Iron triangles

The Great Society’s War on Poverty

by Robert Higgs

For the most part President Lyndon B. Johnson was simply lucky in regard to economic stability and growth during his term in office, although he does deserve credit for pushing John F. Kennedy’s stalled tax-cut proposal to quick enactment in February 1964. The economy was already growing and the rate of unemployment declining when LBJ took office in November 1963, and macroeconomic conditions continued to improve throughout his presidency, although the rate of inflation began to edge up after 1965, reaching almost 5 percent during his final year in office. Between 1963 and 1968 real gross domestic product increased 29 percent, or 5.2 percent per year on average. Unemployment declined from 5.7 percent in November 1963, when LBJ became president, to 3.4 percent in January 1969, when he left office.

This macroeconomic success owed nothing to policymakers’ fine tuning, because neither the administration nor Congress made such delicate adjustments of fiscal policy as conditions changed. In truth, the U.S. government was institutionally incapable of fine tuning fiscal policy, however much it appealed to Keynesian economists drawing diagrams on blackboards.

Whatever its sources, this remarkable macroeconomic performance deserves the lion’s share of the credit for the reduction in measured poverty that occurred during the Great Society years. Of course the administration did propose, gain enactment of, and implement a plethora of bills aimed at reducing poverty in one way or another. Indeed, for many observers, the Great Society is virtually synonymous with the War on Poverty.

Major events included enactment of the Civil Rights Act of 1964 (often viewed as an antipoverty measure because blacks had relatively low average income), the Economic Opportunity Act of 1964, the Food Stamp Act of 1964, the Elementary and Secondary Education Act of 1965, and the Social Security Amendments of 1965 (creating Medicare and Medicaid), as well as establishment of the Office of Economic Opportunity (to oversee programs such as VISTA, Job Corps, Community Action Program, and Head Start), hundreds of Community Action Agencies, and many other bureaus ostensibly promoting poor people’s health, education, job training, and welfare.

Nearly all these antipoverty measures, if successful at all, had only a small effect on the national poverty rate, which fell from 19.5 percent in 1963 to 12.8 percent in 1968. Many of the antipoverty programs had scant funding and received news coverage out of proportion to the amount of money they spent. Most of the programs were ineffectual, spending taxpayer money with little or nothing to show for their display of good intentions. “[T]hose who most directly benefited,” says historian Allen J. Matusow, “were the middle-class doctors, teachers, social workers, builders, and bankers who provided federally subsidized goods and services of sometimes suspect value.”

Poverty researcher Michael D. Tanner recently remarked, apropos of the War on Poverty and its programmatic legacies:

Throwing money at the problem has neither reduced poverty nor made the poor self-sufficient. Instead, government programs have torn at the social fabric of the country and been a significant factor in increasing out-of-wedlock births with all of their attendant problems. They have weakened the work ethic and contributed to rising crime rates. Most tragically of all, the pathologies they engender have been passed on from parent to child, from generation to generation.

The Great Society at least did not bring economic growth to a halt, and therefore did not preclude a continuation of the long-term reduction in the proportion of Americans living in poverty. As for the War on Poverty in particular, however, no such benign evaluation is justified. Matusow, by no means a conservative ideologue, concludes that “the War on Poverty was destined to be one of the great failures of twentieth-century liberalism.”

Like most of the other Great Society programs, the War on Poverty rested on the presumption that technocrats possessed the knowledge and capacity to identify what needed to be done, design appropriate remedial measures, and implement those measures successfully through the use of government’s coercive power and taxpayers’ money. The technocrats did not give much weight—indeed, they generally gave no weight whatsoever—to the possibility of what later came to be known in Public Choice theory as “government failure.”

According to LBJ’s biographer, Paul Conkin, Johnson “never easily conceded that any except purely private problems did not lend themselves to a political answer. That is, government could directly or indirectly alleviate any distress.” White House aide Joseph Califano later confessed, “We did not recognize that government could not do it all.” Yet to describe the War on Poverty as merely hubristic would be too kind to its promoters.

All too many of the programs fell short of even this species of defectiveness, amounting to little more than garden-variety efforts to turn taxpayer money into purely personal and political swag for the insiders who designed, operated, and exploited the programs. For example, the Community Action Program, unforgettably lampooned by Tom Wolfe in his 1970 book Mau-Mauing the Flak Catchers, combined ample components of white middle-class guilt, minority shakedowns, and money thrown around basically to appease the menacing claimants who, having been invited to snatch it, resorted to whatever form of intimidation would get it for them quickest. “The money,” Conkin concludes, “often seemed to dwindle away, funding little more than the wages of [Community Action Agency] employees.”

More generally, as historian John A. Andrew notes, “Through ‘iron triangles’ and the use of clientele capture, the very objects of Great Society reforms [including the War on Poverty] all too often seized control of the process to block significant change and enhance their own interests.”

Level-headed analysts could scarcely have been shocked by this outcome. As Adam Smith long ago remarked, although the “man of system”—preeminent examples of which played leading roles in initiating the War on Poverty—treats the members of society as if they were pieces on a chessboard, the people have a motive power of their own. In the mid-1960s those whom the social and economic planners undertook to help in various ways refused to sit still while the technocrats treated them as lab rats. Instead they often reacted by resisting, diverting, or seizing control of the “top-down” schemes the government imposed on them, causing what analysts in retroactive assessments call program failures.

One man’s failed experiment, however, was often another man’s fulfilled political ambition or bulked-up bank account. Across the country, for example, local politicians diverted federal money intended to fund the War on Poverty into support for prosaic, local political priorities. Although many writers now speak of this much-ballyhooed crusade as a failure, it was a rousing success for many of its movers and shakers.

Tyranny Afoot

Arthur Koestler’s Communist Chronicles

By Bruce Edward Walker

“You want to stifle the Republic in blood. How long must the footsteps of freedom be gravestones? Tyranny is afoot; she has torn her veil, she carries her head high, she treads over our dead bodies.”

—Arthur Koestler, Darkness at Noon

Perhaps no author better chronicled the disastrous, soul-crushing European political experiments of the middle half of the twentieth century than Arthur Koestler. The Hungarian-born author wrote magisterially (in English, no less; he first published in Hungarian, German, and Russian) of the follies of the Pink Decade of the 1930s in a series of political novels. Unfortunately, they’re all but forgotten in today’s university curricula. The world requires constant reminders of what actually happens once citizens acquiesce to big-government solutions.

George Santayana wrote: “Those who cannot remember the past are condemned to repeat it,” and Koestler’s body of work from the 1930s to 1950s proves the contemporary relevance of Santayana’s admonition. Perhaps in no other time besides the era in which they were originally published are Koestler’s literary themes more topical than the present, as our own government expands exponentially to bail out and control our country’s financial and automotive industries; mire other industries to the point of stagnation with cumbersome regulations; redefine such basic individual choices as health care and education as prescribed “rights”; and enact wide-ranging schemes to insinuate bureaucratic reach into nearly every aspect of our lives, from the Internet and use of recreational and/or medicinal inebriants to surveillance cameras at every traffic stop.

As this year officially marks the 70th anniversary of the publication of Koestler’s seminal novel, Darkness at Noon, and the 60th anniversary of his essay “The Initiates,” it’s a convenient opportunity to revisit both works as a reminder of what awaits all democratic societies eager to abandon liberties for the sake of utopian ideologies.

Seventy years ago, as war engulfed nearly every continent and the Axis peril seemed poised to destroy two millennia of civilization, Koestler published Darkness at Noon on another, completely different threat to individual freedom: communism. Ten years later “The Initiates” appeared as one of six essays in The God That Failed, a volume featuring the voices of many of the twentieth century’s greatest writers who had embraced the Stalinist enterprise as the singular political corrective to economic misery before abandoning it as contrary to human nature and profoundly detrimental to humanity in general. However, none of Koestler’s fellow travelers—Richard Wright, Ignazio Silone, Andre Gide, Louis Fisher, Stephen Spender—wrote more authoritatively or convincingly against communism than he.

Darkness at Noon is the third novel in Koestler’s quartet depicting what occurs when centralized governments seize control of the means of production and attempt to mitigate the individualist impulse. Briefly, Darkness is bookended by The Gladiators (1938) and Arrival and Departure (1943), and followed by The Age of Longing (1951). In the first, Koestler novelizes the slave revolt commanded by the gladiator Spartacus; in Arrival and Departure he conjectures on the psychological motivations behind a character who alternately embraces communist and Nazi ideologies; and The Age of Longing is a futuristic novel exploring the irreconcilable nature of religious faith and totalitarianism in Paris of the mid-1950s. But it is in Darkness, in my humble estimation, that Koestler succeeds most in capturing the mindset of the collectivist fantasy in order to completely dispel its flawed precepts.

Encapsulating a Century

“If any figure could claim to have encapsulated in his own life—and recorded—the political, intellectual, and emotional tribulations of the twentieth century, it is [Koestler],” wrote Theodore Dalrymple in “A Drinker of Infinity,” an essay that appeared in The City Journal, Spring 2007, and that took its title from a later work by Koestler.

Koestler’s life leading up to the writing of Darkness at Noon reads like a novel (or several) itself. Born to Jewish parents in Budapest in 1905, he displayed an affinity for math and science that led him to study engineering in Vienna. Before he could graduate, however, Koestler embraced radical Zionism (although biographies report he wasn’t an observant Jew), which led him to live briefly on a kibbutz in Palestine. He subsequently became the Palestine correspondent for a German newspaper group, the Ullstein Trust, was based for a while in Paris, and wound up simultaneously serving as science editor and foreign correspondent for two Ullstein-owned newspapers in Germany.

After Ullstein fired Koestler (some sources assert he resigned) for his political leanings, the writer threw the full weight of his intellectual and physical energies behind Marxism (fully detailed in “The Initiates”). He traveled extensively throughout the USSR in 1932 and 1933 at the invitation of the Revolutionary Writers of Germany, a Comintern front agency. When the Spanish Civil War erupted in 1936 Koestler was writing communist propaganda in Paris and accepted an assignment from a British newspaper to file reports from Francisco Franco’s fascist army headquarters. In Spain he was arrested as a communist spy and sentenced to death. He documented his internment in Spanish Testament (1937). Once released—through international efforts resulting in a Republican swap of Koestler for a fascist prisoner—he returned to France to continue writing for the communist cause. He severed ties with the party over his disagreement with the 1938 Soviet show trials and set about writing Darkness at Noon.

Navigating the bureaucratic maze

Navigating the Bureaucracy to Start a Food Truck

By Mark Perry

As they prepared for the lunchtime crowd, the owners of the Concrete Cuisine food truck in Detroit (pictured above) explained to the Detroit Free Press what it took to get their vehicle and food business licensed:

"The food truck owners started working to get their license from the Wayne County Health Department -- known for its tough standards -- in the spring. "It took us three or four months," says Kava, 32, of Livonia. "You had to come up with a plan review, the same as you would with a bricks-and-mortar restaurant. They wanted to see your whole layout. They wanted to know every single piece of equipment -- dimensions, specs, where you're buying it. You have to have a spec sheet for every single thing -- the exact model.

"They wanted to know your food sources and the entire flow of the food. ... We had to say we were getting the chicken, for instance, from U.S. Foods. And then it's, 'OK, you buy your chicken frozen. What's your thawing-out process? How do you cook it? How do you hold it? How do you serve it?' We had to go through every single menu item and do the exact food flow."

And those were only a few of the requirements.

"They say you have to do this, this, this and this," says Aquilina, 35, of Plymouth. "So you go back and do that, and keep redoing it. The final step was the lighting. We didn't have a lighting chart. They wanted to know where the lights are going to be and what's covering the lights."

"We were amazed at the amount of steps," adds Kava. Other people told them they should have gone to Oakland County, where the process is said to be easier. "But you know, it's cool, because once you actually receive the license, you have a sense of accomplishment."

Yes, once it's all over, you might have a sense of accomplishment from successfully navigating the bureaucratic maze and getting a food truck license, but it's too bad that so much time, energy and money has to be spent on the mountain of paperwork required to start a small business to serve the public.  Well, at least it's creating a huge barrier to entry for the incumbent businesses, and will limit the competition from potential entrants who might be unwilling or unable to navigate the bureaucracy.  

The discredited "new" orthodoxy

Twelve Thoughts on Inflation

 

W. H. HUTT*

THE PRESENT WRITER’S interest in the phenomenon of inflation goes back at least forty-five years. He was then an undergraduate at the London School of Economics. The famous Edwin Cannan, at whose feet he was studying, had taken the delightful gesture of suing the British Government under the Profiteering Act for selling pound notes at above their gold value. Cannan wanted to bring home to the public the extent to which inflation had debased the pound sterling.

As a teacher of business administration during the last thirty-eight years, the writer’s attention has been repeatedly forced back to this question of the spasmodic, yet persistent, depreciation of money. How can businessmen co-ordinate the private sector of the economy effectively when the most important measuring-rod of all—the monetary unit—has been left with no reliable, defined value? Units of length, volume, and weight have been universally defined with meticulous care; but dollars, lire, francs, and pounds have been allowed to change in every significant attribute over time. Hence, the aim in this article is to record briefly the twelve most important practical conclusions to which the thought of an academic lifetime on this issue has led the author.

(1) Nearly all inflations have been intentional, calculated actions of governments, however reluctant they may have been. No monetary depreciation in history has ever occurred in which governments have not purposely taken the steps needed to bring it about or, alternatively, have not deliberately refrained from action which could rectify any inadvertently caused inflationary tendencies. If monetary systems had rested solely on private contracts to redeem credit instruments (according to some stipulated standard) inflation could never have occurred.

(2) From time immemorial princes debased currencies. To such an extent did this happen that almost invariably the emergence of representative government in different parts of the world was followed by legislation to remove the right of monarchs to reduce the metallic content of moneys. But curiously, with the transfer of the kingly power to parliaments, no similar constitutional limitations were imposed upon elected governments. There have been suggestions in the United States, since the Second World War, that the continued decline in the purchasing power of the dollar should be brought to an end by incorporating the objective of a stable price index, by amendment, into the Employment Act of 1946; but the leadership which could have forced governments to take so difficult a step has thus far been lacking.

(3) When governments plan the programs which force up the cost of living they are usually reluctant. If they (or their advisers) could conceive of some means other than inflation for keeping their supporters happy they would make use of them; but provided the public generally does not predict the speed with which it is to occur, or its duration, inflation accords governments an easy access to income—unauthorized by democratic process—with which to purchase popularity, as well as an easy means—although a clumsy and unjust means—of temporarily alleviating the most common causes of disco-ordination in an economic system.

(4) Inflation can serve as a sort of palliative or anaesthetic which deadens the pain of a serious economic disease, namely, disco-ordination due to different categories of prices coming to be wrongly related to one another. Various types of restraint on competition permit wage rates and prices to be fixed too high to permit the full flow of output to be purchased from uninflated income, or too high in relation to price expectations. When one kind of labor or its product is priced too high, the sources of demand for non-competing labor and products are reduced; and if prices generally are rigid downwards, a cumulative decline in activity is set in motion. In the absence of inflation, therefore, the symptoms of the disco-ordination so caused are unemployment and depression.

Desperately in need of a scientific formula

Keynes and the Ruling Class

by Garet Garrett

The work cumbersomely entitled, The General Theory of Employment, Interest and Money, now commonly abbreviated as The General Theory, was published in 1936. It was therefore only ten years old when the author, John Maynard Keynes, died last April. Probably no other book has ever produced in so little time a comparable effect. It has tinctured, modified, and conditioned economic thinking in the whole world. Upon it has been founded a new economic church, completely furnished with all the properties proper to a church, such as a revelation of its own, a rigid doctrine, a symbolic language, a propaganda, a priestcraft, and a demonology. The revelation, although brilliantly written, was nevertheless obscure and hard to read, but where one might have expected this fact to hinder the spread of the doctrine, it had a contrary result and served the ends of publicity by giving rise to schools of exegesis and to controversies that were interminable because nothing could be settled. There was no existing state of society in which the theory could be either proved or disproved by demonstration — nor is there one yet.

The moment of the book was most fortunate. For the planned society they were talking about the Socialists were desperately in need of a scientific formula. Government at the same time was in need of a rationalization for deficit spending. The idea of welfare government that had been rising both here and in Great Britain — here under the sign of the New Deal — was in trouble. It had no answer for those who kept asking, "Where will the money come from?" It was true that government had got control of money as a social instrument and that the restraining tyranny of gold had been overthrown, but the fetish of solvency survived and threatened to frustrate great social intentions.

Just at this historic crisis of experimental politics, with the Socialists lost in a wilderness lying somewhere between Utopia and totalitarianism, and with governments adrift on a sea of managed currency, afraid to go on and unable to turn back, the appearance of the Keynes theory was like an answer to prayer. Its feat was twofold. To the Socialist planners it offered a set of algebraic tools, which, if used according to the manual of instructions, were guaranteed to produce full employment, economic equilibrium, and a redistribution of wealth with justice, all three at once and with a kind of slide-rule precision — provided only that society really wanted to be saved. And the same theory by virtue of its logical implications delivered welfare government from the threat of insolvency. That word — insolvency — was to have no longer any meaning for a sovereign government. The balanced budget was a capitalist bogey. Deficit spending was not what it seemed. It was in fact investment; and the use of it was to fill an investment void — a void created by the chronic and incorrigible propensity of people to save too much. "There has been," he said, "a chronic tendency throughout history for the propensity to save to be stronger than the inducement to invest. The weakness of the inducement to invest has been at all times the key to the economic problem." By investment he was supposed to mean the use of capital in the spirit of adventure.

This idea was the very base of the theory. From oversaving and underinvestment came unemployment. And when from this cause unemployment appeared, as it was bound to do, first periodically and then as a permanent evil, the only cure was for government to spend the money. Among the algebraic tools was the famous multiplier by use of which the experts would be able to determine precisely how much the government would have to spend to create full employment.

Briefly therefore the theory was that when people were not investing enough in their own future to keep themselves all at work the government must do it for them. Where and how would the government get the money? Well, partly by taxing the rich, who notoriously saved too much; partly by borrowing from the rich, and, if necessary as a last resort, by printing it — and everything was bound to come out all right because from full employment society at large would grow always richer and richer. Ultimately the economic satisfactions of life would become dirt cheap, the interest rate would fall to zero, and the sequel would be the painless extinction of the rentier class, meaning those who live by interest and produce nothing.

If I am right [he said] in supposing it to be comparatively easy to make capital goods so abundant that the marginal efficiency of capital is zero, this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism. For a little reflection will show what enormous social changes would result from a gradual disappearance of a rate of return on accumulated wealth. A man would still be free to accumulate his earned income with a view to spending it at a later date. But his accumulation would not grow. He would simply be in the position of Pope’s father, who, when he retired from business, carried a chest of guineas with him to his villa at Twickenham and met his household expenses from it as required.

And what would the government spend the money for? Preferably of course for the creation of productive works, that is, means to further production of the things that satisfy human wants; but such was the importance of keeping everybody fully employed that it were better to invest the money in monuments and pyramids than not to spend it at all.

Ancient Egypt [he said] was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the financial burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to enrich an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.

This passage is seldom referred to by the Keynesians, perhaps because they have never been sure that he meant it to be taken seriously. It might very well be Keynes in one of his impish moods.

It is significant to recall that the first definite and conscious application of the theory was made by the New Deal; and when in the third year Mr. Roosevelt began to say that the government’s deficit spending must be regarded as an investment in the country’s future, he was taking the word directly from the Keynes theory. The promised results did not follow; unemployment was not cured. This disappointment, say the believers, was owing to no fault of the theory but simply and only to the fact that the deficit spending did not go far enough. The deficits should have been courageously greater.

It is perhaps even more significant that in his own country he was regarded as a dangerous luminary and that the British government was unable to avail itself of his genius until the time came when it found itself in a very difficult money position. It had already divorced the gold standard, pretending to make a moral of it; and then, as the British mentality changed from that of a creditor to that of a debtor country, what the Treasury needed was someone who could clothe the bareness of financial heresy with a plausible nontransparent drapery and at the same time give to the managed pound sterling a glitter to replace the lost luster of the gold pound. And so it happened that Mr. Keynes was taken into the British Treasury as its principal advisor, seated on the board of the Bank of England, and elevated to the peerage as Baron Keynes of Tilton.

All planners take Keynes for their prophet. But in the one great test of his prophetic powers he failed historically. He had represented the British Treasury at the making of the Versailles Treaty. Soon after, he resigned his post in order to attack the treaty and wrote a book entitled The Economic Consequences of the Peace, the political effect of which, regarding it now in retrospect, was disastrous. His argument was that Germany could never pay the reparations that were demanded of her, and that even if she could afford to pay them her creditors could not manage to receive them. In view of what Germany was able to do in preparation for World War II, it was nonsense to say that she couldn’t pay reparations on account of World War I, and if she had not been let off, World War II might not have been, or at least not yet.

The literature founded on Keynes is dogmatic. Keynes himself was not. At the end of his book he suddenly wondered if it would work. Were his ideas "a visionary hope?" Were they properly rooted "in the motives which govern the evolution of political society?" Were "the interests which they will thwart stronger and more obvious than those which they will serve?" He made no attempt to answer his own questions. It would take another book, he said, to indicate the answers even in outline.

Garet Garrett (1878–1954) was an American journalist and author who was noted for his critiques of the New Deal and US involvement in the Second World War.  

This article is excerpted from The Critics of Keynesian Economics

No way out

Unstoppable: Why this crisis will keep unfolding

by DETLEV SCHLICHTER

When the tectonic plates underneath society shift, confusion reigns, together with wishful thinking.

It appears that financial markets have again managed to get themselves into a state of unrealistic expectation. The European summit this coming Sunday (or the follow-up summit on Wednesday) is now supposed to bring a “comprehensive plan” to solve the European debt crisis. Of course, nothing of the sort will happen, and for a simple reason: it is impossible. Those who cherish such fanciful hopes are naïve and will be disappointed.

Let’s step back and look at the problem, which in a nutshell is this: The dominant societal model of the second half of the twentieth century – the social democratic nation state with its high levels of taxation, regulation and stifling market intervention, and thus increasingly dependent on a constantly expanding fiat money supply and artificially cheap credit –is rapidly approaching its logical endpoint everywhere, not just in Europe: excessive and unmanageable piles of debt, systemic financial fragility and weak growth.

For many, including quite a few of those demonstrating under the ‘Occupy Wall Street’ banner, this whole mess deserves the label “crisis of capitalism”.  That this is nonsense I explained here. What we are witnessing is not the crisis of capitalism but the failure of statism. The present system, certainly the financial system, has very little to do with true capitalism, and if financial markets are now being demonized for their failure to go on funding political Ponzi-Schemes, than this means shooting the messenger rather than addressing, or even understanding, the root causes of the malaise. As I said, this is also a time of great confusion.

Failure of statism

The monetary madness of recent decades was only made possible by the transition from apolitical and inflexible commodity money (free-market money) towards limitless, entirely discretionary fiat money (state money). This shift was completed on August 15, 1971, when this system was also made global. What does such a monetary system logically entail?

In a complete paper money system, banks cannot be private capitalist enterprises but must be extensions of the state because the state holds the monopoly of unrestricted money creation. The banking sector is cartelized under the state central bank. To operate a bank, you need a state license that requires that you open an account with the central bank.

In such a system, the central bank can create bank reserves out of thin air and without limit, and has thus full control over the level and the cost of such reserves. The central bank has therefore ultimate control over the funding of the banks and the availability of credit in the economy – which is now supposed to be magically freed from its natural constraint under capitalism: voluntary savings.

In such a system, it is generally assumed that the state cannot go bankrupt as it can always print more money to fund itself. It is equally assumed that the banks cannot fail and do not ever have to shrink, at least collectively, as ever more bank reserves can be made available to them – if need be at no cost, as has become – now that the system arrived at the point of ultimate excess – the global norm.

It can hardly be surprising that those who are in charge of the banks and those who are in charge of state finances have behaved for decades as if the Great Regulator of economic life, the threat of bankruptcy, was of no concern to them. Now that the system has finally overdosed on cheap credit and that the forty-year fiat-money-fed boom is over, reality is sinking in. And it comes as a shock.

There is a lot of talk of return to normality. The market has, of course, a way of returning to normality, which involves liquidating the excesses, clearing out the dislocations, defaulting what will not be repaid, and deflating prices that do not reflect real demand. Liquidation, default and deflation, however, are politically unacceptable, as they cut right to the core of our system of state-managed ‘capitalism’: the notion that the state is above the laws of economics and that it can bestow a similar immunity on its protectorates, most importantly the banks.

What’s €2 trillion among friends?

Back to the alternate reality of the policy debate in Europe. The hope of many financial market participants seems to be that the summit will reveal measures by Germany and France to erect a firewall around Greece in case it will default, that the banks will get ‘recapitalized’, and that steps will be taken toward further ‘fiscal integration’. The wish here is evidently that Big Daddy will finally step forward, that he draws a line in the sand, and says, hey, this stops here. Time out on the crisis.

There is only one problem: Nobody has the money to do it.

Two days ago the British newspaper The Guardian broke the story, unconfirmed so far, that Germany and France had agreed to a €2 trillion bailout fund. In response, equity markets around the world enjoyed a brief rally. Finally, the big bazooka had arrived.

Really? I was wondering if nobody ever heard of Brian Cowen.

He was the hapless Irish chap who in 2008 played Big Daddy himself and implemented an official government back-stop for the Irish banks. And duly bankrupted his country.

If Merkel and Sarkozy were really stupid enough to launch a €2 trillion bailout fund, it would certainly pay to go short French BTANs and German Bunds right away. Germany and France have no money to bailout anyone. All they could do is pile on more debt on the already large and ever-growing debt pile of their own. It would not take the market as long as it did in 2008, in the case of Ireland, to figure out what the endgame must look like.

But surely, everyone involved must realize that the little boy in the crowd has already pointed out that Emperor Sarkozy and Empress Merkel have no clothes. Interest spreads on French bonds have already blown out, and Moody’s has warned that France’s AAA-rating (what? Triple-A?) might come under review. Credit-default spreads on German bunds have widened of late, and the cost of insuring against the bankruptcy of the Bundesrepublik Deutschland will most certainly only go one way: up. Have I mentioned that Bunds are the short of the century, and U.S. Treasuries, too?

The whole notion of ‘ring-fencing’ Greece is, of course, absurd, as if Greece had contracted some rare contagious disease from which healthier nations, such as Italy or Spain, had to be isolated. Ongoing, endless fiscal deterioration is, however, not a virus but a self-inflicted and ultimately fatal wound that all European states, and in fact, almost all modern social democratic states are already suffering from. The difference between Greece and Germany is one of degree, not principle.

For these reasons, the idea that some form of ‘fiscal integration’ could be the solution, is equally absurd, as if pooling the finances of the already-bankrupt and the almost-bankrupt will somehow give you a community of the fiscally strong, as if you could improve the financial standing of a trailer park community, in which some inhabitants are maxed out on their credit cards while others still have some borrowing capacity left, by giving all of them a joined bank account.

So does this mean that all political options are exhausted, that default, liquidation, and deflation are now unavoidable?

It will get worse

Not so fast. There are still some options left to governments. None of them will solve the problem, all of them will make the crisis worse. All of them are scarily ugly and destructive. Of course, I expect that all will be adopted by governments soon.

There is, of course, always the prospect of growing regulation and market intervention, of capital controls and the banning of short selling of government debt. I expect all of this to be enacted at some point in the not-too-distant future. Like all government intervention, it will make things worse and accelerate the demise of the system.

But the biggest of all policy mistakes is already being made, and we will get more of it, much more of it: printing ever more money ever faster.

The ECB will be forced/asked/convinced to support the market for government debt of ever more European states to an ever larger degree. Central banks and fiat money are not creations of the free market but of politics. Their role has always been to fund the state. We have already reached the point at which all major central banks are dominant buyers, frequently the largest marginal buyers, of their governments’ debt. The U.S. Fed is already the single largest holder of U.S. Treasuries, and when the just-announced second round of ‘quantitative easing’ in Britain will have been completed, the Bank of England will own almost a quarter of all outstanding Gilts. Funding the state directly with the printing press is the logical penultimate stage of the demise of the present global fiat money system, and all major economies are approaching it fast. The eurozone will be no exception. The ultimate step is loss of confidence in paper money and inflationary meltdown.

If there is one outcome from the European debt summit that I am most convinced about it is that another crucial step will be taken to accelerate the ongoing debasement of fiat money.

The power of free market

The magic of (quantumtatively-locked) levitation

"Wait a sec.  Did he say 'levitation'??  Oh, come on!  What's next, ESP?  UFOs?  Boy, the crap you see on blog sites these day, huh?"

Yeah, well...

No coincidence

Washington DC Has Highest Median Household Income, As Wall Street Moved to K Street. 

Political Capital Is Now Richer Than Tech Capital

 

BLOOMBERG -- "Federal employees whose compensation averages more than $126,000 and the nation’s greatest concentration of lawyers helped Washington edge out San Jose as the wealthiest U.S. metropolitan area, government data show.

The U.S. capital has swapped top spots with Silicon Valley, according to recent Census Bureau figures, with the typical household in the Washington metro area earning $84,523 last year. The national median income for 2010 was $50,046.

The figures demonstrate how the nation’s political and financial classes are prospering as the economy struggles with unemployment above 9 percent and thousands of Americans protest in the streets against income disparity, said Kevin Zeese, director of Prosperity Agenda, a Baltimore-based advocacy group trying to narrow the divide between rich and poor.

“There’s a gap that’s isolating Washington from the reality of the rest of the country,” Zeese said. “They just get more and more out of touch."

In recent years Washington has attracted more lobbyists and firms with an interest in the health-care overhaul and financial regulations signed into law by President Barack Obama, according to local business leaders.

“Wall Street has moved to K Street,” said Barbara Lang, president and chief executive officer of the DC Chamber of Commerce, referring to the Washington street that’s home to prominent lobbying firms. 'Those two industries clearly have grown in our city.'"

MP: Considering that Washington has the highest median income in the country thanks to all of the lawyers and lobbyists, and all of the federal employees earning compensation that averaged $126,369 last year, OWS might have the wrong target.  After all, it was government housing policies originating in Washington that contributed more significantly to the housing bubble, mortgage meltdown, financial crisis and economic recession than any greed on Wall Street.

Based on a new Gallup Poll (ht: Economix Blog), the American people understand this, and they are more than twice as likely to blame the federal government in Washington (64%) than financial institutions on Wall Street (30%) for the economic problems facing the U.S. How about: Occupy K Street? Or Occupy 1st Street SE?

The Rust Belt Comes Back to Life

Shale Gas Revolution Could Bring 200,000 Jobs to Ohio

 Steubenville, Ohio = "Little Saudi Arabia"

By Mark Perry 

ABC NEWS -- "Steubenville, Ohio, may not look like a city sitting on a multi-billion dollar industry. Unemployment here reached 15 percent in 2010, and a now-shuttered steel mill -- which was once the lifeline of the Steubenville economy -- is now just a painful reminder of what used to be. While the old way is gone for good -- a new way has already changed lives.

Two huge shale formations -- the Marcellus and Utica -- lay underneath a five-state region. Steubenville sits right on the epicenter of the Marcellus formation, ready to absorb all the new positions needed to open new and repurposed old wells. In a matter of months, rigs will begin to dot the landscape, and current and former residents hope the money will line their pockets. 

More than 300 new jobs have already come to the Steubenville area. And as many as 10,000 more are expected in the next three years. If jobs keep growing at this pace, every adult in Steubenville could be working by April. 

No one in Steubenville can remember the last time anyone heard of a job that paid as much as $77,000 a year coming to town, but those jobs are coming. There could be more than 200,000 of them in Ohio in the next few years."

MP: Inspired by the jobs booms in energy-rich states like Ohio and North Dakota, let me propose the "Domestic Energy Jobs Act."  Unlike Obama's "American Jobs Act" that would cost the American economy $450 billion from a mix of tax cuts, tax credits, and government spending to create a questionable and uncertain number of new jobs, the "Domestic Energy Jobs Act" would open up more domestic areas to oil and gas drilling and cost nothing. 

Thousands or even millions of guaranteed new jobs would be created throughout the country, bringing full employment to cities like Steubenville, Ohio.  Increased domestic production of oil and gas wouldn't require a penny of taxpayer subsidies or government spending, and instead would actually generate millions of dollars of government revenue from oil taxes and royalties.

In additions to more jobs, another benefit of increased natural gas production is that it would help lower energy costs for American manufacturers, increasing their competitiveness.  The National Association of Manufacturers explains:

"Manufacturers, users of approximately one-third of the energy consumed in the United States, strongly support the use of hydraulic fracturing to access our nation’s abundant supply of natural gas. We use natural gas not only as a source of electricity, but as a feedstock for products such as plastics, fertilizer and pharmaceuticals. Affordable natural gas provides manufacturers with the ability to expand their facilities, increase production and create even more jobs. It is critically important that the states and the federal government not stand in the way of our access to these valuable resources."

Liberals gone wild

Windmills Halted at Night Lest They Hurt Bats

By Moonbattery.com

Apparently enviro-sensitive moonbats don’t care much about the thousands of birds killed by the economically inefficient windmills they impose through government subsidies, but when the noisy and hideous contraptions start chopping up their fellow bats in Pennsylvania, action must be taken:

Night operation of the windmills in the North Allegheny Windpower Project has been halted following discovery of a dead Indiana bat under one of the turbines, an official with the U.S. Fish and Wildlife Service said Monday. …

The find is significant because the Indiana bat is an endangered species and is protected by thefederal Endangered Species Act.

So after the taxpayer was forced to spend who knows how many $millions on these eyesores, they won’t even run at night, rendering them even less likely to meet anyone’s energy needs. Good thing windmills serve only as symbols to help liberals feel pleased with themselves about their good intentions. If anyone actually relied on them, this would be trouble.

The arrogance and ignorance of the monopolist

The random shock that clinched a brave Nobel Prize

By John Kay

Last week, Thomas Sargent was awarded the Nobel Prize for economics. The idea most economists would associate with him is “rational expectations”. But the citation does not use the term. It asserts that his methods have been adopted around the world, but gives little clue what these are, hinting only they can be applied to the study of macroeconomic relationships.

The Swedish Academy is brave, but not very brave. It sensed that in present circumstances a prize to those who claim to understand the business cycle might encounter criticism. The public suspects that economists who specialise in this subject are of little use, and some professional critics agree. Willem Buiter has observed that the macroeconomics in which Prof Sargent is a central figure has been a “privately and socially costly waste of time and other resources” and represented “self referential, inward-looking distractions at best”.

Needless to say, this is not how Prof Sargent sees it. In an interview published last year on the Federal Reserve Bank of Minneapolis website, he dismissed critics of the state of macroeconomics as too ignorant to deserve a response. Asked to explain how his research illuminated the recent crisis, he makes much of the finding that deposit insurance can halt bank runs. This insight is not, however, unique to Prof Sargent, who must be aware that the establishment of the Federal Deposit Insurance Corporation precedes the paper he cites by 50 years.

As the Nobel committee observes, “economic behaviour depends on expectations about the future and economists must consider how such expectations are formed”. In a brilliant linguistic coup, Prof Sargent and colleagues appropriated the term “rational expectations” for their answer. Suppose the economic world evolves according to some predetermined model, in which uncertainties are “known unknowns” that can be described by probability distributions. Then economists could gradually deduce the properties of this model, and businesses and individuals would naturally form expectations in that light. If they did not, they would be missing obvious opportunities for advantage.

This approach, which postulates a universal explanation into which economists have privileged insight, was as influential as it was superficially attractive. But a scientific idea is not seminal because it influences the research agenda of PhD students. An important scientific advance yields conclusions that differ from those derived from other theories, and establishes that these divergent conclusions are supported by observation. Yet as Prof Sargent disarmingly observed, “such empirical tests were rejecting too many good models” in the programme he had established with fellow Nobel laureates Bob Lucas and Ed Prescott. In their world, the validity of a theory is demonstrated if, after the event, and often with torturing of data and ad hoc adjustments that are usually called “imperfections”, it can be reconciled with already known facts – “calibrated”. Since almost everything can be “explained” in this way, the theory is indeed universal; no other approach is necessary, or even admissible. Asked “do you think that differences among people’s models are important aspects of macroeconomic policy debates”, Prof Sargent replied: “The fact is you simply cannot talk about their differences within the typical rational expectations model. There is a communism of models. All agents within the model, the econometricians, and God share the same model.”

Rational expectations consequently fail for the same reason communism failed – the arrogance and ignorance of the monopolist. In their critique of rational expectations, Roman Frydman and Michael Goldberg employ Hayek’s critique of planning; the market economy, unlike communism, can mediate different perceptions of the world, bringing together knowledge whose totality is not held by anyone. God did not vouchsafe his model to us, mortals see the present imperfectly and the future dimly, and use many different models. Some agents made profits, some losses, and the financial crisis of 2007-08 decided which was which. Only Prof Sargent’s econometricians were wedded to a single model and could, as usual, explain the crisis only after it had occurred. For them, the crisis was a random shock, but the occasion for a Nobel prize.