Economics -- Mathematical Politics or Science of Diminishing Returns). Rosenberg is the sort of philosopher who knows the fundamentals of economics much better than most economists, and the fundamentals of Darwinian biology much better than most biologists (why? because most economists and biologists are either narrow mathemacians or they are narrowly empirically oriented -- they take for granted the background explanatory superstructure they usually think about only rather superficially. Also Roseberg is one of the smartest folks on the planet.)

Stephen King (not that Stephen King) finds our Keynesian Fed is having a problem keeping it up:

"The probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level."

Well, who would have thought it? .. The Fed's policy statement last week suggests that inflation - rather than growth - is top of the policy agenda. But, unlike the 1970s and 1980s, the Federal Reserve will now be aiming to keep inflation up: America's central bank needs to find the monetary policy equivalent of Viagra .. Of course, the central bank can offset this .. problem in normal circumstances by lowering the interest rate. If the interest rate is also lower than expected, the debtor is back to square one. Yes, the real debt level is higher but the cost of servicing that debt - the interest payment - is lower. The two factors cancel each other out.

Or at least that would be true if interest rates were always able to fall. At very low interest rates, however, this might not be possible. If inflation is 2.5 per cent lower than expected and interest rates start off at 5 per cent, the central bank merely has to cut interest rates by 2.5 per cent. If, however, inflation is 2.5 per cent lower than expected and interest rates start off at 1.25 per cent - which is where they are in the US today - then it's simply impossible for the central bank to provide the necessary offset: nominal interest rates cannot fall below zero.

Because of this, the Federal Reserve finds itself in a bit of a quandary. America's central bank has spent the last two years trying to bring about a sustained recovery in economic growth. To a degree, it has been successful: consumer spending had, until recently, been quite buoyant and, in 2002, economic growth surprised on the upside. Despite all this, inflation - excluding the volatile food and energy components - has continued to ebb away, suggesting that, despite the pick up in economic activity in the first half of 2002, there is now an increasing risk of a downward debt-driven spiral. If inflation persistently surprises on the downside, real debt levels will persistently surprise on the upside. But if interest rates are already very low - as they are today - the Federal Reserve may no longer be in a position to bail out the economy via more and more interest rate cuts.

Indeed, it may be the case that the attempts to prevent deflation have, in reality, made the situation even worse. To understand this point, it's worth going back to the arguments of the Austrian economists who, in the 1920s, were all the rage but were then quietly forgotten about - apart from the free market revival that took place in the Thatcherite 1980s.

The Austrian view - proposed by Friedrich Hayek - was quite straightforward. The Austrians made three general points.

First, during bubbles, interest rates are too low because the central bank will not allow them to rise to a "market clearing" level (in America, the justification for keeping rates low in the late 1990s was partly based on the Asian crisis, Long Term Capital Management scandal and the Y2K fever).

Second, the low level of interest rates will give companies the impression that consumers prefer to save rather than spend (after all, the greater the supply of savings the lower the interest rate), thus companies should invest because it will appear that future demand will be higher than current demand.

Third, consumers themselves will take one look at the low level of interest rates and conclude that there is absolutely no point in saving from current income because returns are insignificant. So they spend. The net result is that, in the boom, there is too much demand and, at the point when the investment comes on stream, there is too little demand. Seven years of famine then follows seven years of feast.

A non-Austrian central bank will look at this situation and see a standard cyclical shortfall in demand. Concerned about this shortfall, it will decide to lower interest rates still further. Consumers carry on spending and, hopefully, companies carry on investing. But this simply defers, rather than cures, the problem. Indeed, the policy potentially makes the problem bigger: consumption will only remain strong if consumers can be persuaded to carry on borrowing. But this is very much a finite process. Either nominal incomes will be hit, thereby reducing the desire to borrow, or interest rates will fall to zero and, therefore, be unable to decline any further. In both cases, the consumer will eventually hit a brick wall, increasing the risks of a shortfall in demand and an undesirable further decline in inflation.

Could the Federal Reserve now be facing this Austrian problem? Two years ago, it cut interest rates with the intention of stimulating an economic recovery. But if interest rates were too low during the period of the boom, it becomes difficult to see why even lower interest rates can be part of any subsequent solution. Indeed, by creating more debt, the danger is that the ultimate deflationary impetus becomes even more unpleasant.

Ultimately, this is an issue about prevention and cure. Interest rate cuts are seen as a way of preventing deflation. But if inflation is still falling after interest rates have come down to something close to zero, policy makers have got a serious problem. The irony is that the policy used to prevent deflation - getting people to borrow on the back of low interest rates - becomes the very worst policy to use if deflation arrives in any case.

So, should we worry? The good news is that, unlike the Bank of Japan in the first half of the 1990s, the Federal Reserve has been quick to recognise the possibility of deflation and, therefore, should stand a better chance of coming up with either prevention or cure. The potential bad news is that the prevention polices pursued by the Federal Reserve are, according to Austrian arguments, doomed to failure. Low interest rates only make the problem worse: ultimately, time alone will provide a resolution to America's economic difficulties. On this basis, policy makers should aim only to minimise the pain of adjustment, not pretend that the pain can be removed altogether.

Stephen King is managing director of economics at HSBC (the global bank).

All of the fundamental principles of economics tell us that if you produce more goods at less cost -- and the money supply increases less rapidly than productivity -- then prices should come down . And there is no reason to believe that this is not a good thing. Why then all the chicken little clucking over deflation? It makes no sense, certainly not any economic sense. (For a primer on deflation, see this article by Joe Salerno.)

Productivity last year was up 4.8 percent, the largest jump in productivity since 1950. If we had sound money, right now we should be seeing continually lower prices, not endlessly higher prices. It is only continued mismanagement of the money supply which gives us unceasing inflation -- and constant irrational swings in the interest rate.

Talk about folks with an uncontrollable vice. Andrew Sullivan has the story on those drunken sailors . er . Republicans who run the Federal government. If only we could return to the days when when Democrats were in control and Federal spending was 30% less than it is today. Here is Sullivan:

This is Daniels' and Bush's legacy: one of the most recklessly big spending administrations in recent history, higher deficits and mounting debt.

The fantasy of "a strong dollar policy" and other mythologies of monetary nationalism go up in smoke in the hands of two economists who debunk the idea that the U.S. Treasury has anything to do with maintaining the value of the dollar.

Paul Krugman -- hack or fraud? Alan Reynolds investigates.