Why QE3 Will Fail

 Booms and Busts

                    Expert from America's Great Depression (1963)

by Murray N. Rothbard

Study of business cycles must be based upon a satisfactory cycle theory. Gazing at sheaves of statistics without "prejudgment" is futile. A cycle takes place in the economic world, and therefore a usable cycle theory must be integrated with general economic theory. And yet, remarkably, such integration, even attempted integration, is the exception, not the rule. Economics, in the last two decades, has fissured badly into a host of airtight compartments — each sphere hardly related to the others. Only in the theories of Schumpeter and Mises has cycle theory been integrated into general economics.[1]

The bulk of cycle specialists, who spurn any systematic integration as impossibly deductive and overly simplified, are thereby (wittingly or unwittingly) rejecting economics itself. For if one may forge a theory of the cycle with little or no relation to general economics, then general economics must be incorrect, failing as it does to account for such a vital economic phenomenon. For institutionalists — the pure data collectors — if not for others, this is a welcome conclusion. Even institutionalists, however, must use theory sometimes, in analysis and recommendation; in fact, they end by using a concoction of ad hoc hunches, insights, etc., plucked unsystematically from various theoretical gardens. Few, if any, economists have realized that the Mises theory of the trade cycle is not just another theory: that, in fact, it meshes closely with a general theory of the economic system.[2] The Mises theory is, in fact, the economic analysis of the necessary consequences of intervention in the free market by bank credit expansion. Followers of the Misesian theory have often displayed excessive modesty in pressing its claims; they have widely protested that the theory is "only one of many possible explanations of business cycles," and that each cycle may fit a different causal theory. In this, as in so many other realms, eclecticism is misplaced. Since the Mises theory is the only one that stems from a general economic theory, it is the only one that can provide a correct explanation. Unless we are prepared to abandon general theory, we must reject all proposed explanations that do not mesh with general economics.

Business Cycles and Business Fluctuations

It is important, first, to distinguish between business cycles and ordinary business fluctuations. We live necessarily in a society of continual and unending change, change that can never be precisely charted in advance. People try to forecast and anticipate changes as best they can, but such forecasting can never be reduced to an exact science. Entrepreneurs are in the business of forecasting changes on the market, both for conditions of demand and of supply. The more successful ones make profits pari passus with their accuracy of judgment, while the unsuccessful forecasters fall by the wayside. As a result, the successful entrepreneurs on the free market will be the ones most adept at anticipating future business conditions. Yet, the forecasting can never be perfect, and entrepreneurs will continue to differ in the success of their judgments. If this were not so, no profits or losses would ever be made in business.

Changes, then, take place continually in all spheres of the economy. Consumer tastes shift; time preferences and consequent proportions of investment and consumption change; the labor force changes in quantity, quality, and location; natural resources are discovered and others are used up; technological changes alter production possibilities; vagaries of climate alter crops, etc. All these changes are typical features of any economic system. In fact, we could not truly conceive of a changeless society, in which everyone did exactly the same things day after day, and no economic data ever changed. And even if we could conceive of such a society, it is doubtful whether many people would wish to bring it about.

It is, therefore, absurd to expect every business activity to be "stabilized" as if these changes were not taking place. To stabilize and "iron out" these fluctuations would, in effect, eradicate any rational productive activity. To take a simple, hypothetical case, suppose that a community is visited every seven years by the seven-year locust. Every seven years, therefore, many people launch preparations to deal with the locusts: produce anti-locust equipment, hire trained locust specialists, etc. Obviously, every seven years there is a "boom" in the locust-fighting industry, which, happily, is "depressed" the other six years. Would it help or harm matters if everyone decided to "stabilize" the locust-fighting industry by insisting on producing the machinery evenly every year, only to have it rust and become obsolete? Must people be forced to build machines before they want them; or to hire people before they are needed; or, conversely, to delay building machines they want — all in the name of "stabilization"? If people desire more autos and fewer houses than formerly, should they be forced to keep buying houses and be prevented from buying the autos, all for the sake of stabilization? As Dr. F.A. Harper has stated:

This sort of business fluctuation runs all through our daily lives. There is a violent fluctuation, for instance, in the harvest of strawberries at different times during the year. Should we grow enough strawberries in greenhouses so as to stabilize that part of our economy throughout the year.[3]

We may, therefore, expect specific business fluctuations all the time. There is no need for any special "cycle theory" to account for them. They are simply the results of changes in economic data and are fully explained by economic theory. Many economists, however, attribute general business depression to "weaknesses" caused by a "depression in building" or a "farm depression." But declines in specific industries can never ignite a general depression. Shifts in data will cause increases in activity in one field, declines in another. There is nothing here to account for a general business depression — a phenomenon of the true "business cycle." Suppose, for example, that a shift in consumer tastes, and technologies, causes a shift in demand from farm products to other goods. It is pointless to say, as many people do, that a farm depression will ignite a general depression, because farmers will buy less goods, the people in industries selling to farmers will buy less, etc. This ignores the fact that people producing the other goods now favored by consumers will prosper; their demands will increase.

The problem of the business cycle is one of general boom and depression; it is not a problem of exploring specific industries and wondering what factors make each one of them relatively prosperous or depressed. Some economists — such as Warren and Pearson or Dewey and Dakin — have believed that there are no such things as general business fluctuations — that general movements are but the results of different cycles that take place, at different specific time-lengths, in the various economic activities. To the extent that such varying cycles (such as the 20-year "building cycle" or the 7-year locust cycle) may exist, however, they are irrelevant to a study of business cycles in general or to business depressions in particular. What we are trying to explain aregeneral booms and busts in business.

In considering general movements in business, then, it is immediately evident that such movements must be transmitted through the general medium of exchange — money. Money forges the connecting link between all economic activities. If one price goes up and another down, we may conclude that demand has shifted from one industry to another; but if all prices move up or down together, some change must have occurred in the monetary sphere. Only changes in the demand for, and/or the supply of, money will cause general price changes. An increase in the supply of money, the demand for money remaining the same, will cause a fall in the purchasing power of each dollar, i.e., a general rise in prices; conversely, a drop in the money supply will cause a general decline in prices. On the other hand, an increase in the general demand for money, the supply remaining given, will bring about a rise in the purchasing power of the dollar (a general fall in prices); while a fall in demand will lead to a general rise in prices. Changes in prices in general, then, are determined by changes in the supply of and demand for money. The supply of money consists of the stock of money existing in the society. The demand for money is, in the final analysis, the willingness of people to hold cash balances, and this can be expressed as eagerness to acquire money in exchange, and as eagerness to retain money in cash balance. The supply of goods in the economy is one component in the social demand for money; an increased supply of goods will, other things being equal, increase the demand for money and therefore tend to lower prices. Demand for money will tend to be lower when the purchasing power of the money-unit is higher, for then each dollar is more effective in cash balance. Conversely, a lower purchasing power (higher prices) means that each dollar is less effective, and more dollars will be needed to carry on the same work.

The purchasing power of the dollar, then, will remain constant when the stock of, and demand for, money are in equilibrium with each other: i.e., when people are willing to hold in their cash balances the exact amount of money in existence. If the demand for money exceeds the stock, the purchasing power of money will rise until the demand is no longer excessive and the market is cleared; conversely, a demand lower than supply will lower the purchasing power of the dollar, i.e., raise prices.

Yet, fluctuations in general business, in the "money relation," do not by themselves provide the clue to the mysterious business cycle. It is true that any cycle in general business must be transmitted through this money relation: the relation between the stock of, and the demand for, money. But these changes in themselves explain little. If the money supply increases or demand falls, for example, prices will rise; but why should this generate a "business cycle"? Specifically, why should it bring about a depression? The early business cycle theorists were correct in focusing their attention on the crisis and depression: for these are the phases that puzzle and shock economists and laymen alike, and these are the phases that most need to be explained.

The Problem: The Cluster of Error

The explanation of depressions, then, will not be found by referring to specific or even general business fluctuations per se. The main problem that a theory of depression must explain is: why is there a sudden general cluster of business errors? This is the first question for any cycle theory. Business activity moves along nicely with most business firms making handsome profits. Suddenly, without warning, conditions change and the bulk of business firms are experiencing losses; they are suddenly revealed to have made grievous errors in forecasting.

A general review of entrepreneurship is now in order. Entrepreneurs are largely in the business of forecasting. They must invest and pay costs in the present, in the expectation of recouping a profit by sale either to consumers or to other entrepreneurs further down in the economy's structure of production. The better entrepreneurs, with better judgment in forecasting consumer or other producer demands, make profits; the inefficient entrepreneurs suffer losses. The market, therefore, provides a training ground for the reward and expansion of successful, far-sighted entrepreneurs and the weeding out of inefficient businessmen. As a rule only some businessmen suffer losses at any one time; the bulk either break even or earn profits. How, then, do we explain the curious phenomenon of the crisis when almost all entrepreneurs suffer sudden losses? In short, how did all the country's astute businessmen come to make such errors together, and why were they all suddenly revealed at this particular time? This is the great problem of cycle theory.

It is not legitimate to reply that sudden changes in the data are responsible. It is, after all, the business of entrepreneurs to forecast future changes, some of which are sudden. Why did their forecasts fail so abysmally?

Another common feature of the business cycle also calls for an explanation. It is the well-known fact that capital-goods industries fluctuate more widely than do the consumer-goods industries. The capital-goods industries — especially the industries supplying raw materials, construction, and equipment to other industries — expand much further in the boom, and are hit far more severely in the depression.

A third feature of every boom that needs explaining is the increase in the quantity of money in the economy. Conversely, there is generally, though not universally, a fall in the money supply during the depression.

The Explanation: Boom and Depression

In the purely free and unhampered market, there will be no cluster of errors, since trained entrepreneurs will not all make errors at the same time.[4] The "boom-bust" cycle is generated by monetary intervention in the market, specifically bank credit expansion to business. Let us suppose an economy with a given supply of money. Some of the money is spent in consumption; the rest is saved and invested in a mighty structure of capital, in various orders of production. The proportion of consumption to saving or investment is determined by people's time preferences — the degree to which they prefer present to future satisfactions. The less they prefer them in the present, the lower will their time preference rate be, and the lower therefore will be the pure interest rate, which is determined by the time preferences of the individuals in society. A lower time-preference rate will be reflected in greater proportions of investment to consumption, a lengthening of the structure of production, and a building-up of capital. Higher time preferences, on the other hand, will be reflected in higher pure interest rates and a lower proportion of investment to consumption. The final market rates of interest reflect the pure interest rate plus or minus entrepreneurial risk and purchasing power components. Varying degrees of entrepreneurial risk bring about a structure of interest rates instead of a single uniform one, and purchasing-power components reflect changes in the purchasing power of the dollar, as well as in the specific position of an entrepreneur in relation to price changes. The crucial factor, however, is the pure interest rate. This interest rate first manifests itself in the "natural rate" or what is generally called the going "rate of profit." This going rate is reflected in the interest rate on the loan market, a rate which is determined by the going profit rate.[5]

Now what happens when banks print new money (whether as bank notes or bank deposits) and lend it to business?[6] The new money pours forth on the loan market and lowers the loan rate of interest. It looks as if the supply of saved funds for investment has increased, for the effect is the same: the supply of funds for investment apparently increases, and the interest rate is lowered. Businessmen, in short, are misled by the bank inflation into believing that the supply of saved funds is greater than it really is. Now, when saved funds increase, businessmen invest in "longer processes of production," i.e., the capital structure is lengthened, especially in the "higher orders" most remote from the consumer. Businessmen take their newly acquired funds and bid up the prices of capital and other producers' goods, and this stimulates a shift of investment from the "lower" (near the consumer) to the "higher" orders of production (furthest from the consumer) — from consumer-goods to capital-goods industries.[7]

If this were the effect of a genuine fall in time preferences and an increase in saving, all would be well and good, and the new lengthened structure of production could be indefinitely sustained. But this shift is the product of bank credit expansion. Soon the new money percolates downward from the business borrowers to the factors of production: in wages, rents, interest. Now, unless time preferences have changed, and there is no reason to think that they have, people will rush to spend the higher incomes in the old consumption–investment proportions. In short, people will rush to reestablish the old proportions, and demand will shift back from the higher to the lower orders. Capital goods industries will find that their investments have been in error: that what they thought profitable really fails for lack of demand by their entrepreneurial customers. Higher orders of production have turned out to be wasteful, and the malinvestment must be liquidated.

A favorite explanation of the crisis is that it stems from "under-consumption" — from a failure of consumer demand for goods at prices that could be profitable. But this runs contrary to the commonly known fact that it is capital-goods, and not consumer-goods, industries that really suffer in a depression. The failure is one of entrepreneurial demand for the higher order goods, and this in turn is caused by the shift of demand back to the old proportions.

In sum, businessmen were misled by bank credit inflation to invest too much in higher-order capital goods, which could only be prosperously sustained through lower time preferences and greater savings and investment; as soon as the inflation permeates to the mass of the people, the old consumption–investment proportion is reestablished, and business investments in the higher orders are seen to have been wasteful.[8] Businessmen were led to this error by the credit expansion and its tampering with the free-market rate of interest.

The "boom," then, is actually a period of wasteful misinvestment. It is the time when errors are made, due to bank credit's tampering with the free market. The "crisis" arrives when the consumers come to reestablish their desired proportions. The "depression" is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires. The adjustment process consists in rapid liquidation of the wasteful investments. Some of these will be abandoned altogether (like the Western ghost towns constructed in the boom of 1816–1818 and deserted during the Panic of 1819); others will be shifted to other uses. Always the principle will be not to mourn past errors, but to make most efficient use of the existing stock of capital. In sum, the free market tends to satisfy voluntarily-expressed consumer desires with maximum efficiency, and this includes the public's relative desires for present and future consumption. The inflationary boom hobbles this efficiency, and distorts the structure of production, which no longer serves consumers properly. The crisis signals the end of this inflationary distortion, and the depression is the process by which the economy returns to the efficient service of consumers. In short, and this is a highly important point to grasp, the depression is the "recovery" process, and the end of the depression heralds the return to normal, and to optimum efficiency. The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom, then, requires a "bust."

Since it clearly takes very little time for the new money to filter down from business to factors of production, why don't all booms come quickly to an end? The reason is that the banks come to the rescue. Seeing factors bid away from them by consumer-goods industries, finding their costs rising and themselves short of funds, the borrowing firms turn once again to the banks. If the banks expand credit further, they can again keep the borrowers afloat. The new money again pours into business, and they can again bid factors away from the consumer-goods industries. In short, continually expanded bank credit can keep the borrowers one step ahead of consumer retribution. For this, we have seen, is what the crisis and depression are: the restoration by consumers of an efficient economy, and the ending of the distortions of the boom. Clearly, the greater the credit expansion and the longer it lasts, the longer will the boom last. The boom will end when bank credit expansion finally stops. Evidently, the longer the boom goes on the more wasteful the errors committed, and the longer and more severe will be the necessary depression readjustment.

Thus, bank credit expansion sets into motion the business cycle in all its phases: the inflationary boom, marked by expansion of the money supply and by malinvestment; the crisis, which arrives when credit expansion ceases and malinvestments become evident; and the depression recovery, the necessary adjustment process by which the economy returns to the most efficient ways of satisfying consumer desires.[9]

What, specifically, are the essential features of the depression-recovery phase? Wasteful projects, as we have said, must either be abandoned or used as best they can be. Inefficient firms, buoyed up by the artificial boom, must be liquidated or have their debts scaled down or be turned over to their creditors. Prices of producers' goods must fall, particularly in the higher orders of production — this includes capital goods, lands, and wage rates. Just as the boom was marked by a fall in the rate of interest, i.e., of price differentials between stages of production (the "natural rate" or going rate of profit) as well as the loan rate, so the depression-recovery consists of a rise in this interest differential. In practice, this means a fall in the prices of the higher-order goods relative to prices in the consumer-goods industries. Not only prices of particular machines must fall, but also the prices of whole aggregates of capital, e.g., stock-market and real-estate values. In fact, these values must fall more than the earnings from the assets, through reflecting the general rise in the rate of interest return.

Since factors must shift from the higher to the lower orders of production, there is inevitable "frictional" unemployment in a depression, but it need not be greater than unemployment attending any other large shift in production. In practice, unemployment will be aggravated by the numerous bankruptcies, and the large errors revealed, but it still need only be temporary. The speedier the adjustment, the more fleeting will the unemployment be. Unemployment will progress beyond the "frictional" stage and become really severe and lasting only if wage rates are kept artificially high and are prevented from falling. If wage rates are kept above the free-market level that clears the demand for and supply of labor, laborers will remain permanently unemployed. The greater the degree of discrepancy, the more severe will the unemployment be.

Notes

[1] Various neo-Keynesians have advanced cycle theories. They are integrated, however, not with general economic theory, but with holistic Keynesian systems — systems which are very partial indeed.

[2] There is, for example, not a hint of such knowledge in Haberler's well-known discussion. See Gottfried Haberler, Prosperity and Depression (2nd ed., Geneva, Switzerland: League of Nations, 1939).

[3] F.A. Harper, Why Wages Rise (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1957), pp. 118–19.

[4] Siegfried Budge, Grundzüge der Theoretische Nationalökonomie (Jena, 1925), quoted in Simon S. Kuznets, "Monetary Business Cycle Theory in Germany," Journal of Political Economy (April, 1930): 127–28.

Under conditions of free competition … the market is … dependent upon supply and demand … there could [not] develop a disproportionality in the production of goods, which could draw in the whole economic system … such a disproportionality can arise only when, at some decisive point, the price structure does not base itself upon the play of only free competition, so that some arbitrary influence becomes possible.

Kuznets himself criticizes the Austrian theory from his empiricist, anti-cause and effect-standpoint, and also erroneously considers this theory to be "static."

[5] This is the "pure time preference theory" of the rate of interest; it can be found in Ludwig von Mises, Human Action (New Haven, Conn.: Yale University Press, 1949); in Frank A. Fetter, Economic Principles (New York: Century, 1915), and idem, "Interest Theories Old and New, "American Economic Review (March, 1914): 68–92.

[6] "Banks," for many purposes, include also savings and loan associations, and life insurance companies, both of which create new money via credit expansion to business. See below for further discussion of the money and banking question.

[7] On the structure of production, and its relation to investment and bank credit, see F.A. Hayek, Prices and Production (2nd ed., London: Routledge and Kegan Paul, 1935); Mises, Human Action; and Eugen von Böhm-Bawerk, "Positive Theory of Capital," in Capital and Interest (South Holland, Ill.: Libertarian Press, 1959), vol. 2.

[8] "Inflation" is here defined as an increase in the money supply not consisting of an increase in the money metal.

[9] This "Austrian" cycle theory settles the ancient economic controversy on whether or not changes in the quantity of money can affect the rate of interest. It supports the "modern" doctrine that an increase in the quantity of money lowers the rate of interest (if it first enters the loan market); on the other hand, it supports the classical view that, in the long run, quantity of money does not affect the interest rate (or can only do so if time preferences change). In fact, the depression-readjustment is the market's return to the desired free-market rate of interest.

Libya - Doomed From Day One

The post-Gaddafi Libya is not real

by Jen Alic

People often ask me why the West doesn’t attempt a Libya-style intervention in Syria. After all, things are going so well in Libya. Oil production is up. But oil production is merely a mirage, as is security in Libya, which was doomed from the day one PG (post-Gaddafi) because of the way it was “liberated”.

On Wednesday, US envoy to Libya Christopher Stevens was killed along with three other American diplomats in a rocket attack on the US consulate in Benghazi.

What about the oil, that global elixir? Well, the violence will not bode well for Libya’s production ambitions, coming at a time when the country looked prepared for a boost in output and was banking on this for economic growth.

Security was already dubious at best, and now international oil companies will be more reluctant than ever. Those that are already there—Germany’s Wintershall AG, Italy’s Eni and France’s Total—will be seeking to beef up security and have already started sending some of their workers home.

If the picture was not clear from the onset of the post-Gaddafi atmosphere, it certainly came into focus earlier this summer when protests over parliamentary elections forced the temporary closure of the el-Sider oil terminal, the country’s biggest.  

Anyone who thinks that Libya will be a secure oil frontier after the formation of a new government next summer is mistaken. The road to destruction runs from Afghanistan to Benghazi (incidentally, the oil-producing region), branching off to southern Iraq and Pakistan’s tribal regions.

So, you ask, what about the controversial anti-Islamic movie apparently put together by an Israeli-American real estate developer with too much time on his hands?

The future is now

The Magnitude of the Mess We're In

The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States

By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor

Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don't want, but need, to hear.

Where are we now?

Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.

The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.

The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.

Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens' and institutions' purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.

Britain silently defaulting on its debts

The Deflation Boogeyman is back

By Dan Atkinson

Many years ago, in the run-up to the Easter bank holiday weekend, MPs were told of a terrifying terrorist threat and were asked to vote more powers to the police. They did so.

Little more was heard of the terrifying threat, though the powers are presumably still in existence.

More recently, we heard an awful lot  about another terrifying threat – deflation, or falling prices. 

In normal times, currencies inflate, which is to say that things – whether a bar of chocolate or a family home – rise in price. Deflation sees the reverse happen, so money becomes more valuable in relation to goods rather than less valuable. 

The official line is that deflation is worse than inflation because it makes existing debts harder to pay. To exorcise the deflationary spectre, central banks globally have cut interest rates close to zero and engaged in money-printing operations on a gargantuan scale. 

Presumably they would point to the remarkable absence of deflation as proof that this has worked as intended. 

Britain’s latest inflation data is due out on Tuesday and the annual rate as measured by the Consumer Prices Index is expected to have fallen from 2.6 per cent in the year to July to about  2.4 per cent in that to August.

Not much deflation there, although the ‘need’ to battle this menace continues to inform official thinking, so that ‘everyone’ agrees that inflation does not matter, just as 20 years ago today, ‘everyone’ agreed that Britain should do whatever it took to stay inside Europe’s Exchange Rate Mechanism. 

Greenmail Madness

Critics Say California Law Hurts Effort to Add Jobs

By IAN LOVETT

Environmentalists in this greenest of places, call the California Environmental Quality Act the state’s most powerful environmental protection, a model for the nation credited with preserving lush wetlands and keeping condominiums off the slopes of the Sierra Nevada.

But the landmark law passed in 1970 has also been increasingly abused, opening the door to lawsuits — sometimes brought by business competitors or for reasons unrelated to the environment — that, regardless of their merit, can delay even green development projects for years or sometimes kill them completely.

With California still mired in what many consider its worst economic crisis since the Great Depression, the law, once a source of pride to many Californians and environmentalists across the country, has turned into an agonizing test in the struggle to balance environmental concerns against the need for jobs and economic growth.

“Something is broken,” said Leron Gubler, the president of the Hollywood Chamber of Commerce. “A lot of jobs could have been saved if not for these lawsuits, as well as new jobs once these projects were completed.”

Mr. Gubler said lawsuits and the threat of litigation had delayed at least seven recent projects in Hollywood, costing the area more than 6,000 jobs.

In one of those Hollywood projects, the developers of a mixed-use retail and residential project won a lawsuit over its building plans, but the owners declared bankruptcy and sold before the ruling. Work has finally begun under new ownership, but another lawsuit has been filed.

U.S. will always have enemies

The real lesson from embassy attacks

By Andrew Coyne

Violent protests outside American embassies, first in Egypt and Libya and now across the Muslim world, have provided a rare moment of agreement for partisans of the right and left: the right, for whom everything is President Obama’s fault, and the left, for whom everything is America’s fault.

The protests, both agree, are not merely expressions of whatever was on the minds of those who showed up on the day, but a broad indictment of American policy in the Middle East, notably in its support (temporizing as it sometimes was) for the so-called Arab Spring. While American indulgence of western-friendly dictators like Egypt’s Hosni Mubarak was once a bone of contention between the two sides, today there is an odd new entente in favour of letting sleeping Muslims lie.

This is what you get, the right says, for forsaking our allies: not western-style democrats, but implacably hostile Islamists, whether of the Muslim Brotherhood or al-Qaeda strain. Obama’s conciliatory gestures early in his term, they claim, communicated weakness; his passivity in the face of provocation confirmed it.

This is what you get, the left says, for meddling in other countries’ affairs. (Sample Guardian headline: “The west has once again started a fire it cannot extinguish.”) Unless it’s for not meddling soon enough. Or is it for meddling in the wrong way? No matter. Remember, whatever happens, it’s always America’s fault.

Bernanke on the Brink

Ben is in panic mode

By Robert Samuelson 

WASHINGTON -- We are reaching -- or may already have passed -- the practical limits of "economic stimulus." Last week, the Federal Reserve adopted an open-ended bond-buying program of $40 billion a month to goad the economy into faster growth. But even before the announcement, there was skepticism that it would do much to lower the unemployment rate, which has exceeded 8 percent for 43 months. The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year.

At a news conference, Fed Chairman Ben Bernanke explained what the Fed hopes will happen. By buying mortgages, the Fed would push interest rates down. They're already low (3.6 percent in August for a 30-year fixed-rate mortgage) and would fall further. Lower rates would stimulate more homebuying and construction. Greater housing demand would raise home prices. Fewer homeowners would be "underwater" (homes worth less than mortgages). Banks would refinance more existing mortgages at lower rates because the collateral -- the homes -- would be worth more. Feeling wealthier, homeowners would spend more and cause businesses to hire more.

Unemployment Still High

Not for Government Workers

by  Raven Clabough

While a record number of Americans are not currently in the labor force, according to the Department of Labor, unemployment for government workers drops to 5.1 percent, the lowest among all industries.

In a report issued by the Department of Labor, the number of Americans counted as “not in the civilian labor force” in the month of August reached a record high figure of 88,921,000.

CNS News explains, “The Labor Department counts a person as not in the civilian labor force if they are at least 16 years old, are not in the military or an institution such as a prison, mental hospital or nursing home, and have not actively looked for a job in the last four weeks.”

Those considered by the Department of Labor to be “in the civilian labor force” meet the same characteristics but either have a job or have been actively pursuing a job in the last four weeks.

Between the month of July and August, 368,000 Americans dropped out of the labor force and did not look for a job. In August, there were 119,000 fewer Americans employed then there were in the month of July. 

Meanwhile, some are celebrating a small drop in the unemployment rate from July to August, from 8.3 to 8.1 percent. But CNS notes, “That is because so many people dropped out of the labor force and stopped looking for work.”

The Unintended Consequences of Low Interest Rates

If capital is punished, there will be less of it

by  Bob Adelmann

Complaints from savers about low rates of return on their money have reached the business page of the New York Times. According to the Times, when Bill Taren, a retiree living near Orlando, Florida, learned that his credit union would pay just 0.4 percent interest on his savings, he decided to take the money out of the bank and put it into his mattress because, he said, “at least there we can see the cash.”

It was worse for Julie Moscove of Fort Lauderdale, Florida. Over the last four years, she has watched her interest income drop from $2,000 a month to $400 a month. She said, “It’s ridiculous. I cut coupons now.”

And Dorothy Brooks has been forced to go back to work in order to supplement what’s left of her retirement income, after being retired for the last 10 years:

I got hit a couple of years ago pretty badly in the stock market, so now my savings are weighted mostly toward bonds. Now both investments are terrible. And I can’t put my money in a money-market account because that’s crazy. That just pays nothing.

Keynesian economic policies allegedly designed (and sold to the American people) to stimulate the economy are actually having the perverse effect of stimulating government spending and putting off the inevitable day of reckoning when interest rates inevitably begin to rise.  As the Times writer Catherine Rampell noted:

Though bad for people trying to live off their savings, low interest rates happen to be quite good for anyone borrowing money, like governments themselves.

Thomas Szasz RIP

Misunderstanding Thomas Szasz

by Jesse Walker

It's hard to think of a writer who expressed himself as clearly as the late Thomas Szasz did, or who argued his points with such precision. You might fault his logic or disagree with his premises, but it ought to be hard to misunderstand what exactly he was saying. And yet he was constantly misunderstood. How many times, for example, has someone suggested that Szasz's argument against the idea of mental illness has been refuted by research on the biological basis of schizophrenia? The implications of that research are routinely overstated, but set that aside: Even if the most breathless pop-science coverage of those investigations were accurate, they wouldn't affect Szasz's distinction between metaphorical mental diseases and actual physical lesions. They would simply move schizophrenia from the first category to the second one. Far from being unable to process such scientific developments, Szasz wrote thoughtfully about something similar that had happened in the past, when the treatment of epilepsy moved from the dominion of the psychiatrists to the dominion of the neurologists.

Spain Destruction Was An Inside Job

Theory of Spain's political class

By CÉSAR MOLINAS

In this article I propose a theory of Spain's political class to make a case for the urgent, imperious need to change our voting system and adopt a majority system. A good theory of Spain's political class should at least explain the following issues:

1. How is it possible that five years after the crisis began, no political party has a coherent diagnosis of what is going on in Spain?

2. How is it possible that no political party has a credible long-term plan or strategy to pull Spain out of the crisis? How is it possible that Spain's political class seems genetically incapable of planning?

3. How is it possible that Spain's political class is incapable of setting an example? How is it possible that nobody - except the king and for personal motives at that - has ever apologized for anything?

4. How is it possible the most obvious strategy for a better future - improving education, encouraging innovation, development and entrepreneurship, and supporting research - is not just being ignored, but downright massacred with spending cuts by the majority parties?

In the following lines I posit that over the last few decades, Spain's political class has developed its own particular interest above the general interest of the nation, which it sustains through a system of rent-seeking. In this sense it is an extractive elite, to use the term popularized by Acemoglu and Robinson. Spanish politicians are the main culprits of the real estate bubble, of the savings banks collapse, of the renewable energy bubble and of the unnecessary infrastructure bubble. These processes have put Spain in the position of requiring European bailouts, a move which our political class has resisted to the bitter end because it forces them to implement reforms that erode their own particular sphere of interest. A legal reform that enforced a majority voting system would make elected officials accountable to their voters instead of to their party leaders; it would mark a very positive turn for Spanish democracy and it would make the structural reforms easier.

Introducing the Latin Euro

This is not the end of the crisis but rather the next stage

By SIMON JOHNSON and PETER BOONE

The verdict is now in. Traditional German values lost and the Latin perspective won. Germany fought hard over many years to include “no bailout” clauses in the Maastricht Treaty (the founding document of the euro currency area) and to limit the rights of the European Central Bank to lend directly to national governments.

But last week, the bank’s governing council – over German objections – authorized the purchase of unlimited quantities of short-term national debts and effectively erased any traditional Germanic restrictions on its operations.

The finding this week by the German Constitutional Court that intra-European financial rescue funds are consistent with German law is just icing on this cake, as far as those who support bailouts are concerned.

With this critical defeat at the E.C.B., Germany is forced to concede two points. First, without the possibility of large-scale central-bank purchases of government debt for countries such as Spain and Italy, the euro area was set to collapse.