Tabarrok on “Bernanke vs. Friedman”

Alex Tabarrok has a very flattering post at Marginal Revolution about my 2011 article,  “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner.” It seems that the President of the Richmond Fed has independently just made a similar argument.

Around the Web

This is the 69th installment of ‘Around the Web’. Giggity!

  1. guaranteed income vs. open borders; Economist Kevin Grier weighs the options
  2. How poverty taxes the brain; A sexy-sounding female gives us the low-down
  3. The origins of Northwest European ‘guilt culture’; Evolutionary anthropologists are so, soooo cute
  4. The ‘thoughtful libertarian’ subreddit; Finally!
  5. Is Christmas efficient? Only an economist (Tyler Cowen) could ask such a thing
  6. God, Hayek and the Conceit of Reason; Concise essay by Jonathan Neumann in Standpoint
  7. Milton Friedman’s 1997 musings on a common currency in the European Union: The Euro: From monetary policy to political disunity

FDR, Uncle Fred, and the NRPB

In Ayn Rand’s epic novel Atlas Shrugged, government officials regulate the economy through something called the Bureau of Economic Planning and Natural Resources. She clearly chose that name to reflect their belief that productive people were bound to produce just because of their “conditioning” and could therefore be treated pretty much like coal in the ground—as resources ripe for exploitation.

One wonders whether she had ever heard of the National Resources Planning Board (NRPB). The NRPB was a real agency, part of the kaleidoscope of bureaus that formed the New Deal. Its history is in some ways as dry as dust, but a closer look reveals some interesting and timeless insights into the planning mentality and the role of personalities in shaping history.

The philosophy underlying Roosevelt’s New Deal, if one can call it that, was to try something and if it didn’t work, try something else. In that same spirit the NRPB mission changed frequently; even its name changed four times before it was killed in 1943. It had been authorized as part of the National Industrial Recovery Act, but that program was ruled unconstitutional in 1935, leaving the National Planning Board, as it was called then, in danger of extinction. It was quickly rescued by FDR, however, and established as an independent agency. Casting about for a new name, one planner suggested “natural resources,” whereupon another commented that human beings were America’s most important resource. “National Resources” was suggested. The President chewed the phrase over a few times, then, pleased with its sound, grinned and announced, “That’s it. Get that down, boys, because that’s settled.” Continue reading

Unemployment: What Is It?

Unemployment has regained center stage now that the debt crisis has receded from that position, at least for a time. Unless things change dramatically over the next year unemployment will be the number one issue in the forthcoming presidential election. Hardly any proposal will escape being labeled “job-killing” or “job-creating” or both.

To begin with some basics, what is work and what is a job? For economists, work is any activity that we would not perform without tangible compensation, usually money. In our work lives almost all of us are also motivated by nonmonetary considerations, and to the extent we diverge from the most remunerative activity available to us, we are blending work and leisure. A retired person who takes up college lecturing may do the work primarily for the satisfaction it brings. If his salary were withdrawn and he continued to teach, he would be enjoying leisure.

The goal of all economic activity is consumption, which to economists means not just mundane goods like faster cars but also “noble” ends like cathedrals. Jobs are therefore not ends in themselves, as much as public discussion would suggest otherwise. They are means to acquire income to be used for consumption and saving, in addition to personal satisfaction, learning opportunities, or socializing.

A person who lacks a job is unemployed if he or she wants work, has suitable skills, and has realistic expectations about compensation. These are vague terms; they make unemployment a murky concept. That goes double for underemployment, though both remain very real phenomena. Continue reading

The Curious Case of the Bourgeois Bubble Boy

Since Ron Paul’s fantastic, spontaneous, incredible 2008 presidential campaign libertarianism has become a hot topic among the brightest people throughout the world. This is not a coincidence or an act of God, I think. The recent peak in interest of libertarian alternatives has to do with the sometimes sorry state that our world always seems to be in.  As somebody who came from the hard, anarchist, collectivist Left, I can assess that the libertarian alternative has been given a fair shake by a broad swathe of the American public.  However, on the hard Left, there has been bitter hostility towards anything remotely libertarian in American political discourse.  Most of this is envy, I think; a primitive form of envy that always forms when competition arises to challenge the orthodox opinions and mores of a society.

More on this is just a minute, but first: although there are indeed many problems facing the world today, we are living in a time of great abundance and peace. Furthermore, the periodic mass starvations in East Africa and the short, intense outbursts of small wars are both relatively simple to fix and uncommon (which is why they make the news). These are facts that we would do well to remember. Back to the hard, bitter Left.
Continue reading

August 15, 1971

People who were alive in 1941 can tell you right where they were on Pearl Harbor day.  I can tell you exactly where I was when I heard that President Kennedy had been shot.  We all remember 9/11.   Another day that I sticks in my memory just as clearly is one that is now remembered by few: Sunday, August 15, 1971.

There was no internet in those days and no cable news channels, so I was mercifully spared the news until the following morning at 8:15 when I opened my motel room door in Huntington Beach and saw the L.A. Times on the doorstep with a headline that said something like “Nixon Imposes Price Controls.”

I was shocked and disgusted for two reasons: though I was employed as an aerospace engineer, I was beginning to learn about free markets, having attended a FEE seminar the year before at which Mises and Hazlitt  – now saints of Austrian economics – lectured.  And I had voted for Nixon in 1968, naively believing the Republicans were the party of free markets.  The following year I signed up with the new Libertarian Party and never looked back on the Republicans until 2008 when Ron Paul ran.

Here is a video recording of Nixon announcing a 90-day “freeze” on prices and wages. Note the Orwellian references to the evils of price controls even as he imposes them.Image

So what was the big emergency that prompted such a drastic response?  Unemployment was running about 6%; price inflation at about 5%.  Nixon’s problem was that an election was coming up in the following year.  He remembered bitterly his narrow loss to Kennedy in the 1960 election which he attributed to a mild recession of that year. Now he was determined to goose the economy and get himself re-elected. Like FDR, Nixon loved dramatic strokes and never mind the consequences. Earlier that year the man who had made his reputation as an implacable anti-communist had made a sudden and dramatic overture to communist China.  So on that sleepy Sunday Nixon delivered another bold stroke, in an end run around the Democratic opposition.  Perhaps it worked: he won 49 states in the 1972 election with considerable help from his bumbling opponent, George McGovern.

His action was quite popular.  The stock market surged that Monday morning and polls showed a 75% approval rate.  But Milton Friedman was right when he predicted “utter failure and the emergence into the open of suppressed inflation.”  Another freeze was imposed in 1973 but this time the damage to the economy became evident.  As explained in the excellent video series “The Commanding Heights,” “ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.”  Inflation reached a peak of about 14% before the decade was out and before the powers that be accepted the fact that excessive money creation is the main cause of price inflation. George Schulz, Nixon’s economic advisor and a vigorous opponent of price controls consoled himself with the thought that Nixon had demonstrated dramatically how not to fight inflation.

Nixon wasn’t finished.  During that same Sunday broadcast he slapped a 10% tariff on imported goods, accompanied by some blather about fairness.  More significantly, he ended the Bretton Woods international monetary system.  That arrangement, conceived in 1944, had the U.S. dollar convertible into gold at $35 per ounce, but only for foreign central banks.  Not only could private banks and private citizens not convert their dollars, it was even illegal to own gold (with exceptions for dentists, jewelers, etc.).  I made a point of violating that particular law on principle before the prohibition was lifted in 1974.

In all fairness, the Bretton Woods system was doomed long before that August.  The gold exchange standard had persisted only because of a gentlemen’s agreement that European central bankers would refrain from exercising their redemption rights to any significant degree.  So many new dollars had been created to finance Lyndon Johnson’s war in Vietnam and his “Great Society” at home, and so many of those dollars were parked overseas as a result of trade imbalances, that the U.S. government could not come close to honoring its Bretton Woods obligation in full.  The French under de Gaulle and his gold-bug advisor Jacques Rueff had become increasingly strident about the situation, but in early August the British ambassador showed up with $3 billion to be redeemed, and that may have been the straw that broke the camels back.

So on that same Sunday Nixon slammed the gold window shut (video here)  pushing us out of the frying pan of Bretton Woods, under which numerous wrenching devaluations had wracked international trade, into the fire of floating exchange rates, the system we have now.  The devaluations are gone but the wild swings in currency values, something that was not foreseen by Milton Friedman who was an early advocate of currency markets, are almost as bad.  Now, wonder of wonders, there is resurgent talk of some sort of gold standard.

Reagan tempted me with with some pretty inspiring rhetoric in his 1980 campaign about getting the government off our backs.  Not enough to vote for him, but I was glad he got elected and with the help of Fed chairman Paul Volcker he did break the back of inflation, but he never got spending under control and he didn’t deserve as much credit as he got for the fall of communism, which had been rotten at its core for decades.  But Bush I was terrible and in hindsight Clinton wasn’t all bad, yet I confess I was relieved when Bush II beat Gore in 2000.  I needn’t remind anyone what a disaster GWB was with his wars, his unfunded medicare expansion and his bailouts (OK, thanks for the tax cut).

I’m voting for Gary Johnson who won’t win, and I really don’t care who wins.  Gridlock is the least bad outcome, even if that means the despicable Obama stays in office facing a Republican congress.