Lately we've had some pretty good stuff come out at the Institute for Energy Research (IER), if I do say so myself. And such horn-tooting isn't as bad as it first seems, since the below were truly team efforts.

* In this press release we pointed out the irony of Joe Biden's recent recommendations to Ukraine. (Hint: he wants them to cut government subsidies and to increase domestic natural gas production in order to bolster their national security.)

* In this blog post we underscored the significance of Secretary of State Clinton's visit to India, where she was told that India was not going to sacrifice its economy to fighting climate change.

* Continuing the theme, in this press release the IER team collected a bunch of quotes showing that US officials seem to not be listening to Chinese and Indian officials, when they say in quite plain English (?) that they aren't going to adopt caps on their carbon dioxide emissions. This is rather awkward, since the only sliver of a rationale left for the Waxman-Markey bill (which passed the House narrowly and still has to get through the Senate) is that US leadership will provoke other major countries to follow suit.

* Finally, here is a blog post giving the low down on the CFTC's recent announcement that, "after further review," it turns out speculators caused the oil price spike in 2008 after all. I guess science advances one election at a time.

Excuse the paucity of posts; on Saturday I went to Dick Clark (the younger)'s wedding to Justina White and then I went straight from there to Mises University. For those who know him, let me mention that Dick's wedding was great; we had the best karaoke ever for the afterparty. I know that might sound lame but really, it was a small group in a dive bar in Decatur AL, but there were several musicians in the group and it was freakin' sweet.

In the meantime, here is my critique of a PIMCO guy talking about how awesome Bernanke is, and why paying interest on reserves will contain the inflation genie. An excerpt:

Recall that Bernanke's extreme money pumping — necessary to avoid the "mistakes of the Great Depression" — began in September 2008. That means almost two-and-a-half years will have passed, before these wonderful remedies work their magic.

Am I the only one who wants a refund? Back when Bernanke and Henry Paulson were bailing out AIG et al. with hundreds of billions of dollars, they told us it was necessary to avert a global economic catastrophe. Did everyone realize that the lesser of two evils involved two-and-a-half years (at least) of stagnation and interest rates at 0 percent?

In light of our recent wrestling match, I decided to look up the terms of the wager I had made with Robert Wenzel (see here and here). Back in January we agreed that the winner (someone who gets 2/3 or 3/3 out of the following) would get a dinner of up to $350 from the loser in the winner's city of residence. The 3 conditions were:

* Murphy says CPI (not the "core" number) will rise by at least 8% during 2009; Wenzel says it won't.

* Murphy says unemployment will be higher at end of 2009 than at start; Wenzel says no.

* Murphy says real GDP growth will be flat or negative for 2009; Wenzel says it will be positive.

I'm feeling great about the unemployment call, I'm optimistic about the CPI call, and I'm not at all confident about the real GDP call, especially because suppressed inflation numbers would artificially boost the official real GDP figures (which we have no choice but to use for our bet).

But here's the problem: If you follow the links, and especially if you read other Wenzel posts from January, you'll see that the reason he made the case for optimism (which prompted me to disagree and then our bet) was that M2 was growing at double-digit rates. Nowhere in our bet did we say "assuming Bernanke keeps up the money printing."

So what do the judicious readers of Free Advice (both of you*) think? Do I give Wenzel the opportunity to cancel the wager since the basis for his views has now collapsed?


* I mean that only two readers are judicious; I have way more than two readers.

Last week, I dazzled you all with my computer analogy that I thought neatly solved the philosophical mind-body problem as well as the theological problem of God's sovereignty and free will. In the comments, KSralla argued that my approach wasn't consistent with the Christian conception of God:

Unless God violates his own rules (becoming a lawbreaker), then he must (according to his nature) allow the physical universe to expand and evolve according to these rules, and has in effect banned himself from pervading his physical creation at t=X. That might be an acceptable model if it were consistent with the image of the Judeo-Christian God portrayed in scripture. It is not.

Several Christians have recoiled from my "solution" in this fashion in the past, and so I want to spend today's post trying to defuse the hostility. (Note that to make sense of today's post, you should first read last week's, though you don't need to read any of the comments to get up to speed.)

First, let me spend a minute explaining that by definition, God can't break the laws of physics, any more than He can make 2+2=5. What are the "laws of physics"? As Richard Feynman explained in an essay called "The Character of Physical Law," they are simply the rules that describe the behavior of the objects of our natural investigations. Now because we are fallible, if we ever discover a violation of one of these "rules"--and we're sure it's a legit violation, not due to experimental error--then we must conclude, "The rules aren't what we thought they were yesterday." Einstein overturned Newtonian physics, but the universe itself didn't change because of his work.

Now the average Christian, I think, believes that scientists have come up with the "normal" laws of physics and of biology. Further, the average Christian believes that when Jesus walked on water, or raised Lazarus from the dead, that these miracles were violations of those rules. Maybe they were, and maybe they weren't (I think not--it would make God's design that much more impressive), but either way, it is nonsensical to say that the atoms in Lazarus' body broke the laws of physics that day in the tomb. Whatever behavior his atoms did display, must have been consistent with a generalized body of laws that would be the new and improved "laws of physics."

(In case this sounds too tautologous, note that unless the rules are fairly economical, the study of physics is pointless. The reason it's so helpful for us to learn "the laws of physics" is that it gives us predictive power; we really do gain insight into how nature operates. But we could imagine a world in which the laws were so broad that onlookers with our degree of mental powers would discern no obvious patterns, and the world would be a chaotic muddle. So part of God's design is that all of the wonders of the universe have their physical instantiations--apparently!--composed of a small group of elementary building blocks, which obey a fairly sparse set of rules.)

So we see that KSralla's objection doesn't make any sense. The standard Deistic image of God--against which KSralla is reacting--doesn't really work if you think that God created not only space but also time. It's wrong to think that God created Adam and Eve and everything else, then sat back and waited for His wound-up clock to spin out His design. From God's point of view, it is all simultaneous; He creates Adam and Eve just as He descends to Earth with a flaming sword in His mouth. (Note that this is also how I deal with Mises' praxelogical critique of the Western idea of God. Mises asked, why wouldn't an omnipotent and omniscient being remove all of its felt uneasiness in one action? He does.)

In my view, it's wrong to picture God as only jumping in once in a while to help out nature to fulfill His plans. "Whoa, those whiny Israelites will be in bondage forever if I don't do something. I'll temporarily make bushes impervious to fire and talk to Moses. Then I'll hang out back in heaven for a while until they need Me to swoop in again and change the charge on electrons in the Nile to turn the water into blood."

No, that's not how I picture it at all. Every instant of the history of the universe is intimately infused with God's presence and action; He is always "intervening." But in order to allow us to make sense of things, 99.999999% of the time it seems as if nature obeys its "lifeless" rules, and then once in a great while an apparent "miracle" takes place. There couldn't be apparent violations of the ordinary rules all the time, lest those "rules" would never be perceived in the first place. (Just to clarify, I am not saying that what we call the laws of physics were actually violated during the plagues and so forth. I think those were just unexpected and rare outcomes of the standard rules, given the earlier conditions of the physical universe.)

OK so on to the new analogy, to help make this point: Let's say I have a stack of blank index cards. With my pencil I start doodling shapes on the cards. Also, I don't do the first card, and then the second. Rather, I do part of the doodles on, say, the 87th card in the stack, then I do part of the doodles on the 13th card, and so forth.

Finally, when I'm all done doodling, I call my buddy over. I tell him, "I am going to show you a new world in which your body is that of a frog. Your objective is to get from one side of the street to the other, without getting hit by any of the traffic."

I start flipping through the stack of cards, on which I have drawn the scenes from a game of Frogger. But because I perfectly anticipated what my buddy would will with his mind, I have drawn the scenes such that the frog moves in exactly the way my buddy wants it to. After a few minutes, the novelty wears off and my buddy is dead certain that he is controlling his frog body with his mental desires.

Now, if I stop the demonstration and ask my buddy, "Describe how the cars move?" he will be able to do it. Some cars move really fast, others move slow. But at no time does a car that's on the top right of the xth index card suddenly teleport to the lower left of the (x+1)th index card.

I hope it is clear that in order for my buddy to be able to play the game at all, I had to build in some patterns for the objects in the alternate world to obey. Did these rules constrain me? Not really; I was free to do whatever I wanted with the pencil and the blank cards. But part of what I wanted was for my friend to be able to test his frogging skills, and he couldn't have done that if the cars appeared in and out of existence at apparently random spots on the cards. Moreover, it's clear that the "time" in the frogger world has nothing to do with me; I didn't even create the cards in order.

This is what I think the actual, physical universe must be like. It's true, the replacement of a deterministic, Newtonian universe with quantum uncertainty makes the analogy less compelling. But in any event I think it disposes of the claim that my approach somehow limits God's sovereignty, or limits His creative work to the first week of Genesis.

* Jason Clemens and I have a piece in Human Events on California's predicament. (The comments are more entertaining than our dry analysis.)

* Marlo Lewis challenges the claim that the "science is settled" regarding global warming. Does anyone know if RealClimate has addressed Watts' claims about thermometers being put next to exhaust fans, etc.? If his work is right (as Lewis summarizes in the linked post), it's pretty serious.

* Scott Sumner continues to unwittingly support my new book's thesis. After quoting Bernanke's recent WSJ op ed, in which Big Ben listed all the ways he had expertly steered the economy through this storm, Scott asks:

Isn’t this basically what Herbert Hoover’s Fed did? Didn’t they also cut rates to near zero levels? Didn’t they also massively expand the Fed’s balance sheet, causing rapid growth in the monetary base? Didn’t Hoover also bail out the banking system with taxpayer money through his Reconstruction Finance Corporation? So does that mean the Fed was also “accommodative” in the early 1930s? And if so, what’s the difference between ‘accommodative’ and ‘expansionary.’

Am I being too hard on Bernanke? After all, the Fed has done a lot. But so did Hoover’s Fed, the question is whether the Fed is doing anything effective. The only difference I can see is that the base rose even more under Bernanke than under Hoover, but that was fully neutralized by the policy of bribing banks to hoard excess reserves.

Yes Scott, that is what happened under Hoover. The government has implemented the exact policies that it implemented the last time it caused a decade-long depression. And since Bernanke was appointed before it was apparent that we were in for Depression 2.0, and since he was an academic expert on what has caused the Great Depression...that's why I got suspicious.

* In the post calling for celebrity quotes, someone posted the following video. Hilarious. (Make sure you watch the finale.)

Here is the audio [.mp3]. (Note that that's not me singing in the beginning.)

I am working on a project where I need to collect a bunch of economically ignorant quotes from famous people. So for example, I know Bono has pontificated about Third World debt, Leonardo DeCaprio has jumped on the global warming bandwagon, etc. In the comments I'd like any links you could provide to examples.

Von Pepe sent me this fascinating video that I just had to stop. (I can't spend an hour at the office watching it right now, and if I go for 10 minutes I won't have the willpower to turn it off.) In fact, it looks like this MIT video series has a bunch of really interesting lectures.

I had read Mandelbrot's The (Mis)Behavior of Markets when making the jump from academia to the financial sector, and it was amazing. Also, if you are curious about chaos theory but don't know where to start, James Gleick's book is awesome. (Fractals and chaos theory aren't the same thing, but Gleick discusses Mandlebrot's connection to finance.)



Now don't get all tribal on me, Austrian purists. I'm not saying Mandelbrot's "non-Gaussian" models of the stock market are right. Rather, I'm taking Rothbard's approach when he argued that the chaos theorists are showing just how baseless the neoclassical economists are when they try to play the "we're real scientists" card on Austrians.

EXTRA CREDIT: What's the special connection between the blog Free Advice and the work of Benoit Mandelbrot?

Every now and again it's fun to disrupt the blogospherical equilibrium by picking a fight with your allies. Hence today I will point out my serious reservations with Robert Wenzel's analysis of stock prices and his preferred monetary aggregate, non-seasonally adjusted M2.

Back on June 12 Wenzel announced (CAPS in original):

MAJOR ALERT: Another Major Switch in Fed Policy?
After unprecedented money growth, in recent weeks I have hinted that Fed money growth was slowing. The latest data now show that money supply is now in a nosedive.

The whipsaws in Fed monetary policy under Fed chairman Ben Bernanke are unprecedented.

In early 2008, money supply (M2 not seasonally-adjusted) grew at rate of around 12%. During the summer of 2008, Bernanke reversed engines and completely slammed on the breaks and slowed money supply growth to 1.2% annualized. This last money slow down is what I believe intensified the downturn.

In late September 2008, in panic, Bernanke opened the money spigot, again, For approximately 6 months we had money growth of near 15% on an annualized basis. An unprecedented amount of Fed money growth. This is what I believe is fueling the current rebound in stocks and commodities.

However, it appears that Bernanke may now be reversing policy, again. The latest numbers from the Fed show that over the last three months the money supply has actually declined. On March 9, 2009 M2 non-seasonally adjusted stood at 8363.7 billion. Yesterday, the Fed reported that as of June 1, 2009 the money supply stood at 8335.1 billion. This is an annualized decline of of 1.4% in the money supply.

Needless to say, this stock market climb is pretty much over, if Bernanke keeps this money shrinkage act up.

Just to make sure that he is still sticking to this story, yesterday Wenzel wrote:

[A]s I have warned many times, the Fed is not printing any money at the current time. Couple this with the fact that August begins the start of seasonal down trend in the market and we [could] be in for a lot of trouble.
...
If Bernanke keeps up his no money printing stance, there is a huge market break coming. Don't be sucked in by any short term rallies. The money isn't there to support them long term.

I have several problems with all of this. First and most serious: How can you possibly argue that stock prices respond to money supply numbers with a 3-month (or greater) lag? I understand if you want to argue that measured CPI responds only slowly to injections of new money; fair enough. But surely it shouldn't take forward-looking investors three months to digest the implications of a change in Fed policy. Imagine if oil prices crashed one day. Would anybody say, "It was because the Saudis cut production two months ago"?

Yes, there is certainly a connection between Fed policy and nominal stock prices, but it can't be backward-looking and with a lag (let alone a variable lag!). That is impossible to reconcile with any type of sensible expectations theory. I'm not claiming that the efficient markets hypothesis is correct; I'm just saying that it can't possibly take speculators months to react to unexpected changes in Fed policy.

But let's put aside all of the theoretical issues. In practice, how useful is Wenzel's approach? Mostly because of the huge upswing today, the S&P 500 right now is up more than 3% from when Wenzel first warned us (on June 12) that the market rally was kaput. That's more than a 20% annualized rate of appreciation, which isn't a bad return in the present environment.

Yes yes, of COURSE the stock market is bouncing around like crazy; for all I know it might fall 3% tomorrow. And just because it rose at 3% in less than two months, it doesn't mean it will continue to do so for the next year.

But my point is, if Wenzel's theory is driven by 3-month changes in (nsa) M2. This variable was almost perfectly flat from the week of March 23 to the week of July 6. If the market were much lower today than it was at some point in the interval, I am quite sure Wenzel would have pointed to that as vindication of his analysis.

This is the supreme problem with monetary theories that rely on "long and variable lags." They are non-falsifiable, because no matter what happens, you can always pore over the last two years of data and find some monetary trend to point to as "causing" whatever is happening today.

Of course, pure economic theory is a priori; Mises argued (and I agree with him--and so does Wenzel I believe) that you come to the table already armed with theories about how the economy works. It is precisely this antecedent framework that allows you to interpret the vast reams of data pouring in by the hour.

But on either count--theoretical or empirical--I don't see how looking at lagged changes in M2 explains stock movements.

A final note: I am sure that Wenzel is much more attuned to market movements than I am. If you had $1000 to entrust to either of our calls on market timing, you would do better to give it to Wenzel. What I am saying though is that when he steps back and tries to formalize why he thinks the market will do such-and-such, he is not accurately crystallizing his tacit knowledge. But because his theory is so open-ended, I don't think he even sees when it is being contradicted by actual events.

One of the most shocking talking points floating around right-wing talk radio goes something like this: "Obama keeps saying that if you like your insurance, you can keep it, and that his plan won't interfere with existing plans. But that's a lie! Just look at page 16 of the health care bill online. You can read for yourself that it makes it illegal for private insurers to add new clients once the bill goes into effect. From that point on, if you lose your job or otherwise drop your private health insurance, you'll have to sign up for the so-called 'public option.'"

Is that true? Not really, but it's true that the language on page 16 is ominous. (And of course in this post, I'm taking the bill's language at face value. Obviously I agree that the grand plan is to get as many people dependent on the government for their health care.)

Here's the actual text of the health care bill [.pdf]. If you turn to page 16, there is indeed some scary language about private plans needing to have been in effect before the first year in which the "reform" kicks in. So if you are already convinced that Barack Obama is devil spawn, you would look at that and say, "Yep, it's just like the guy on the radio warned me. I can't believe the mainstream media is silent on this crime!"

However, let's calm down for a second. The timing issues on page 16 are referring to those private plans that can be grandfathered in. Obviously, you can't grandfather in someone's private coverage, if the person signs up for the coverage after the start of the new regulation. (That would be soning or daughtering in the coverage.)

If you go back to page 14 and start reading from the "TITLE I" section, you'll see what's really going on. The health bill is coming up with all sorts of new requirements that any private plan must satisfy. If you agree that the government should ensure "universal coverage" (something with which I DON'T agree, of course!), then there needs to be a list of attributes the private coverage must satisfy. Otherwise, someone could set up a plan that charges $10 per month in premiums, and provides access to free aspirin whenever the person has a headache. Then that person could say, "See, I have health insurance! No need for me to sign up with the government plan." So obviously that wouldn't qualify as making sure everybody had health insurance.

Now just to allay people's (justified) fears that these new conditions would render their current health insurance plan illegal, the bill specifically exempts all previous plans from these new conditions; coverage that existed before the bill goes into effect is grandfathered in. And the conditions for which plans qualify for such an exemption are listed on page 16.

So in conclusion, it's not true that the ominous language on page 16 is saying private health insurers will be legally barred from accepting new clients after the health bill is signed into law. What is true is that many current plans may not qualify under the new regulations, and so private insurers won't be able to offer the same plan to new customers once this monstrosity kicks in.

In general, the talk radio hosts' warnings are correct; this bill will definitely hamstring the private provision of health insurance, not even counting the huge advantage the "public" plan will have because it can draw on tax revenues. But strictly speaking, the language on page 16 isn't showing that anyone born after 2015 will necessarily have to sign up for ObamaCare. (I imagine that aspect will come in through a different mechanism...)

Mario Rizzo has another good post:

While I am not a Keynesian, I would agree that the economics of Keynes (and Keynesian economics!) is more relevant to the present crisis than the graduate macroeconomics taught in most high-level departments today.

I’d also suggest that the business cycle analysis of F.A. Hayek is also more relevant than today’s macro-theory.

That's definitely true. Let me commit heresy and say that Keynes' General Theory is (a) comprehensible and (b) packed full of deep insights. Of course, Keynes' policy recommendations are wrong. Rizzo goes on to say:

By “relevant” I mean, in both cases, that the issues addressed and emphasized are keys to either understanding what is going on or making progress in so understanding. Hayek asks us to consider the role of resource misallocation. Keynes asks us to consider the role of radical uncertainty. Mainstream macro is silent on these issues. In fact, much of it recognizes no connection between financial markets and the real economy.

I am not saying that there is some grand synthesis of Hayek and Keynes that will yield truth. I am saying that these economists raised the fundamental issues. They are relevant.

I actually do think a grand synthesis of Hayek and Keynes is a good approach; I was trying to lay the foundation for such an enterprise in my dissertation [.pdf]. (Now Rizzo was my dissertation chairman, meaning he presumably read it. I hope I did not sour him on the prospects for a grand synthesis.)

Rizzo and O'Driscoll had a very important and (at the time) celebrated book, The Economics of Time and Ignorance. They pushed the idea of "pattern coordination" as a way to retain some type of equilibrium construct, in the face of "radical" uncertainty. The problem was, thinkers like Shackle and Lachmann had come up with very serious objections to the typical notion of intertemporal equilibrium, in which everybody's expectations about the future are compatible. So rather than just yell, "Ah take your nihilist doubt and go hang out with Krugman!" Rizzo and O'Driscoll tried to salvage things.

I think they were on the right track, and in my dissertation I tried to apply their new equilibrium concept to money. What was amusing is that the single biggest objection I got from Austrians (who had the intrepidity to read my dissertation) was, "Isn't your theory Keynesian?"

I am getting a little impatient with all of these self-defined "progressives" who won't admit their mistakes. (Obviously there are analogs of this habit in every movement; the progressives don't have a monopoly here.) We all got a chuckle over Paul Krugman ridiculing the very IDEA that he could have called for a housing bubble, and today we get to see Matt Yglesias laugh off Alex Tabarrok's clear busting of him.

Okay so here is the progression:

* On May 30, 2009 Yglesias wrote:

This goes back to a point I was making a while ago about how dangerous it is that the public discourse is so dominated by low-quality freelance philosophy done by people with PhDs in economics. I’m fairly certain that if Mankiw were to walk over to Emerson Hall he could find some folks (possibly T.M. Scanlon who I know sometimes reads this blog) who could explain to him that there’s little grounds for the belief that a commitment to utilitarianism is the main justification for redistributive taxation.

* Then on July 20, 2009 he wrote:

...the point here is that the marginal utility of money income declines as it grows. This is also a strong argument for believing that redistributing money from wealthy or high-income individuals to the poor or to public services will be welfare-enhancing.

Tabarrok pointed out the above contradictions, in a post titled, "Yglesias vs. Yglesias." Then Yglesias says today:

Contra Alex Tabarrok’s cute post here there’s nothing contradictory between pointing out that Greg Mankiw is wrong to imply that utilitarianism-based arguments are the only (or even the primary) arguments available for redistributive taxation and also to point out that considerations related to the declining marginal utility of money do, in fact, militate in favor of redistributive taxation.

Give me a break, Yglesias. Just say, "Heh, you got me there, Alex. At least I know there was a housing bubble."

Yes, it's logically possible that one could have pointed out that Mankiw was wrong, while simultaneously arguing that utilitarian considerations "militate in favor of" redistribution. (By the way, Yglesias, you're aware that many economists--and philosophers--think it's impossible to engage in interpersonal comparisons of utility, right?)

But that's not what you did. Here is a bigger quote from your July 20 post, after you summarize some of Will Wilkinson's objections to using income inequality as a basis for tax policy:

At the same time, the point here is that the marginal utility of money income declines as it grows. This is also a strong argument for believing that redistributing money from wealthy or high-income individuals to the poor or to public services will be welfare-enhancing. The difference, in welfare terms, between a Sub-Zero refrigerator and an Ikea refrigerator is much smaller than the difference in welfare terms between having health insurance and not having health insurance. So a surtax on high earners that goes to finance expansion of health coverage to the working poor is making people better off. In that case, when we look at statistics indicating skyrocketing income inequality we’re seeing evidence of inefficiency that can be rectified through the policy process.

The crude utilitarianism you mention here is the only justification you give for redistribution, to oppose to Wilkinson's critique. And you specifically say "the point here is".

So you're saying that "the point here" is something that isn't the main justification, a main justification that you failed to mention in the post when arguing for progressive taxes?

To repeat, it's theoretically possible that you didn't contradict yourself, but c'mon, Tabarrok busted you. Just admit it and move on. We all screw up from time to time. It's hard work pontificating on everything under the sun!

In a previous guest post, Edward Gonzales explained his experiences with government spending on an Iraqi community. In the present essay, Gonzales caters to our requests for more talk of blowing stuff up. --RPM

===============================
Fighting an Insurgency
by Edward Gonzales

While serving in Iraq I came to the conclusion that a thriving economy did more to fight the insurgency than all the weapons in my arsenal. To fully explain this I will describe the conditions in the village in which I served, the type of enemy I encountered, the change in tactics we employed, and the results I witnessed.

The Village

When I first arrived in Iraq I had a very simple view of what fighting an insurgency was going to entail. I would organize combat and reconnaissance patrols, find the insurgents, and kill them. The reality I experienced was not so simple. I very rarely saw the bad guys. Most attacks took the form of Improvised Explosive Devices (IEDs), booby traps, snipers, and mortars. The only time the insurgents openly exposed themselves to us was during suicide attacks. It was physically and emotionally draining. Nothing would happen for weeks and then three days of attacks would come with two or three IEDs and booby traps per day and then nothing again. The anticipation of when the next attack might occur was the most draining. When the attacks came from snipers, the insurgents placed themselves in populated areas, so if the patrol returned fire and killed the sniper, the chance of killing one or more innocent villagers was highly likely. After the attacks the insurgents would disappear by blending into the local populace. The insurgents had this ability because the villagers either supported them or they were too afraid to speak out against them. I became convinced within a month that “winning” in the traditional sense against an insurgency was impossible.

The Enemy

Insurgents fell into one of two categories. In the first category were the die-hard extremists committed to jihad. There is no negotiation with this type of insurgent. They must be fought with weapons and brute force. We hear a great deal about this type of insurgent from our politicians and the media. What is not said is that they represent a very small minority of insurgents in Iraq. In my time in Iraq I captured and questioned dozens of insurgents. Only one insurgent fell into this category. The great majority of insurgents I encountered fell into a second category. They were young men who had been recruited by the extremists. They certainly had been ingrained with the usual pro jihad, anti American propaganda that I expected, but upon further questioning the reoccurring theme was no money, no hope for the future, and a promised better quality of life once the Americans were thrown out. I realized that had I gotten to these young men first, I could just have easily recruited them into the Iraqi Army or local police force. These insurgents did not care about American democracy or Al Qaeda ideals. They wanted someone to show them a way towards a better life, a life that included a job and a family they had the ability to support. Al Qaeda in Iraq had convinced these young men that America was the source of all trouble and once the Americans were destroyed Iraq would be a prosperous nation again. The realization I came to was that as long as there was no hope for a better future, I and any Marine who might replace me would be fighting insurgents forever.

A Change in Tactics

My focus therefore became about providing enough security to let the village be relatively safe but not so much that it stifled trade. Myself and the Iraqi officers and soldiers patrolled daily and on every patrol we would stop in to see as many shop owners and village elders as we had time for. I would take ten minutes to have tea with each one and ask if their neighborhood was safe and if business was growing. I repeatedly told them that our only intentions were to keep them and their families safe. The security measures that we did put in place were meant to protect and improve trade, not hinder it. After a few weeks I was on a first name basis with most of them and knew their children. Within six weeks of this type of patrolling the difference within the village was noticeable. The people would greet us and let us know if any outsiders had come to the village. They pointed out the areas and trails they thought might be unsafe and we began to find many more IEDs, booby traps, and weapons caches. The number of attacks began to drop.

The Effect

I noticed a direct and snowballing correlation between safety and economic conditions. In a dangerous area the people produced just enough for their survival. When security was provided against murder and robbery, people began to produce more for trade. As trade started the area became more safe and production and trade increased again which lead to greater safety. As production and trade increased and more people came into the village my job became easier, not harder. The local businessmen gave us all the information we needed to keep insurgents from launching heavy attacks. There were still dangers and attacks still did happen, but in a village with active trade the locals turned those who did launch attacks into the Iraqi Army or local police force, usually within hours. Many locals risked their lives on numerous occasions to stop an American or Iraqi patrol from walking into an IED or booby trap in the road. On another occasion, two men trying to emplace an IED were chased away by the local men all armed with AK-47 assault rifles. (In the Al Anbar province men were allowed one assault rifle in their homes for protection. As a Marine tasked with providing security I was much safer and my job easier with armed locals, but that is another article altogether.)

As these conditions developed young men who had been “away” began returning to their family homes. Some Americans pointed out the danger that many of these young men had probably been insurgents in the past and they were biding their time in order to attack us again at a later date. I and many of the Iraqi and American officers I worked with disagreed strongly with this assessment. These were young men who had given up fighting and were moving back in with their families and now were making a go at a peaceful life in their hometowns. A discussion that I had with an Iraqi Army officer put the situation into perspective for me. He had fought against the Americans when we first invaded Iraq. When the Iraqi Army was stood up again he decided that the best way for Iraq to be peaceful and prosperous once again was not to fight the Americans but join the Iraqi Army. As time passed he believed that more and more young men who were working with Al Qaeda would realize that the insurgent groups were not the way for a better future in Iraq and would quit those groups and return home.

I knew that the insurgency in the village that I was in was defeated when more and more people moved back into the village to go to work on the family farm or work as a fisherman on the river. There was still an occasional attack, but locals were as committed to stopping the attacks as we were. The insurgents had lost the support of the locals

Sound economics is so vitally important because young men who have jobs and hope for the future do not join insurgent groups and launch attacks against police and army units. The dangerous extremists do still exist, but without the support of the local populace these extremists have no young men to recruit and are much easier to hunt down. A thriving and growing economy does more to combat insurgents than all the weaponry in existence.

Folks, I do not have anything to do with the content of the Google Ads. I certainly don't sign up for the "Play now, my lord!" ads that seem to feature women with increasingly large busts as the weeks pass.

It's true, there's a way I can go into Google Ads and tinker with it, but it's comparable to my policy with hecklers: Once I start banning posters (or ads), the stuff that remains is prima facie approved.

Plausible deniability is the name of the game. Huh? What's Area 51?

In case you're wondering, the only reason I torture myself by going to CNBC.com 5x a day is that I check the price of gold, and I continue to wait for the dollar to crash. But then when I'm there, I can't help but look at the headlines.

For example, right now I read that Bernanke says there should be no audit of the Fed, lest the venerable institution's independence is compromised by political factors.

Another headline reads: "Only Fed Fit to Do Systemic Exams."

If I were running the PR on a big investment bank, I'd take out full-page ads in the Wall Street Journal saying, "Mr. Bernanke, don't want your mission to be compromised by interference from Congress? Our shareholders know how you feel."

It wouldn't do any good, of course, since government officials are the most transparent hypocrites around (with the possible exception of televangelists). But it would be funny.

* A bunch of Ron Paul fans have been griping about this WSJ article on the Fed, and I assumed they were just being touchy. But seriously just read the first three paragraphs. That might as well have titled it, "Give me a B! Give me an E! Give me an N!..."

In case you don't see the big deal, consider this excerpt:

"Rallying one charge is Ron Paul, an iconoclastic Texas Republican who wants to abolish the central bank entirely. Mr. Paul's economic ideas sometimes make him the target of ridicule -- in the new film "Bruno," shock comedian Sacha Baron Cohen tries to seduce the startled congressman in a hidden-camera scene while discussing economic theory.

Still, Mr. Paul has persuaded nearly two-thirds of the House to co-sponsor a bill requiring far-reaching congressional audits of the Fed."

So my question is, what the heck is that "Still" doing? Are these clowns really suggesting that other Congressmen shouldn't have supported Ron Paul's bill, since he suffered ridicule at the hands of a comedian? How about this, "President Barack Obama is meeting with fierce criticism, with some commentators--such as Ann Coulter--suggesting he remove his temple from his anus. Still, Obama enjoys strong support from the Congressional Black Caucus."

* Von Pepe sends me this link of Bernanke explaining that he has no idea where the Fed's $500,000,000,000 went, after he gave it to some other central bankers. And this is the guy who says he needs more oversight over the financial sector, to prevent systemic risks and such.

* At MasterResource I have another summary of the economics of climate change, and the relation to policy activism. Most of it is recycled (ha ha) but I dwell a bit more on how economic models deal with uncertainty, if you care.

* Hayek [sorry!!] Henry Hazlitt reviews Rothbard's Man, Economy, and State.

* Ben Bernanke's ghost writer(s) have an op ed in the Wall Street Journal today. (HT2EPJ) Pinky, are you thinking what I'm thinking?

* Bob Roddis has a Rothbard speech (in three parts) at his blog.

* We are now officially in Bizarro World. Conservatives are finally on the anti-Fed and anti-Wall-Street bandwagon, while Paul Krugman concludes: "[I]t’s crazy to cut off our future to spite Goldman Sachs’s face."

* Mario Rizzo laments the failure of macroeconomics. An interesting excerpt:

As a member of NYU’s Ph.D. admissions committee for the past fifteen years, I have even seen applicants who apologize for taking “too many” philosophy courses in college. I have seen others remind us that although they have been interested in history and literature, they are fully cognizant of the need to express their ideas in precise mathematical terms.

What of a clearly brilliant student who wants to question (or at least think about) these methodological issues? I had a colleague tell me, informally, that he would probably be a disruptive influence in the first-year classes. I guess it depends on one’s definition of “disruptive.”

I was definitely an influence, and perhaps even a disruptive one (especially when it was just the TA running the class) in my first year at NYU. But was I the clearly brilliant student? We will never know.

* Bob Higgs takes the time to blow up the silly petition about "Fed independence." Don't get me wrong, I think this audit-the-Fed movement might end up backfiring, but even so the petition is a bit like saying, "All this public scrutiny over Guantanamo is hampering the torturers' efforts to spread democracy."

* David R. Henderson somehow manages to relate Frank Zappa to Friedrich Hayek. I enjoyed both in college. (And I never inhaled while reading Hayek.)

* Speaking of college, here's an interview with Richard Ebeling, conducted one year after I graduated Hillsdale. I think during my last semester I had three Ebeling classes. The best was when the government shut down under Clinton; Ebeling literally came dancing into the classroom that day. (That wasn't my senior year, and now that I bring it up, I can't remember if I actually was in his class or if somebody just told me about it. Anyway, funny stuff.) Wow now the nostalgia train has fully pulled into the station. I also vividly remember how excited all the conservative Hillsdale students were when the Republicans took over Congress. Small government, here we come!

* This news story ran a while ago, but it was just brought to my attention. Here's the photo of the talk I gave to the Houston Property Rights Association (they supplied the signs and flag):



My favorite excerpt from the news story: "The idea that Hubert Hoover was for limited government was a “complete myth,” Murphy says." Well it was! Get off my back.

This is hilarious. (HT2LRC) The internet is awesome. I'm impressed that someone took the time to make this video without putting in an ad or something at the end. That's just how much people can't stand Bernanke; his public repudiation is its own reward.

* This guy emailed me to say that my Mish article went awry at the crucial point: When the creditor lends out money so that borrowers can spend more, the creditor is content to carry lower cash balances, because he's now holding a claim on future income. I had considered this at the time I wrote the article, but now I can't remember how I resolved it. I'm not going to lie to you, I sorta thought Mish himself would blow me up in a response, so that we could move this debate forward. Anyway I might write a future post to tie up these loose ends, but like I said I wish a big gun pro-deflationist would spell out what's wrong in my Mish critique.

* Today at Mises I criticize CNBC for dissing savings. I shower some love on Tyler Cowen near the end.

* Speaking of Tyler, what the @$@#$( is he talking about in this post? Seriously, did he and Scott Sumner decide to pull a prank and write a crazy post each? Here's Tyler:

I don't know the "inside scoop" on the bank books, but in purely theoretical terms a bit of chicanery may be socially optimal now. In general, bank moral hazard-induced-risk-taking may move closer to socially optimal, the closer banks are to insolvency. Let's say that banks are generating high profits now by, one way or the other, pursuing short run profits and "going short" on market volatility. In the long run this investment strategy will bite them, sooner or later but probably later. In the meantime they likely will become solvent. If insolvency has a high fixed cost this can be a good risk, even from the taxpayer or social point of view.

In the comments of Tyler's post, somebody already beat me to the punch of the gambling analogy. Really, wouldn't it make more sense to say the exact opposite? Namely, that the very worst time in the world for banks to be engaging in high-risk bets (let alone when backed up by the taxpayers), is when they are on the verge of insolvency?

Tyler seems to be saying, "It's not a bad idea to take a gamble that pays $1 million with 99% probability, but pays negative $1 billion with 1% probability, so long as you don't play it very often." I don't think that's right, and even if it were, the time to play it (a few times) would be when you were already up several billion dollars--not when that 1% outcome could ruin you.

Yesterday I sent Scott Sumner a goofy email, to the effect that he needed to blog more because he didn't realize how much angst it caused me when he skipped a day. He warned me that I wouldn't like his latest post. This is true:

I used to think that people deserved what they earned, but no longer. Now I think rich people should keep what they earn if and only if trying to take it away from them it will do more harm than good. In other words, I’ve gone from being a dogmatic libertarian who thought the Nordic model was bad, to being a pragmatic libertarian who thinks it’s worth considering. I lean towards Singapore’s slightly less egalitarian forced saving regime for many different pragmatic reasons. But if someone can convince me that Denmark’s undeniably successful social welfare system is better, I’d jump ship in a moment. As far as I am concerned the fact that “millions of individuals” have “chosen” to spend their money on Nicole Kidman films has no more normative implications than if a bag of Federal Reserve notes had fallen from an airplane into her front yard.

Seriously, does Scott really believe this? If so, then don't let him into your house or watch your kids (he might sell them into slavery if his calculation comes out that way). And what' with putting "chosen" in quotations marks, Scott? OK you don't believe people really choose; they can't help but throw money at the pretty girl, fine.

But more important, what's with putting "millions of individuals" in quotation marks?! Presumably you still believe in numbers, so I take it that you now question whether individuals really exist?

Say what you will about Free Advice, but we tackle deep issues on this blog. No chatter about Joe the Plumber here (except when it's important).

In a previous post, I listed some of the major problems with materialism, which is the view that the only "real" things are atoms and energy, and everything else is subordinate to them. So for example, the materialist says that disembodied thoughts are "really" just patterns of electrical and chemical reactions in your nervous system, and one commenter (Tokyo Tom) went so far as to say that "2+2=4" is just a model we have of the physical universe, which has been falsified by the discoveries of relativity and quantum mechanics.

In the present post, I want to lay out my working hypothesis for how to reconcile the apparently objective laws of physics governing the physical universe, with the equally apparently objective fact that human subjective desires influence events in this physical universe. (In other words, it seems that minds exist and affect inanimate matter, even though staring at the molecular level there doesn't seem to be mind power coming in from an alternate dimension.) At the same time, my theory will explain how God can be the ultimate Designer of the universe, in which every event happens with His permission, and yet we humans still have free will and can choose to sin or to obey Him.

============================

Imagine a computer programmer who makes a program that simulates a ball moving around the monitor. The program is entirely deterministic; the programmer could tell you beforehand what the exact position of the ball will be on the monitor, at any future time. The ball's entire life cycle of movements are already embedded at t=0 in the software.

The programmer asks his buddy to sit down in front of the computer and watch the ball. Now here's the freaky thing: Wherever the guy moves his eyes, that's where the ball goes to on the monitor. So if the guy stares at the ball, it's motionless. But then if he slowly starts looking to the left, the ball follows his gaze. He can try to "trick" the ball and suddenly dart his eyes to the opposite corner of the monitor, and BAM the ball instantly responds to his eye movement.

The guy keeps this up for a good 10 minutes, and it never fails. So he is obviously perfectly certain that he is controlling the ball. He hypothesizes that there must be a camera in the computer that notes his eye movements and then translates them into the appropriate pixels to light up on the monitor.

But actually, the programmer tells him that's not what's going on at all. The ball's movements are completely pre-determined by the software. The trick is, the programmer predicted perfectly what his buddy's eye movements would be. This is inconceivable to the buddy, because how could the programmer have known that RIGHT NOW he would zoom his eyes to the top left of the monitor? And yet, he can call in computer experts who can look over the machine, and they assure him that there is no way his eye movements are transmitting information into the computer. The ball's movements "originate" entirely from within the hardware and software; there is no mechanism for the guy's eye movements to influence the state of the machine (in any relevant sense--of course in reality if he flicks his eyes around a lot, the room gets hotter and this influences the computer etc.).

So that's my theory of how God designed the physical universe to interact with our souls. (As C.S. Lewis said, you don't have a soul, you are a soul--you have a body.) The physical universe is completely distinct from the spirit world (I'm sorry secularists but that's an accurate term for what I'm talking about), and the quarks or other elementary particles in it, obey the laws of physics. Maybe our scientists are wrong in the exact nature of those laws, but the point is, there is a body of very economical laws governing physical matter and its behavior.

However, God designed these laws (and the initial state of the physical universe) such that it appears to us that we exercise (limited) control over the material universe. That's why I can apparently control my fingers as I now type. It's true, scientists can bore ever deeper into the processes governing the cells in my fingers, and they are never going to see injections of commands coming from my soul. But it sure seems as if my mind controls my fingers, and by the positivist's own criterion of predictive power, it is a very strong hypothesis indeed.

As far as free will goes, God designed our souls such that we really do have free choice. In principle, our wills are independent of His. Yet God is also omniscient, and so He knew beforehand what we would choose to do when we (somewhat simplistically) think we are influencing the physical universe.

In other words, God had to solve an unimaginably complex problem when designing the universe. It is akin to solving a huge economics model to find the equilibrium. God had to choose the initial state of the universe, and dictate the laws governing those physical particles, such that every human who would ever live, would be fooled into thinking his or her subjective desires influenced the unfolding events, and that things could go one way or the other, depending on the person's choice. Even though that belief was mistaken, in a sense it would still be true, since the laws of the universe (and its state at any moment) were originally designed with those choices in mind.

As a final point, "miracles" do not occur, in the sense of a violation of the laws of physics. The laws of physics are simply patterns describing how the atoms operate. If Jesus walks on water and thus violates the "laws" of physics, then they weren't really laws, were they? In my interpretation, Jesus really did walk on water, raise the dead, etc., but nothing miraculous happened at the subatomic level. Rather, God had designed the universe such that these "impossible" (from a normal everyday human viewpoint) events were the necessary unfolding of the laws of physics, preordained from the first moment of creation.

============================

I am 95% persuaded by Stephan Kinsella's classic article "Against Intellectual Property" [.pdf]. However, I think if we take Kinsella's views seriously, it means that "identity theft" isn't really theft. Let's say someone fills out a credit card application claiming to be Robert Murphy, and has my date of birth, my address, my (anti)Social (in)Security number, etc. He runs up a huge tab, which ruins my credit score and prevents me from being able to charge anything again.

So long as I'm not forced to actually pay the bill for his charges, but merely have my credit score ruined, I don't think this counts as a violation of my property rights. After all, I don't have a right to borrow money from people; they are always free to refrain from lending to me. And it is standard in Rothbardian libertarian theory that blackmail defamation isn't a crime, because you don't have a right to your reputation. (How can you have a property right in what other people think of you?)

At best, I think you could only claim that the "identity thief" violated the property rights of the creditor, by extracting a loan from him/her under fraudulent pretenses. But the "thief" didn't steal anything from you.

Is that right? If so, does it pose a problem for Kinsella's approach to IP?

I don't know what the timelines are, so maybe he didn't have access to this information when he wrote his short post. But here Ezra Klein points to how encouraging the fate of Massachusetts is for health care reform (HT2MR). Nowhere does Klein mention this:

As lawmakers on Capitol Hill battle to create a nationwide health care system to cover all, Massachusetts is struggling to keep the state's groundbreaking universal coverage program up and running.

Facing a massive budget shortfall, lawmakers are cutting roughly 30 thousand legal, taxpaying immigrants out of the state subsidized Commonwealth Care program.

Health Care for All, a Boston based advocacy group, is taking hundreds of calls on their help line from people like El Salvador native Eugenio Hernandez who is battling prostate cancer and will be among those losing coverage.

So apparently it's still "universal" coverage even when you kick out a bunch of legal immigrants who are paying the government premiums just like they're supposed to. But surely when they do it at the federal level, costs will go down (as they are wont to do with other government programs) and there will be no temptation to ration care to politically weak groups.

Besides Klein failing to mention the 30,000 immigrants getting dropped (which might not have been in the news when he posted, I don't know), his excitement over the fate of Massachusetts baffles me. As I said on MR in the comments, Is Klein even making an argument here? It sounds like he's saying, "This has to work, because otherwise it will fail." Seriously, look at his post. I really think that's a fair summary of his argument.

Bill R. sent me a link to this amazing site where they excerpt the news from WSJ from the corresponding day in 1930. For July 18, 1930:

Editorial: Constantly increasing taxation is a burden on "every form of enterprise". It diverts money from productive uses to government functions which "though mostly indispensable, do not always require the scale of expenditure to which our public servants have become accustomed." Total taxation (including local) has risen from under $3B in 1913 to about $9B now; recently rising about $500M/year. This aggravates the current depression.
...
Federal Reserve faces tough problem in how long to continue easy money policy, since in time “this has always stimulated speculation to dangerous proportions.”
...
Credit likely to remain easy for some time, but extremely low current rates seen unlikely to last (call money at 1.5%-2.5%). Rates for credit in the 3-6-month range have already begun to move up. This month seen as a low point for industrial activity; demand for credit anticipated to increase seasonally in August.

Now in fairness, someone like Scott Sumner would say, "Yes, those fools thought the Fed was engaging in 'easy' money, but it wasn't!"

But let me point it out again: During the 1920-21 depression, the New York Fed jacked up its discount rate to a (then) record high, while in the aftermath of the 1929 crash, the NY Fed cut its discount rate to a (then) record low. Price deflation was more severe during the 1920-21 depression than during any comparable time period in the early 1930s. And I think it's safe to say that the 1920s were a better economic experience than the 1930s.

We are truly repeating the mistakes of the 1930s. Scott Sumner's has drawn the wrong lesson, and thinks that if only we did what they did times a hundred, then things will be rosy. Just as the Keynesians think Hoover and FDR didn't run high enough deficits, the Friedmanites think that the Fed didn't print enough green pieces of paper. Even though the deficits and money printing (as far as monetary base) were much more aggressive than in previous U.S. depressions, still for some reason a moderate dose of the "right medicine" (from Krugman and Sumner's different viewpoints) led to the worst economic calamity in U.S. history.

* Here's Bryan Caplan's reply to Krugman and Drum.

* An interesting analysis of a paper (on boundary layer clouds and the effect on global warming) that clearly went into the IPCC summary, and yet had key words changed to match with the spirit of the IPCC report. (HT2 Rob Bradley)

* I have gotten a lot of negative feedback about my Mish article. Folks, before you confidently tell me that "in our system, money is debt and that's why the money supply is shrinking," please look at the below graph. M1 consists of checkable deposits, travelers checks, and currency in circulation; it is the money supply "held by the public." I don't see it crashing because of losses by lenders. That's why, in my Mish article, I dealt with credit cards; I thought people couldn't be talking about the money supply fostered by the fractional reserve banking system, since that clearly started exploding in late 2008.

A rare post in which I agree wholeheartedly with Brad DeLong (HT2 Bob Roddis):

The Economist gives us economists too much credit...

I would like to draw a distinction between economics as a way of thinking--the way good economists think, at least--and academic economics as a profession. Economics as a way of thinking is, I believe, still very valuable. But academic economics as a profession has proven itself to be not valuable at all in this financial crisis.

Yep. It would be hard to imagine a worse performance by professional economists during the last few years. Follow the link to the Economist pieces to see some examples of how badly the profession botched things.

I'll go even further, and say that I totally understand why DeLong (and Krugman) think Fama et al. are being crazy in their opposition to fiscal stimulus. They are trying to use accounting tautologies to "prove" that deficit spending can't reduce unemployment. But that doesn't work; it's not necessarily true that "every dollar the government borrows means one fewer dollar spent by the private sector."

Naturally, I oppose DeLong (and Krugman) in their call for greater fiscal stimulus; I think their recommendations are awful. But as I argued in this article, the real problem is that even if deficit spending (temporarily) reduced unemployment, it would simply delay the sectoral adjustments needed to restore the economy to a sustainable growth path.

Note that I'm not saying deficit spending will always reduce unemployment; I am rather saying that Fama et al. are wrong for claiming that it will necessarily have zero effect on it. In fact, some of the opponents of "stimulus" are trying to have it both ways. Before the plan passed, it seemed (many of them) were saying that government spending would be perfectly counterbalanced by private sector losses, and so the effect on employment should have been nil. And yet now that the stimulus passed and unemployment jumped higher than most were predicting, the critics are saying, "See? We told you this would destroy jobs!" (Of course, there was not a unified voice of criticism of the stimulus package; some people made arguments at the time saying it would "destroy jobs on net." So those critics could claim justification.)

A lot of people ask me if I think Krugman (and DeLong) are liars or just stupid. They're certainly not stupid, and I don't even think they're necessarily dishonest. After all, they each have thousands of fans who leave comments on their blogs, so presumably it's not a giant Keynesian conspiracy. Yes they will often make (in my opinion) unfair attacks on their opponents, or will conveniently overlook certain facts that hurt their cases, but there are people on "my" side who do the same thing from time to time.

The one thing that does bother me about these two guys is the ease with which they accuse their intellectual opponents of being stupid and/or evil. Ah well.

Once you start entertaining the notion that there are secret groups running world governments, you see evidence all over the place. What's really funny is that, if you want to debate a conspiracy theorist, you can't say, "You have no proof of that plan." Because the conspiracy theorist will give you actual quotes from people like David Rockefeller and other big guns saying literally what the conspiracy theorist claims is their plan for worldwide domination. So the skeptic has to fall back on, "Oh come on, you're reading too much into that," or, "Surely that must be a joke."

Case in point, take Hillary Clinton's recent speech to the Council on Foreign Relations. (HT2 David Kramer for all of this.) Her opening remarks:

Thank you very much, Richard, and I am delighted to be here in these new headquarters. I have been often to, I guess, the mother ship in New York City, but it’s good to have an outpost of the Council right here down the street from the State Department. We get a lot of advice from the Council, so this will mean I won’t have as far to go to be told what we should be doing and how we should think about the future.

Richard just gave what could be described as a mini-version of my remarks in talking about the issues that confront us. But I look out at this audience filled with not only many friends and colleagues, but people who have served in prior administrations. And so there is never a time when the in-box is not full.

Now I'm sure people were laughing, and that these remarks were supposed to be the opening joke before she got into the meat of her speech. You could say that just because the CFR tells her what the State Department "should do," doesn't mean Clinton will obey those instructions. And of course, I don't think she was literally saying the CFR headquarters was an alien spacecraft.

But at the same time, the part I put in bold is exactly what the conspiracy theorists say about the CFR (and other groups like the Trilateral Commission, Bilderberg Group, etc.). So if you challenge them to prove their "crazy" claims, all they need to do is point at Hillary Clinton's latest speech as an example.

I was curious to see the actual delivery of these remarks, to see just how ha-ha Clinton's tone was when she said it. Aww too bad, this MSNBC video leaves out the above two paragraphs, and starts at the third paragraph of the transcript linked above. No need to waste the viewers' time with silly jokes about the CFR running the government! We've got to leave time for the story about Michael Jackson's kids.

Another post for posterity: I want to take a snapshot of the BLS' figures for actual and seasonally adjusted CPI for the first half of 2009, since I predict that they will revise those figures later on, in order to suppress the reported monthly inflation rates.

Month....CPI....SA CPI
=====================
Dec08...210.228...211.577
Jan.....211.143...212.174
Feb.....212.193...213.007
Mar.....212.709...212.714
Apr.....213.240...212.671
May.....213.856...212.876
Jun.....215.693...214.459
=====================


And while we have the numbers in front of us, just note again that actual CPI has risen at a 5.3% annualized rate this year, while seasonally adjusted CPI has only risen at a 2.7% rate. In and of itself this isn't necessarily sinister, but it is surely odd that we are being told we're on the edge of a deflationary cliff, when actual prices are rising at such a rate, and even when adjusted prices are rising at a rate higher than Bernanke's "comfort zone"!

For those who are baffled, you must realize that Bernanke's "comfort zone" of 1%-2% inflation refers not to the actual CPI, nor to the seasonally adjusted CPI, but to the "core" seasonally adjusted CPI, which has had those pesky and misleading items of food and energy taken out.

So don't worry, inflation is well under control. Your government is in charge and is taking care of you.

Glenn Beck does a surprisingly good job explaining all the shenanigans involving Goldman Sachs the last year. (HT2 Wenzel, who was on to Goldman a long time ago.)

I'm glad to see that this stuff is finally going mainstream. Of course, it's a bit like the Jedi Council finally realizing Palpatine is the Sith lord, after he's declared himself emperor and has an army of clones under his command. But hey, maybe the Americans will come out of this three movies from now.

Hi my name's Bob and I'm a recovering materialist. I'd like to thank my sponsor Gene, who talked me down from the ledge a few years ago...

Over at Crash Landing, my frequent critic Tokyo Tom decided to throw caution to the winds and went head to head(s?) against Gene Callahan and me on materialism. Specifically, Tom labors under the belief that something doesn't "really" exist unless it's physical, or at the very least corresponds to something physical. Now you have to overlook Gene's impatience, but in my book we whupped Tom good. It wasn't even close.

However, I sympathize with Tom because several years ago I thought the exact same thing he did. Rather than write a huge essay here, let me just give some bullet points. What I'm trying to get you to see is that it is a completely baseless bias to reserve "objective existence" only for items of the physical universe. So here goes:

* Does Sherlock Holmes exist? Where is he then? Can you point to him? (And don't point to a book talking about him; that's not Sherlock Holmes himself, that's a book describing him.)

* OK so maybe he exists in our thoughts, and thoughts are "really" just a part of our brains. But why do we say that? Why aren't our brains just "really" a part of our thoughts? We know brains exist, and we know minds exist, and for some reason we attribute more objective reality-ness to the former. Why?

* This is the deep part. We know that our subjective experiences are real. We only hold a theory that there is a physical world. It is logically possible that we are in the matrix, that this is all a dream, that we are being deceived by an evil demon, etc. But as Descartes famously argued, we can't be mistaken about our own consciousness.

* Now here's an argument Gene used on me back in the day, which at the time I dismissed as flippant. But now I realize, I had to just blow it off, because it was crushing. Daniel Dennett convinced me at the time that consciousness was a "user illusion." During evolution, it became advantageous for our ancestors to learn to "talk to themselves," and so our bodies now create the illusion of consciousness. But Gene asked a simple question, "Whom are they fooling?" (Actually I bet Gene's question was less grammatical.) You can't have a "user illusion" if there really is no user!

* Is 2+2=4 an objective, true statement? Is it physical? Can you point to it? Sure, you can point to two balls, and then another two balls, and then say that all four of them are, well, four balls. But that's not the same thing as grasping the truth of the equation, and in fact, it's entirely possible that one of the balls will disappear while you're counting (maybe it's a ball of ice on a stove), or will multiply while you're counting (maybe it's a ball of Tribble fur). So when you try to "demonstrate" 2+2=4 with physical objects, it might not work. But you rule out such counterexamples, because you know a priori--without having to look at the physical universe--what the equation means. So all of mathematics seems like a pretty important thing that exists and yet is not physical.

* OK let's assume that all of reality consists entirely of atoms (or quarks or whatever). We're watching them bounce around, obeying the laws of physics. Whoa, say what? What the heck is a law of physics? Where is it? Can you point to it, weigh it, see how much bathwater it displaces? No, it's just a pattern governing the motions of the "real" stuff. But is the law itself real?

* This last point is at once incredibly obvious and yet unbelievably profound. (That's how I roll on Free Advice.) You can control matter with your mind. (!!) In fact, right now I am making the molecules in my "fingers" (just an arbitrary label we give to these group of cells) move in very specific ways, in order to influence the electric charges in my "laptop" (another label for molecular configurations). I know scientists can peer really hard at the action, and tell me that it seems to be completely due to the laws of physics with no ghostly interference from the spirit world, but I tell ya, I can really control my fingers with my mind. We can sit here all day, and my predictive powers over the motions of the molecules in my fingers will be uncanny. So by the positivist's own criterion, it seems as if there is more to existence than mere matter in motion.

In an earlier post, I remarked on Brad DeLong's failure to reflect on the (reported) fact that China has booming economic growth even as its consumer prices are falling. Instead of dealing with that problem (since it is rather inconvenient for those warning about a deflationary trap), DeLong simply titled his post, "China's Larger Stimulus Program Appears to Be Working."

At first, I thought DeLong's title meant, "China's stimulus program is bigger than the US stimulus program, and that's why its economy is booming." As we'll see below, that theory doesn't work, because the US deficit is much bigger (even as a share of the economy) than China's. Another interpretation is that DeLong simply meant, "Now that the Chinese have bumped up their spending, their economy is doing better." If that's what he means, OK, but then it's still odd that with such a punitive (by Keynesian rhetorical standards) deficit, they are having a booming economy.

I didn't research it too much, but this Reuters story (from back in February) says that the Chinese government's budget deficit was projected to be about 3% of GDP in 2009.

For comparison, the US budget deficit in FY2009 is projected to be more than 13% of GDP. And for what it's worth, the US budget deficit in FY1933--this was when the stupid Hoover foolishly tried to balance the budget, much to the chagrin of Krugman--was 4.5% of GDP. So I'm not seeing how the Chinese right now are engaging in more aggressive Keynesianism than Obama & Friends; they're not even pumping up Aggregate Demand as much as Hoover did right at the time when Krugman scolded him for dooming the economy.

(And note that DeLong can't say, "Sure China's overall budget deficit is lower, but their stimulus package is bigger." Because we all know the object of the spending is irrelevant as far as Aggregate Demand goes. That's why Keynes said burying bottles of money would work, and remember when President Obama said, in reference to his Republican critics complaining about spending, "Whaddya think a stimulus is?!")

Explain please, Prof. DeLong.

I told Jeff Tucker (editor of Mises.org) that I would lay off Krugman for a while, since I don't want the Austrians to be the Party of No. But I didn't make any promises about Free Advice. Today Krugman has three contiguous blog posts that really set me off.

In this one Krugman says "Matthew Yglesias marvels at the extent to which stagflation in the 1970s — which was bad, but not remotely as bad as the Depression — was used to sell the idea Keynes bad, free markets good." That's right Prof. Krugman. The old-school Keynesian model said that you can't have rising prices with excess capacity; you said it yourself earlier this year. (Update: Krugman actually didn't mention excess capacity in this piece saying we have no inflation risk right now.) So stagflation is impossible, according to classic Keynesianism. Thus the observed stagflation of the 1970s blew up the theory. QED. (I'm sure Krugman would give some story that it wasn't increased Aggregate Demand, but rather falling Aggregate Supply, causing the inflation. But then why is he blaming monetary policy in the latest post?) There was no liquidity trap in the 1970s; interest rates weren't zero. So again, how does a Keynesian explain zooming prices amidst excess capacity?

Now on to post #2, which really got me going. Krugman takes a pompous swipe at Bryan Caplan--hey, that's my job! Caplan is such a dumb economist, he actually thought raising the price of something would reduce the quantity demanded. Naturally this earned Caplan an "Um" from the laureate. And for good measure, at the end of the post Krugman said, "What’s striking here is the cynicism. Feldstein, in particular, is surely a good enough economist to know better. But he and Caplan and others are prepared to grab any argument they can to block progressive reform." So not only is Caplan an idiot, but he's such a bad economist that Krugman doesn't really expect anything better from him; hating sick people is par for the course for such a lightweight.

The funny thing is, if you click through and read the post, part of Krugman's (echoing Kevin Drum) complaint is that Capan and Feldstein are counting the negative impacts of the health care "reform" and Waxman-Markey bill, when those plans won't kick in until after the recession. That's what makes Caplan and Feldstein such liars (and/or morons); they are saying "at a time like this" we can't raise labor costs. But at the end of April, Krugman had no problem saying the climate bill would help pull us out of the recession (because it would force businesses to invest on carbon-free techniques). So I guess businesses are forward-looking when it comes to capital costs, but not to labor costs. Presumably Feldstein (the good economist) learned that at his school, but Bryan and I missed that subtlety.

Finally, in this post Krugman says that the AMA has "played a consistently nefarious role" in health care reform. He notes that the AMA has endorsed the House plan, and then proceeds to rip the WSJ. So, does that mean the House health plan is nefarious? I don't think that's what Krugman is trying to say. But if it's not nefarious, then the AMA's endorsement of it means they aren't nefarious anymore. So why then is their earlier (nefarious) history relevant? (Update #2: Upon further review, maybe Krugman is just being goofy in this post. He did rip the WSJ, but now I don't think that was the main point.)

Look at this:

A trivial but telling example

Example of what? Of the absurdity of the US health care system.

Today’s mail brought a letter from Princeton: all faculty members must supply copies of their marriage licenses and of their 2008 tax forms if they want to have their spouses continue to receive health benefits. I don’t know exactly what that’s about — are there a significant number of my colleagues just pretending to be married?

We’ve checked — we don’t know where our marriage certificate is. We’ve already sent to California for a copy — but given the state of that state, God knows when or whether it will actually be delivered.

I assume the university has some good reason for doing this; but from a social point of view it’s just bizarre.

Now he doesn't say it in this particular post, but obviously Krugman is telling us our health care system is screwed up, and so the government needs to fix it.

So, does Krugman seriously believe that stupid pointless form-filling-out is going to go down when the government gets more involved in health care?

And let's look at the specific reason this is such a chafe for him. The government record keepers in the most "progressive" state in the country can't be bothered to send him the form he needs.

Far from justifying bigger government in health care, Krugman's anecdote--to the extent that it has any relevance--shows the opposite.

Tom Woods defends his honor against what was apparently a hit piece in Liberty magazine. Bruce Ramsey was reviewing Woods' book Meltdown, as well as a book by two other authors, and wrote: "You immerse yourself in the facts, see what the connections are, and let the story itself tell you what the explanation is. This is what Muolo and Padilla try to do. It is what many libertarians ought to learn how to do." Ramsey's point was that Woods--an ideological libertarian--came on the scene already knowing "the government did it" and just found the facts that suited his preconceptions.

Tom does a good job rebutting that charge, as you can see if you click the link. Part of the response involves a point that we learned from Mises: you can't look at history and let the facts speak for themselves. (As I said in an earlier article, if you try that, your biases will end up doing the talking.) The very act of choosing the facts to inspect is guided by your theories of the subject in question. To give a silly but perfect example: If we want to explain the housing boom, why not pore over NASA records regarding Neptune's orbit from 2002-2006? Those are facts of that period. I sure hope you don't walk into this project already "knowing" that Neptune had nothing to do with it, crank!

Anyway, on Brad DeLong's blog today I spotted a good example of this. He links to this FT article on China's economic growth, and Brad excerpts the following:

China’s economy accelerated significantly in the second quarter, with gross domestic product expanding by 7.9 per cent, ahead of analysts’ consensus estimates. Li Xiaochao, a spokesman for the National Bureau of Statistics, said the economy “had stabilised with increasing positive changes”, as the new data were announced on Thursday. The surge in growth was driven by the government’s aggressively loose fiscal and monetary policies, introduced late last year, with most of the funding coming from record lending by state banks.

The economy grew by 6.1 per cent in the first quarter, leading many China economists to believe that the government would not be able to meet its year-long growth target of 8 per cent. But the government’s pump-priming has turned the economy around, prompting rapid revisions by many investment bank economists, and the World Bank, to upgrade China’s outlook. Mr Li said that fixed asset investment rose strongly, up 33.5 per cent in the first half of the year compared to the same period in 2008.

Inflation, the Chinese government’s biggest policy headache until the middle of last year, remained under control, with the consumer price index falling by 1.1 per cent in the first half of the year and 1.7 per cent in June alone. Many local economists believe that the central government will not begin to rein in the stimulus programme until inflation begins to pick up, or at least turns positive...

Now just look at that last paragraph again. Doesn't that strike you as a bit odd? I thought the very very worst thing in the world, was to get caught in a deflationary spiral. The Chinese CPI reportedly fell 1.7 percent in June alone, and it's down 1.1 percent over the first two quarters of 2009. Haven't we had it beaten into our heads that Asians and deflation don't mix? And yet, real GDP reportedly grew at a 7.9% rate in the 2nd quarter. (Note that I keep saying "reportedly" because I have no idea how much credence to give these numbers. I don't trust the BLS figures for the US, so I am extremely skeptical about what nominally communist ministries tell us.)

So does DeLong come up with some convoluted story as to why deflation isn't such a big deal after all? Nope, he ignores that part of the story completely. He offers no commentary except the headline: "China's Larger Stimulus Program Appears to Be Working"

Now kids, I realize some of you may think I've gone off the deep end lately. But let's suppose for the sake of argument that we really are getting close to some major financial action, and that the elite need to keep everybody distracted RIGHT NOW. So you've got the Michael Jackson stuff, which--come on--is talking up a ridiculous amount of coverage.

And oh yeah, for a few days now CNBC has been pushing pornography. (It's both the big ads and the "news" stories.) Doesn't that seem a bit odd?

And the beat goes on. Two days after having a bunch of fair weather friends tell me, "Normally I love your stuff Bob, but Mish is right--we can't have inflation until the deleveraging is complete," the media tells us "Inflation Remains Tame" even though prices went up 0.7% from May to June. (Since when is an 8.7% annualized inflation rate "tame"??) Of course, the real number was 0.9%, and they seasonally adjusted away 20 bps. A few observations:

* Now the grace period is over. Every single month this year, the BLS has reported a lower inflation number than the actual increase in the CPI. Now that in and of itself isn't sinister, so long as they now overreport the numbers from July through December. (That's the whole rationale of seasonal adjustment, that prices tend to rise in the first half of the year, and so the BLS spreads it around more evenly among the months so as not to give a misleading impression in the early months when prices shoot up.) But since the desire is to keep inflation expectations low--among other things, it allows Bernanke to continue with his insane policies--I predict that they won't bump up the actual numbers in a symmetrical fashion in the coming months. Rather, they will revise the adjustments from the first half of this year, saying, "Oh, we actually did have real inflation back in the first two quarters. So now we'll book the price rises to those previous months, meaning that the price rise of 1.2 percent in September is real; we don't need to bump it up to a seasonally adjusted 1.6 percent hike."

* For those who don't know how to do exponentiation, the actual 0.9% price hike from May to June corresponds to an annualized price inflation rate of 11.4%. I'm not sure how that's possible, because everybody from Paul Krugman to the Austrians who email me, assures me you can't have inflation when there's "excess capacity" in the system. Why, just this morning even our beloved Robert Wenzel wrote in a post that hyperinflation and depression were on opposite ends of a spectrum. (I think it was a brief lapse for the great Wenzel; earlier he has been good by pointing out that Zimbabwe shows you can get big unemployment and big inflation at the same time.)

* Of course, you can't cherry pick a single month. Rather than looking at just what happened from May to June, let's go from Dec 08--when prices bottomed out--to June 09. That is half a year, kids, so surely that's a decent length of time for the trends to assert themselves. This is no mere blip. And during this six-month interval, when "right wingers" like Mankiw and left wingers like Krugman are telling us we need to fear a deflationary black hole, the actual, unadjusted CPI rose 2.6%, translating into an annualized price inflation rate of 5.3%. Can someone remind me what Bernanke's "comfort zone" is on inflation? I'm pretty sure 5.3% inflation is way way above it. At what point is he going to start sucking reserves out?

* For those who like pictures, try this:



So what's my explanation of the above? Simple. Because of the panic that began in September 2008, everybody wanted to hold more cash. Bernanke accommodated them by expanding M1 at double digit rates. However, the demand for cash outstripped even this huge growth in supply, and prices had to fall a few points to restore equilibrium. But this process ended back in December. Since then, we are back on the normal inflationary path. The kicker is, banks have an obscene amount of excess reserves. Once people besides me (and a few others who "don't get deleveraging") realize that our future portends INflation, not deflation, banks are going to get those reserves into something that yields more than 0.25% (or whatever rate Big Ben is paying them). And then you're going to wish you had more gold and silver coins under your bed.

* Last point: In fairness, the humongous 0.9% jump in prices last month was not across the board; it was focused in energy and a few other sectors. You can see the breakdown here. So someone pushing the Mishian approach could wriggle out of it, I suppose, and say that this is just due to blips in oil, and isn't representative of "the trend." Yet that picture above sure looks like a trend to me.

While it's fun, geeky, and necessary to argue about credit vs. money, I think we should also occasionally take a big step back and look at the broad themes. In a recent post, I said that the best way to predict what was coming--and how to protect your household--was to imagine that you were in control of the world governments and central banks, and had no conscience. I challenged Robert Wenzel to throw us a bone, but apparently if you want something done...

One disclaimer before I get going. I am not saying the following are my official predictions, and of course a lot of what I do below is post-dicting (not predicting). Furthermore, I am aware that an insane person has quite rational beliefs and theories; it's just that he sees spurious patterns everywhere. (That's what really happened to John Nash, if you read the book and don't trust Ron Howard's entertaining but absurd interpretation.) But even if the below is a little off in some of the specifics, it is the type of analysis of which we need a lot more. If the below is right, if only in spirit, then it's pointless for us to ponder what the "right" Fed move is, vis-a-vis the payment of interest on reserves. Bernanke isn't implementing what he thinks is best for the US economy, and so that academic question is as relevant as arguing about whether the Fed should allow casual Fridays at its offices.

THE BIG PICTURE
===============

If I were extremely rich and powerful, and had absolutely no conscience, this is what I might do:

* I'd have a very popular and trusted Fed chair all of a sudden prime a massive bubble in the world economy. Then, just as it was about to crash, I'd make him take the fall and install a new chair.

* The qualities I would seek in the new Fed chair would be threefold. First, he'd have to be a complete tool. Second, he'd have to be a very competent economist. And third, he'd have to be an expert on how to turn a huge financial crash into a worldwide economic depression.

* Now the fun stuff. When everyone started flipping out, I'd use the crisis to bail out my associates at the big banks and investment firms who had had to go along with my reckless plan. Obviously I would zap anybody who hadn't been playing ball with me, and give trillions to those who had the foresight to tell I was the coach of the winning team.

* For some time I would have known that the US government was getting too big for its britches. As its global supremacy grew, there would be a greater and greater chance that the American presidents and senators I installed might decide they didn't like my plan after all (even though that was the deal when I hired them). So I would gradually shift my power base elsewhere, and I would leave the US government in such a mess that it would take decades to recover.

* In order to contain the US government, I'd get its military bogged down in foreign adventures. I'd do what I could to spur dictators (whom I couldn't directly control) into developing nuclear weapons. (My plan there would be simple: I'd invade those dictators who disarmed like I demanded, and I'd give money to those dictators who repeatedly flouted my ostensible demands and openly developed an offensive nuclear program.)

* On the economic front, I'd cripple the US economy relative to its major rivals by slapping on a huge new system of energy regulation. Once I had let that particular genie out of the bottle, I wouldn't need to worry about economic growth from the US for decades.

* Now just before jumping ship, I would crank up the printing presses and have the federal government incur unprecedented new debt. It would be one last parasitic HURRAH before my colleagues and I plunged the US government into truly Banana Republic status, and destroyed the dollar. In order to cover our tracks, I'd make sure that the crash originated from foreign speculators who "attacked" the dollar. I might even plant stories suggesting that Bernie Madoff (whose Ponzi scheme we had nurtured for years, knowing it would be a great pretext for further power grabs in the financial markets) had orchestrated the speculative attack from prison.

* In order to make the dollar truly crash, I'd have my tool at the Fed pump in an absurd amount of new reserves, and then have him keep them bottled up in the banks by paying interest. I'd dangle that sword in front of the markets for several months, until they became desensitized to it. Yet deep down all the traders would know, in the back of their minds, that if they all began to anticipate a fall in the dollar, then it would immediately become a self-fulfilling prophecy. As the yields on dollar-denominated bonds suddenly went through the roof because of the speculative attack, the banks would rush to exchange their bottled reserves for Treasurys. The money supply held by the public would begin expanding at double-digit weekly rates, at the same time that foreign central banks would dump their dollar holdings.

* Of course, there would be resistance to my plans. Most obvious, the other major financial players--US commercial and foreign central banks--would normally be unwilling to go along with my suggested course of action, since they would be devastated by the dollar's collapse. In order to get them to follow my lead, and do what I wanted at the precise time I wanted, I would have to divide the spoils with them. I would give government guarantees to all the major US domestic players, to make sure they were whole when the smoke cleared, and that any of their losses were transferred to the US taxpayers. I'd also give plenty of advance notice to the central bankers, to give them time to expand their holdings of gold and hence offset their losses from the dollar crash. Also, I would remind China and Russia that their economies would benefit tremendously (at least in a relative sense) from the new regulations being slapped on to the American economy.

* And at last, we come to the remaining obstacle to my plans: the charming American public. Even though they are ultimately the only force on earth that could physically stop me, I've known for years how to keep them in line. Through just a few companies, my associates and I dominate all of the major media, and we can keep them distracted about celebrity funerals and racist judges while the final elements of my plan are implemented.

* Just to make sure that I kept the American public in line, I would have a black man in the White House when the crash occurred. This would keep the blacks from rioting, for their pastors and grandmothers would tell them they couldn't let the first such administration go down in history as a failure. And if the president himself started to protest to me, saying he hadn't agreed to all of this? I would gently remind him what happened to the last president who had gotten so popular that he thought he could buck the system. I'd also point out that his own second-in-command was just the kind of amoral power seeker who would have no qualms becoming president through any means possible.

* Of course, at some point I might really have to drop the hammer on the dispersed and unorganized band of rebels who would catch on to my plans, and start raising a ruckus. Fortunately by then I would have perfected the Predator drones and my worldwide system of secret prisons.

THE END
===============

* Scott Sumner calls for the Fed to create "the mother of all stock bubbles, permanently." Sumner can be provocative, but this time he's gone too far.

* In a spooky post, Roger Koppl explains that we are all fascists now.

* I don't have time to read this right now, but Bob Roddis sends this very interesting link to Antony Sutton's Wall Street and FDR. If you don't believe that the 1930s were a series of honest mistakes by policymakers, then I think you'll like Sutton.

* MercedesRules sent me this article (picture below) of Russian President Medvedev showing what could very well be the new global money. The gold bugs point out that he's holding what looks to be about a half-ounce of gold, whereas it is "officially" worth $3,900. As I said to MercedesRules, "Do they know something?"

Scott Sumner is a tragic hero. Check out his awesome FAQ (which he confusingly calls "FAQs"); so much brilliance and yet it goes awry because of his obsession with NGDP (nominal gross domestic product) growth.

Let me give you a good example. In a recent (and characteristically awesome) post, Scott goes through and documents just how nuts some economists were before Milton Friedman learned us all that inflation is always and everywhere a monetary phenomenon. Seriously, check out this insane quote from Joan Robinson:

“An increase in the quantity of money no doubt has a tendency to raise prices, for it leads to a reduction in the rate of interest, which stimulates investment and discourages saving, and so leads to an increase in activity. But there is no evidence whatever that events in Germany followed this sequence.”--Joan Robinson, circa 1938

Now this is important for our story, look at Scott's (perfectly correct) reaction to this insanity:

So easy money couldn’t possibly have caused the German hyperinflation because German interest rates were not very low. And everyone knows that easy money is associated with low interest rates. I won’t insult the intelligence of my readers by explaining what is wrong with her reasoning.

But perhaps we shouldn’t be too hard on poor Joan Robinson. Unlike some of the more wimpy Keynesians, she at least had the courage of her convictions. If interest rates are the right indicator of monetary policy; then doggone it money must have been really tight in Germany during the early 1920s. Let’s not be distracted by a few wheelbarrows full of cash.

Great stuff, Scott, but of course it seals your doom. Note, everyone, that Scott did not say, "Let's not be distracted by million-percent nominal GDP growth." No, in order to slap Robinson upside the head and prove to her that the German central bank was engaging in very loose policy, he pointed to the (possibly apocryphal) wheelbarrows of cash.

Later on in the post, Scott says:

This morning I noticed that I was linked to by a blogger way over in England. It seems he wanted to find an economist who was crazy enough to think that Fed policy has recently been tight, despite the low interest rates, and I was the only one he could think of. You’ll have to admit that it would be odd to cite an authority as obscure as me, if there were more famous economists making the same point.

Yes Scott, you are indeed crazy for thinking it was tight monetary policy in the fall of 2008 (!!) that caused all of our recent problems.

But perhaps we shouldn’t be too hard on poor Scott Sumner. Unlike some of the more wimpy Friedmanites, he at least has the courage of his convictions. If nominal GDP growth is the right indicator of monetary policy, then doggone it money must have been really tight in America the last 10 months. Let’s not be distracted by two FRED graphs.

The below picture is from Monday's WSJ article about unions and Wal-Mart:



So, should we be concerned that the jacked officer's uniform appears to have "SMASH" under the badge?!

I flew back from FreedomFest Sunday, but believe it or not I actually have to work to earn money, and so I haven't had time to blog about the festivities till now. Some remarks:

* Tom Woods and Gene Epstein absolutely destroyed John Fund and Warren Coats regarding their Friday debate, "Fed Up With the Fed: Should We Abolish?" Tom gave a good opening, and at the end the crowd erupted into applause. Then Coats got up to give the opening speech for the "No" side, and he started out by saying, "Yes, the Federal Reserve has made mistakes. Alan Greenspan held rates too low for too long. After the crisis hit, Ben Bernanke committed the dangerous precendent of buying mortgage-backed securities and hence politicizing the markets..." and he just keeps listing all the way the Fed stinks. And then he ran out of time and had to sit down!! (I'm not kidding.) John Fund opened with a line of Shakespeare and did some damage control, such that I imagine the people in the crowd who always longed to sit at the cool table in high school may have been swayed. But all in all, Tom and Gene just owned their opponents. (Of course, it was a lopsided event; the crowd was packed with Ron Paul fans.)

* Earlier that day, Rob Bradley (full disclosure: the guy who recruited me for IER) was in a debate (on "Conscious Capitalism) against John Mackey, founder of Whole Foods. It was interesting; I was watching the founder of the organization that gives me a bunch of money, debate the founder of an organization that takes a bunch of my money. But it was a big lovefest; all four people in the debate agreed 99% with each other, and I think they even used that number themselves. One very interesting disclosure was that Mackey said environmentalism had nothing intrinsically to do with his management philosophy, and that if someone were a skeptic on climate change then that was fine. I'm going to bring that up the next time the Whole Foods clerk asks me to start using their "green" bag.

* You won't believe this, but see for yourself on the left side of page 11 [.pdf] of the conference schedule. On Saturday 10:30 am, I was slotted to speak on my book, and at the same time in the main arena, Mr. Schiff from Euro Pacific Capital was speaking. And you know what? I managed to pack out my room, with a good 35 people or so. I'm serious. (You need to follow the link to get the joke.)

* I caught most of the talk by Thomas Krannawitter, who is Tom DiLorenzo's arch nemesis on the topic of Abraham Lincoln. TK was hired by Hillsdale during my last year (I think) teaching there, and I immediately liked him because, despite the PhD, he is a normal guy. During his talk he said something like, "So where is this alleged right of state secession coming from? As Lincoln pointed out, if a state could secede from the Union, then what about a county from the state? A neighborhood from the county? Indeed, followed to its logical conclusion, a secessionist would need to be an anarchist." Later TK and I were both near each other signing books. I asked Tom something like, "Suppose you were confronted with an anarchist who didn't like Lincoln. Would you have anything to say to him, besides your view that anarchy wouldn't work?" And I think Tom basically said, "Yeah, there's no logical contradiction there, I just think he would have a hard time proving that it would be a workable society without the rule of law." I'm pretty sure Tom didn't know my background [.pdf] on this, and I'm also pretty sure he didn't know who David Friedman was, sitting two spots to my left. Tom could have held his own debating us, but I'm just saying it was ironic because I don't think he realized he was within ten feet of the Hall & Oates of anarchist theory. (Calm down, I'm Oates in that analogy.)

* Regarding the above point, no I didn't get to talk to David Friedman. In between us was Quee Nelson, who was kind enough to give me a free copy of her book criticizing postmodern philosophy. I only read about 40 pages on the plane, but it was really good. If you are a secular rationalist and yet think freight trains really exist, I highly recommend the book.

OK back to the coal mines... (Speaking of which, after Waxman-Markey saves the planet from destruction, will wise alecks say, "OK back to the solar panel factory"?)

The head of NASA's Goddard program Institute for Space Studies, James Hansen, was one of the first climate scientists to raise the alarm over global warming. He has recently written [.pdf] that unless we reduce atmospheric concentrations of CO2 to 350 ppm (they're currently at 387 ppm), we may be handing our descendants a climate system with a runaway greenhouse effect. So this guy is no softie on climate change action.

Yet I have to respect him, because Hansen has come out strongly against Waxman-Markey, or in his words, "the counterfeit climate bill known as Waxman-Markey." To clarify, I'm not endorsing Hansen's critique; the reasons he hates it are much different from my own objections. But I respect him because there is obviously a lot of pressure on environmentalists to go along with W-M rather than give points to the Republican "deniers." So unless there is something even more devious going on behind the scenes, it looks like Hansen is actually taking his own rhetoric seriously. In other words, if the world really is going to end without drastic and immediate cuts in emissions, then you can't support Waxman-Markey. Here's my favorite part of Hansen's article:

Some leaders of big environmental organizations have said I'm naïve to posit an alternative to cap-and-trade, and have suggested I stick to climate modeling. Let's pass a bill, any bill, now and improve it later, they say. The real naïveté is their belief that they, and not the fossil-fuel interests, are driving the legislative process.

In case you're wondering whom Hansen has in mind, here's a hint. Ahh it's amusing to watch the fireworks. Joe Romm is actually driven to defend speculators!

So I argue in today's Mises Daily:

Whatever happens to the absolute levels of various prices, certainly the relative prices of hard commodities and staples will rise, compared to the prices of mortgage-backed securities and commercial paper issued by a coal-based utility company. Even if the "debt deflation" scenario is generally right, the absolute effect could be swamped by the relative effects, meaning that retirees on fixed dollar incomes could still get wiped out when their standard monthly expenses rise. The deflationists like Mish might be right, but they need to make a much stronger case.

* Here is my talk [.mp3] to Christ Presbyterian Church (in New Braunfels, TX). The topic was the Great Depression, then and now. I think this was the biggest crowd I have given a talk to, except for my high school graduation. There were more than 250 people at this thing, I believe. Also, hands down this was the best reaction I have received. People weren't just saying, "Hey I liked your talk," they were saying things like, "You are a great teacher. I have never heard economics explained like that before." So anyway, if you haven't yet listened to one of these things, this particular example is probably the best sample so far.

* Here is the link to listen to Scott Horton's recent interview with Daniel Ellsberg, the guy who leaked the Pentagon Papers. (Ellsberg is also an accomplished game theorist.) Even though I read Ellsberg's book Secrets, I had forgotten just how much the government lied about the Gulf of Tonkin and other matters regarding Vietnam. Also, if you do decide to follow the link and listen, pay attention near the end of the interview. I swear Ellsberg comes right up to saying, "The Vietnam hawks took out JFK," but he stops just short. See if you agree.

In a recent post on John Calvin, Tyler Cowen wrote something that caught my eye: "Here is one reason why there is "evil" in the world..."

If you go read it in context, Tyler isn't (I don't believe) putting "evil" in quotation marks to mean "evil as Calvin defines the term." No, I think Tyler is trying to be very non-pushy, and doesn't want to impose his own views on his readers, who after all may not share Tyler's theory of morality.

I think this is a very dangerous habit. The reason it jumped out at me is that in grad school I once wrote in a LewRockwell.com article something like, "Even though I agree the world would be 'better' if heroin had never been invented, even so it doesn't follow that armed men from the State should go around punishing heroin users."

And I know for me (at the time in my super rationalistic worldview), the reason I put "better" in quotation marks was that I was a scientific guy and knew the is/ought distinction. I believed it was just a convention of language to say some state of the world was "better" than another, let alone to label a particular action as "good."

This is dangerous stuff. I don't recall Tyler ever putting "social welfare function" in quotation marks, to denote the fact that some non-economist readers might object to its very existence, and yet he seemed to deny this commonsensical existence to evil.

One of my favorite lines from The Usual Suspects was, "The greatest trick the devil ever pulled, was convincing the world that he didn't exist."

(Note to readers: It was an accident that the post on salvation came out on a Saturday. I clicked on the Post Options and changed the time to early am, and I thought I had changed the date to Sunday. But I must have forgotten to adjust the date. So sorry for any atheist readers whose eyes were seared with the J-word.)

OK that's not quite what he said, but look: In this post Krugman argues that, heh heh, if you naively look at the data, heh heh, it seems that the Fed cutting interest rates actually hurts the economy. And so the Chicago School monetarists are being hypocritical when they condemn fiscal stimulus, because their own arguments would "prove" that monetary stimulus doesn't work either.

That of course is the main contribution of my Depression book, and I crystallized the counterintuitive point in this article, "Banks Should Raise Prices In a Recession." So did Krugman buy my book, or just read the Mises Daily article?

I was raised a Catholic, and now call myself a born-again Christian. The biggest doctrinal change is that as a Catholic, I thought that the way you "get into heaven" was by trying to live a good life, and then if God thought you made the final cut, you got onto His team. But you really couldn't know beforehand whether or not you made it, since after all only God would know such things.

Well Protestants don't believe that. (BTW I am by no means an expert on what various sects believe, so please correct me in the comments if I misspeak.) They think that the way you achieve eternal life is to accept Jesus as your personal Lord and savior. And if a Catholic says, "How do you know that?" they say, "Because I read the Bible and it's plain as day. You should try it sometime."

(BTW I am trying to be funny here. I am not ripping Catholics; in general they are much more scholarly I think than Protestants. However, it is undeniably true that in my experience--and I went to Catholic schools until college--I barely ever held a Bible in my hands. I was stunned when the [born-again] pastor who married us, showed me in the Bible that you could know what you needed to do to achieve salvation. No when had ever stressed those passages to me before, even though I had seen "John 3:16" at baseball games etc.)

Now what's interesting is that even though the Protestant can come up with numerous, apparently airtight declarations in the New Testament about believing in Jesus as the sole thing you need to do to get into heaven, nonetheless the Catholics (if they wanted) could come right back with plenty of other declarations stressing the importance of "works." Thus the Catholic could with good reason retort, "You guys are nuts! You're telling me if a serial killer says 'I accept Jesus' that's it? Even if he keeps killing people?"

For a while I have thought the resolution of this conundrum is the realization that belief in Jesus is an action, it is a "work." In other words, it's not "merely" a belief; it is a conscious choice that you make in leading your life, when you invite Jesus into your heart, accept Him as your savior, and all the other ways a Protestant describes it.

What I (re)discovered while reading the Gideon Bible in sin city during Freedom Fest is that Jesus Himself seems to agree with my take on this. Check out John 6:28-29:

Then they said to Him, "What shall we do, that we may work the works of God?"

Jesus answered and said to them, "This is the work of God, that you believe in Him whom He sent."

(Also, I've noted this before, but I always think it's neat to see what John 6:66 says.)

I am trying to contain costs during my Vegas getaway, so I had toyed with the camel-esque strategy of loading up at 3pm at casino buffets to knock out two meals at once. (I actually don't think it's a good idea.) I texted Robert Wenzel, who said the Mirage buffet was good, and it was. It was pricier than I was imagining--something like $27--but I think I drank that much in Cokes.

Now I'm off to catch the tail-end of Peter Schiff, and then Tom Woods has a talk. When checking in, I saw two women wearing Ron Paul "EVOL" shirts and carrying a humongous "END THE FED" sign.

It's not surprising that Glenn Greenwald busted the NYT on its double-standard regarding the use of the word "torture." (Hint: Americans don't torture.) But if you're interested, click on the link and see just how red-handed the NYT gets caught. Here's Glenn:

It's not particularly unusual for a government to permit itself to do something that it prohibits others from doing. The U.S. is hardly the only country that does that. But when that country's media collectively abets that government effort by molding its language to reflect that exceptionalism, it elevates the propaganda to a much different level.

Then he got medieval on their hineys by quoting himself from a previous article:

Pointing to other governments and highlighting their oppressive behavior can be cathartic, fun and gratifying in a self-justifying sort of way. Ask Fred Hiatt; it's virtually all he ever does. But the first duty of the American media -- like the first duty of American citizens -- is to oppose oppressive behavior by our own government. That's not as fun or as easy, but it is far more important. Moreover, obsessively complaining about the rights-abridging behavior of other countries while ignoring the same behavior from our own government is worse than a mere failure of duty. It is propagandistic and deceitful, as it paints a misleading picture that it is other governments -- but not our own -- which engage in such conduct.

The thing is, I don't think it's actually as devious as GG portrays it to be. In a very real sense, it is much more unbearable to have strange foreigners doing awful things to you, than it would be to have kids who look like you, carrying them out.

In other words, when you read the description of what Iran interrogators would do to people, that really is a lot scarier than listening to descriptions of what the US did to its detainees. So it's easier to automatically call that "torture." Part of the whole nightmare of torture is not understanding and hence not being able to predict what your holders would do next to you. And so obviously NYT writers are going to classify it as "torture" without a moment's thought, when it's Iranians doing it.

* I am going to be in Las Vegas for FreedomFest for a few days, so drop me an email if you will be too.

* Doug French favorably reviews my new book.

* Vasko Kohlmayer favorably reviews my new book.

* Mercedes Rules asks me, in regard to the reports about Goldman Sachs' trading code getting stolen, "So, is Goldman publicly admitting they developed a computer program that can manipulate markets?" I had thought the same thing when the news broke. Yet another, "Is everyone else taking crazy pills?!" moment. (Here's the money quote: “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” [Assistant U.S. Attorney] Facciponti said, according to a recording of the hearing made public today.)

* In yet another post from Bizarro Land, Scott Sumner agrees with me that what the Fed is doing now under Bernanke, is exactly what they did in the early 1930s. So Scott and I are agreed that what they're doing right now, is the way to replicate the Great Depression. The reason I put Scott in Bizarro Land is that his conclusion from all this is that Bernanke should pump in even more dollars created by the stroke of the pen (or click of the mouse). I, on the other hand, think that the way to break the symmetry with the 1930s is for the Fed to stop "helping" the markets at all. Interest rates are prices and they really convey information about the state of the economy; you don't help investors by blindfolding them.

* Krugman is back, this time saying it is speculation driving up oil prices. I was amazed to agree with him back in 2008, when he said it was (fundamental) supply and demand, which is what I said too. The lack of a smoking gun that time was no build-up in oil inventories, whereas Krugman says crude inventories are building up now. Unfortunately he links to a site that requires you to buy a subscription. I'm not kidding, how much of a kickback does Krugman get for something like that? I bet that site got 10,000 hits the day the post first ran. In any event, now I have to go check the EIA website to see what we can see about oil inventories in 2009.

In my weakened state, I can't do full-blown blog analysis. I must opt for s list of links...

* "Lilburne" kicks a horse on its deathbed, but to good effect. There are some juicy Krugman (and Keynes) quotes in here, on the whole issue of "Did Paul Krugman actually suggest that Greenspan deliberately engineer a housing boom to save the economy?!"

* Gene Callahan takes on the anti-medieval canard that those dumb Christians believed the earth was flat. I've heard Gene (and others) explain this before, but Gene made a new point: "What’s really amazing is that this author [who believes the medieval Europeans lost the Greek knowledge that the earth was a sphere], if he had stopped to think about this for a moment, would have realized that the Copernican model of the solar system had to defeat… the Ptolemaic model, in which the earth was at the center of a series of concentric spheres."

* I don't get all this bank capitalization stuff. For example, Brad DeLong seems to be saying: (a) it won't reduce bank equity if they buy back some of their preferred shares, but (b) it WILL reduce bank equity if they buy back some outstanding warrants on their stock. Is that right?

* I do my part to rekindle the Fairfax/Auburn feuding, here and here. (For those who don't know, the Austro-libertarians at GMU often fight with the Austro-libertarians at the Mises Institute. Seriously, those guys are nuts! I can't believe their views on the socialist calculation debate! Insane.)

I am in bed all day--well, except for right now--because I'm pretty sick, and I'm trying to get over this runny nose/headache/fever/achiness before Freedom Fest (imagine the possibilities!).

So I thought maybe I was suffering from delirium, when I read Paul Krugman's recent blog post on the paradox of thrift. It is hands down the most classic example of someone not seeing (and dealing with) an obvious objection to his theory that I have ever seen. (In contrast, when he claims that the rising unemployment rate is proof that the "stimulus" wasn't big enough--rather than proof that the stimulus critics were right--I give him and DeLong a pass, because had things gone the other way, with unemployment rates falling amidst massive government spending on bridges and what-not, I wouldn't have squirmed at all. After all, the whole Austrian theory of what happened with the housing boom is that Greenspan short-circuited the cleansing process after the dot-com crash.)

Anyway, the first comment at Krugman's blog points out the nudity of the emperor, albeit the question is from a true believer who wants to see the fine garments and chides himself for his blindness. (Or maybe it's actually a free market guy, who worried that the NYT would veto his comment if he just came out and said, "Duh, Paul, you're missing the most obvious explanation of the data.")

P.S. One final treat in Krugman's post, apropos of the Wenzel/Murphy throwdown: Note that Krugman says matter-of-factly that savings=investment no matter what. The Keynesians actually don't analyze things the way Wenzel (and I guess Rothbard?) think they do, on this score. There's a distinction between ex ante and ex post, that might be behind the confusion. (I.e. if "planned savings" exceed "planned investment"--perhaps because of evil hoarding--then the Keynesian says national income falls until "actual savings" equal "actual investment.") But anyway, just be careful if you go around saying, "Austrians like Rothbard know that savings must equal investment, whereas Keynesians don't think so." That's not really accurate.

That was the headline on this BBC story, so I naturally clicked on the link. I was imagining a really really heavy beetle that smacked into the hull, knocking the guy who was doing his Leonardo DiCaprio impression into the icy sea. But that seemed absurd, so my second thought was that a motorist died while driving his Volkswagen off a bridge and into a cruise ship.

The real story is far more conventional.

* If you have never really gotten into the economics of climate change, and want an accessible introduction, here you go.

* If you have been laying awake at night, worrying that the depression of 1937-38 proves the success of Keynesianism, here you go. An excerpt:

In any event, Hoover's last fiscal year was FY 1933, which ran from July 1, 1932, to June 30, 1933. (Roosevelt was sworn in on March 4, 1933.) Unemployment in 1933 averaged 25 percent. But, as Romer told us in the block quotation above, the unemployment rate fell rapidly once Roosevelt took over and cranked up the spending.

Yet look at the relatively insignificant increase in deficits. In the rock-bottom FY 1933, the deficit was 4.5 percent of GDP. In the first three years of the New Deal — when Romer says the economy illustrated the success of (modest) Keynesianism — the deficit averaged 5.1 percent of GDP.

Isn't that a rather subtle result? Romer and the other Keynesians are claiming that the timid 4.5 percent deficit under Hoover, allowed the economy to sink into the worst Depression in US history, with monthly unemployment rates above 25 percent. Yet by bumping up the deficit's share of the economy by a mere 60 basis points, FDR was able to achieve the most spectacular turnaround in US history.

I recently became aware of the theory that the elites behind the scenes ultimately want to put microchips in all of us. When I first heard it, I laughed out loud because I thought it was so dumb.

It turns out we have nothing to fear; various states have banned forced microchipping of people. Here's a story (HT2LRC) about the latest attempt to do so in Pennsylvania:

HARRISBURG - Invasion of privacy is an issue that really gets under State Rep. Babette Josephs' skin.

That's why the Philadelphia Democrat introduced a bill, passed unanimously last week by the House, that would ban the forced implantation of computer chips in humans.

Conjuring Orwellian images, Josephs worries the identification devices - the size of a grain of rice - could lead to a real-life Big Brother nightmare.

"I'm doing, I think, what the legislature does too little of," she said. "This is a problem on the horizon, and I want to address it before it becomes a societal disgrace."

Though the technology hasn't debuted in Pennsylvania, VeriChip, a company in Florida, received federal Food and Drug Administration clearance in 2004 to market the implanted microchips, which were tested on 200 Alzheimer's patients.

Injected into the triceps, the chips have unique 16-digit codes and GPS capabilities that allow nursing homes to find wandering patients.

"I think it's really horrible that we want to chip them like barcoded packages of meat," said Kim Sultzbaugh, a research specialist who helped Josephs write the bill.

California, North Dakota, and Wisconsin have enacted laws similar to the ban Josephs is proposing.

Note that the ban is not as airtight and straightforward as one might have hoped:

Josephs said electronic ankle bracelets could keep track of someone in a less-invasive manner.

But for some "murderers, killers, and rapists," ankle bracelets won't do the trick, said State Rep. Dan Moul (R., Adams).

Moul amended Josephs' bill to allow chips to be implanted by court order. The bill also would allow the chips to be implanted in Guantanamo Bay detainees who end up in Pennsylvania.

"Terrorists could take that ankle bracelet off with a saw and strap it to a dog and let them run around," Moul said. "We need to know if these people are returning to the war to fight against America."

I see it clearly now. I don't know how long it will take, but at some point it will be routine for average Americans to have their newborns implanted with a microchip that allows government officials to track their movements and purchases. And then, when I say, "The conspiracy nutjobs were right!! Wake up people!!" the response will be, "Oh give me a break, this isn't due to a conspiracy. This is just typical government overkill. There are lots of legitimate reasons that consumers wanted these products. Occam's Razor, my friend. We don't need to assume Masons are behind this."

Over at MasterResource climate researcher Chip Knappenberger takes on Paul Krugman's op ed where he pulled an Ann Coulter and accused his enemies of treason. Here was my favorite part:

[CHIP:] Krugman completely misinterprets the science on Americans’ response to heat waves. He said:

[KRUGMAN:] Temperature increases on the scale predicted by the M.I.T. researchers and others would create huge disruptions in our lives and our economy. As a recent authoritative U.S. government report points out, by the end of this century New Hampshire may well have the climate of North Carolina today, Illinois may have the climate of East Texas, and across the country extreme, deadly heat waves — the kind that traditionally occur only once in a generation — may become annual or biannual events.

In other words, we’re facing a clear and present danger to our way of life, perhaps even to civilization itself. How can anyone justify failing to act?

[CHIP:] Well, how about this justification—the hottest places in the U.S. are the ones which experience the fewest number of deaths during heat waves. We have shown this on repeated occasions (in the scientific literature, see references below) in research that I have been involved with examining the relationship between excessive heat and human mortality. Not only did we show that the nations hottest (both in terms of temperature and humidity) cities, for example, Phoenix, Dallas, Houston, Tampa, Miami, have the lowest incidences of heat-related mortality in the country, but that in major cities all across the country, the population has grown less sensitive to heat waves even as urban temperatures have increased over the past four decades or so (Figure 1).
...
Clearly, what is happening is that as high temperatures become more commonplace, we better incorporate them into our daily lives—through better access to air-conditioning, community awareness programs, heat watch/warning programs, improved medical technologies, and just plain common sense. And, as has been shown in examples from Chicago (Palecki et al., 2001) and France (Fouillet et al., 2008), these adaptations can take place quickly. It is the rare and unexpected heat wave that kills people, not the common ones. So Krugman’s meant-to-scare example about “deadly heat waves” runs counter to the best science on the subject.

OK this will be my last post on this topic. Robert Wenzel struggles on, even though Stefan Karlsson has further demonstrated the untenability of Wenzel's position. Wenzel is spending 95% of his time trying to show that my arguments sound like the Keynesian position that Rothbard attacks in his treatise. I'm not going to get into that dispute. I don't think Rothbard would agree with what Wenzel is saying, but it would take too long to make my case.

I think that I have demonstrated the problems with Wenzel's approach. He has never really answered that challenge. But let me here take up his implicit (explicit?) claim that my view lines up with Keynes, whereas his (Wenzel's) view lines up with the Austrians.

First, look at Chapter XXV [.pdf] (p. 334) to see Hayek's views on income, saving, and investment in The Pure Theory of Capital. I can't give you a knockdown quote that settles the matter, since--after all--we're dealing with Hayek here. So you need to read five pages to get the context. But my point is, within the first few pages, it should be clear that Hayek thinks saving and investment are different things, and also that he defines saving as income minus consumption. (E.g. on page 337 he says, "The indirect method consists in comparing the increase or decrease with the supposed standard case where capital remains "constant", and thus arriving at the concepts of net saving (net income minus consumption) and net investment, and then placing these derived concepts in juxtaposition.")

Second, if you scroll near to the bottom of this link, you will see that Keynes in the General Theory actually "proves" that savings necessarily equal investment. Since Wenzel was so happy to find Rothbard saying the terms were basically interchangeable, and since Wenzel thought my own view in contrast was similar to the dreaded K-word, I thought this would be surprising. (I too was surprised when I first saw this, such that I bored my History of Economic Thought students to tears by going over it in class. But I had thought one of the big bugaboos in the GT was that investment would fall short of savings. Yet Keynes apparently says that is impossible.)

Third, I have saved the best for last. Here is Mises on the topic. Maybe we can all get along now, because Mises seems to unify us all. As I read the quote below, Mises is clearly saying that adding to your cash balances is a form of saving. However, Wenzel might say that Mises is also (apparently) claiming that it is also a form of investment.

If an individual employs a sum of money not for consumption but for the purchase of factors of production, saving is directly turned into capital accumulation. If the individual saver employs his additional savings for increasing his cash holding because this is in his eyes the most advantageous mode of using them, he brings about a tendency toward a fall in commodity prices and a rise in the monetary unit's purchasing power. If we assume that the supply of money in the market system does not change, this conduct on the part of the saver will not directly influence the accumulation of capital and its employment for an expansion of production.[18] The effect of our [p. 522] saver's saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding. The prices of capital goods do not rise to the height they would have attained in the absence of such hoarding. But the fact that more capital goods are available is not affected by the striving of a number of people to increase their cash holdings. If nobody employs the goods--the nonconsumption of which brought about the additional saving--for an expansion of his consumptive spending, they remain as an increment in the amount of capital goods available, whatever their prices may be. Tho two processes--increased cash holding of some people and increased capital accumulation--take place side by side.

I have to be brief because we're going to church in a bit. But I know at least some of you are following the tennis match between Robert Wenzel and me. We are arguing over whether we should call it "saving" if someone contributes extra cash to a piggy jar on the dresser. I say yes, Wenzel says no. (If you want to get up to speed, here is Wenzel's latest post, which then has a link allowing you to backtrack to the beginning of this debate.)

OK first of all, let me say I was impressed. Like Darth Vader when he says, "All too easy," I thought I blew up Wenzel with my last post. But then he jumped 30 foot out of my trap, leading me to now say, "Impressive." (And no I'm not claiming to be Wenzel's dad.) In particular, the distinction I made between "saving" and "investment" is one that Rothbard might not agree with, though a Hayekian surely would. So in the interest of brevity I withdraw my objection to Wenzel on that front.

Like I said, I need to be brief, so I'm not going to parse Wenzel's post, or go through the long Rothbard quote he listed. Rather I am going to reassert my view, and if you read Rothbard carefully I think you'll see that this is entirely consistent with what he's saying.

Someone gets $1000 in income. We can picture it as cash if we want, but the person could be paid in postage stamps or chickens. That might be part of our confusion here, that we think of someone as "starting out" with cash as that period's income flow, but it need not be.

OK, the person then has to decide how much of that $1000 to consume or to save. Let's say he decides to spend $800 on food, gas for his car, and buying a few DVDs (which feature movies for enjoyment, not training videos for his career). He has clearly consumed $800.

Now, I want to say that the entire $200 remaining is saving. The guy might spend $150 on a CD from his bank, and then put the other $50 underneath his mattress. I claim that these are both forms of saving, even though one "goes to work pushing up capital goods prices when the bank lends it out" [Wenzel's description] and the other "merely" goes to increasing the guy's cash balances.

I'm hoping Wenzel will now say, "Oh OK, I buy that, and so would Rothbard. My whole point was just that the saving/consumption decision happens first, and then it's just a matter of allocation among different ways of holding wealth. We're all good."

Last point: I'm just trying to show the absurdity of (what I take to be) Wenzel's view so far. Suppose I put $100 a week into my jar, and then after 10 weeks I go to Vegas and blow the $1000 on the tables. I come home and say, "Well, I saved up for 10 weeks to enjoy one hour of amazing consumption. I postponed all of the potential consumption I could have had, in order to consume it all in one fell swoop at the tables. Eight weeks ago, I was trading away $100 in potential present goods, for what at that time was an additional $100 in future goods--i.e. enjoyment at Vegas."

I think Wenzel (given his earlier views) would have to say, "No you didn't. That money never hit a bank or was out 'in the economy' pushing up prices, so there was never any saving."

UPDATE: Actually, I realized the above isn't quite right. It's not that the saving/consumption decision happens first (in chronological time), it's rather that we can evaluate the guy's actions with that lens, and we can also evaluate his actions by asking what happened to cash balances. I'm not saying that his decision to save a given $150 is more primordial than his decision to put it into a bank CD rather than buy some shares of corporate stock. We can simply view him as allocating his money to the most highly ranked ends, which include various units of food, bank CDs, DVDs, increased cash balances, etc.

I'm not making an appeal to authority (or to hipness), but I do find it interesting that Johnny Cash sang what would be a goofy Christian hymn if performed by an old lady with a pipe organ. But hey, it's Johnny Cash, so it's cool. He's hardcore.



(Thanks to Aristos for sending me the JC CDs.)

Lately I have been trying to get inside the head of Ben Bernanke:



What's Big Ben up to? If I'm really paranoid, I imagine that he's rattling that huge upswing in the base, in order to get all the savvy investors loaded up on gold and inflation hedges. And then BAM Ben cuts the monetary base in half overnight, saying, "You guys said you wanted me to contain inflation. Make up your mind!"

But then I think, nah, the elites are already in a pretty sweet spot. I don't think they will screw with people just for kicks. No, I think they realize this is their golden opportunity to really make out like bandits. Wow, in one week alone last year they managed to grab $700 billion, and it only took a few billion to pay off the Congressmen who needed prodding.

So, in order for us to anticipate the Fed and government's moves, we need to imagine what we would do in a simulation involving all of their financial and military power, if we had the objective of increasing our wealth and power. Remember, you have to put aside all sympathy for your fellow man. If you could make a trillion dollars by causing the second Great Depression, you would do it. So, how would you do it? And could you really make a trillion dollars if you saw it coming?

This simulation involves more real-world knowledge of financial markets and more treacherous calculation than I can summon. There is one man up to the challenge: Robert Wenzel.

Help us RW, you're our only hope.

This reporter must have attended my talk at the Nassau Institute in The Bahamas. Even though he disagrees with me, I do believe the following is the only actual objection he raises to my analysis (besides citing other economists who recommend different policies):

So what should we do about it? Basically nothing, Murphy says, and let the chips fall where they may, which is what the US government supposedly did in every economic slump from 1819 until the Great Depression. Unfortunately, this overlooks the fact that it is politically impossible for any modern, elected government to simply do nothing in the face of an economic downturn.

All in all, a pretty fair article. The only slight mistake is that he implies that I said the U.S. debt is currently 82% of GDP. I didn't say that--I said that according to the CBO, the debt/GDP ratio would double to more than 80% by 2019, under the Obama fiscal plan.

Folks, the government and big business are doing crazy things. Now whether there is a small group of elites orchestrating all this, that's more debatable. But make no mistake, there are seriously disturbing trends in motion.

I just gave a talk in New Braunfels, TX (outside San Antonio), and one of the guys there was a small farmer who was playing with 52 cards. He told me matter-of-factly about the FDA's "NAIS" program: National Animal Identification System. Its ultimate goal is to microchip (or otherwise tag) all the livestock in the whole country. If I remember him correctly, the guy also said that several states had already mandated that their farmers participate.

Of course the official site doesn't sound ominous at all; it's just about containing disease outbreaks! Nothing sinister here. But still, this is creepy:

Individual identification is a good option for many situations. Any animal can be identified individually if you prefer. The method of identification varies by species. USDA recommends using 840 animal ID devices whenever official animal identification is needed or applicable. Available in visual only eartags, radio frequency identification (RFID) eartags and injectable transponders, 840 devices use a standardized 15-digit numbering system.

Oh, another thing I've been hearing about is that these genetically modified seeds don't reproduce. Did you know that? Further, did you know that even if you don't buy these seeds, they might wander onto your farm from your neighbors, and then your crops become infertile too?

(The above claims come from at least two independent sources, but I haven't actually done my own research on the matter. I used to think the worry over "GMOs" was mostly Luddite anti-corporation fretting. But now I see why the Whole Food'ers hate "Big Ag" so much.)

Can people recommend NNJ (non-nutjob) sites discussing the flaws with the single-shooter theory of the JFK assassination? I just saw that Gerald Posner guy on the History channel. I swear the computer graphics they were using didn't fit the basic facts of the bullet's trajectory (even though they were using an animation to "show" you that Oswald obviously acted alone). Plus, Gene Callahan blew me off in the comments at this thread, so I'm going to challenge him to a duel on this topic.

I don't know who generated it first, but Paul Krugman and Brad DeLong (see the top middle of his website) love this chart:


Yikes! That's almost as scary as the monetary base.

But on second thought, notice the axis: deviations in basis points from an average.

I'll rely on the same GISS data (though I'm using the Dec-Nov averages--which I believe real climate scientists prefer--whereas I'm pretty sure Krugman is using Jan-Dec averages) and plot the absolute temperatures:

Average Global Temperature
(Degrees Celsius)


And if you used the only objective scale we have--the Kelvin--the warming would look even less worrisome.

I AM NOT saying that I've just blown up the case for limiting greenhouse gas emissions. What I am saying is that Krugman's chart does a lot of persuasion with its presentation. Another big thing it does (perhaps unintentionally) is obscure the warming of the 1930s, because Krugman kept the x-axis labels at 0 rather than moving them down. So you really can't "see" anything until the big breakout after 1976.

Pete Boettke links to this post concerning the "transitional gains trap" and cap & trade.

The trap arises when a government restricts some activity, often for the specific purpose of increasing prices or otherwise aiding targeted beneficiaries. The limited rights to engage in these activities become valuable as the constraints bind more severely. Owners of these rights become an effective political force for preserving the status quo. Think taxicab medallions, tobacco quotas, land use restrictions and the U.S. sugar program.

I think Margolis' general point is right. If and when cap & trade goes into effect, it will be extremely hard to unwind it, just as a tariff would be, because all of the carbon-free sectors will go nuts claiming (truthfully) that they will be hurt.

However, I think Margolis' technical analysis is off, because he seems to be treating an emission allowance as analogous to a medallion:

Carbon cap and trade will establish restrictions on economic activity that will bind future generations. Perhaps that’s what some supporters like about it. But notice who pays. For the most part, it’s not us—not the baby boomers. Sure, we’ll bear some of the cost of these restrictions. But the president’s proposed auction collects the present value of the scarce carbon-use rights from here to eternity, then distributes it in the course of a few years.

The part I put in bold is wrong. The auctioned allowances don't give you the perpetual right to emit a ton of carbon annually. (In contrast, you buy one taxi medallion, and you get to drive your cab, year after year.) To put it another way, the government is going to have auctions every year.

Now there are complicating factors; for example I'm pretty sure Waxman-Markey allows you to "bank" allowances and possibly even borrow against future allowances. But even there, each allowance still just gives you the right to emit such-and-such amount of carbon dioxide (or other greenhouse gas).

So the point is, if the government decides to abolish Waxman-Markey in 2040, so long as the abolition doesn't occur until 2041, then nobody gets stuck holding allowances that suddenly drop to a market price of zero. There will still be political opposition to ending W-M if it is ever implemented, but it won't be perfectly analogous to taxi cab drivers freaking out if NYC suddenly said anybody could drive a cab, and they don't need no stinkin medallion.

A while ago Robert Wenzel took me out to the woodshed (in his mind at least) regarding the "natural" rate of interest. (I don't have the link handy.) Our latest spat--which is good, to counterbalance the usual lovefest between my blog and his--involves savings.

It all started when Wenzel criticized the Commerce Department's calculation of the household savings rate. (For the record, I am not necessarily agreeing with the Commerce Department's method. I'm just saying Wenzel's attack was off.) In so doing Wenzel said:

Money "in your pocket" is not savings, it is a demand for cash, likewise excess bank reserves (which have gone through the roof) that are held by banks are also funds that are a demand to hold cash. Neither is "savings" in the technical sense of money out in the economy bidding up capital goods. It's sitting, not bidding up anything. This is not "savings", but money held "as a demand to hold cash".

I thought that was silly, so I emailed Wenzel and said, "If I put $10 a week into a jar on my dresser, you're saying that's not saving?"

Wenzel then wrote a new post on the topic, in which he subjected his readers to an entirely superfluous ode to the importance of theoretical precision. (Nobody's denying the importance of crisp definitions, I was saying his definition was a bad one.) Here's the meat of his position:

Thus, while I know what Murphy means when he calls putting money into a jar "savings," I would never use the term that way. To me putting money into a jar, a wallet or under the bed is exhibiting a "demand for cash". It is not out in the market bidding up for goods, in any fashion.

Now, money put into a savings bank, is to me savings. That is, there is no money in the bank after I deposit it there. The money is loaned out to others, who presumably are borrowing the money to bid for goods and services.

Thus, there is great confusion if you call money put in a jar savings (money which is just sitting there) and, at the same time, call money which is put in a bank the same thing.(Where it is, decidedly not sitting there, but out bidding for good and services).

Of course, you can adopt any functional definition you want. But if you go Wenzel's route, you're going to end up with some awkward situations.

For example, let's say I go put $1000 in my savings account. I ask Wenzel, "Hey, did I just save $1000?"

If I'm reading Wenzel correctly, he would have to say, "I'm not sure. Let me call the bank and see if they've lent that money out to a borrower. If it's still just sitting there in the vault, then no, you haven't yet saved."

(That might be unfair. Maybe he would say, "Yes you saved, but then the bank's demand to increase cash balances withdrew your savings from the economy.")

Another problem: Wenzel seems to be forcing savings to equal investment by definition. In other words, I don't see what the distinction is between savings and investment in his worldview.

I think the basic problem here is that Wenzel overlooks that a given act can be both saving and an increase in cash balances. Look, suppose I spend $20 on a DVD. I both (a) consumed and (b) reduced my cash balances. Right? Surely Wenzel would agree with those two descriptions.

So, going the other way, if I take $20 out of my paycheck and put it into my piggy jar, I both (a) saved and (b) increased my cash balances.

It's true, there are things that you have to worry about when someone saves by hoarding cash, versus saving by giving the money to a financial intermediary. But that doesn't change the fact that devoting some of your income to increasing your cash position is a form of saving.

(The exact definition of saving for me is to consume less than one's income. And then if you ask what income is, it is how much you can consume without impairing your capital. I'm pretty sure I got these basic definitions from Hayek's Pure Theory of Capital. I would be very surprised if Wenzel found an Austrian who said that adding to cash balances wasn't a form of savings, but I am ready to be corrected on that score. Maybe they do somewhere, but again, I'd be surprised to see it.)

For the full effect, first skim this Wonkette hit job on Michelle Bachmann (and Ron Paul and Tom Woods and all my friends) and make sure to skim the comments too. Get a feel for the tone and the intelligence behind the production. Now, can you imagine writing a response that is both enlightening, hard-hitting, and yet civil?

Tom Woods did. (HT2EPJ)

* Scott Sumner busts Krugman's hypocritical condemnation of the WSJ.

* Seeing how fun it was for right-wingers to comb through Krugman's work, Mark Thoma busts Greg Mankiw (HT2BDL).

* Speaking of DeLong, he must not be all that bad--he made a MadMax reference in this post.

* Continuing to speak of DeLong, what do you kids think? Is it worth criticizing his defense of Greenspan vis-a-vis Wicksell? I'm not asking, "Would you prefer I write an article rather than watch the Daily Show?" I'm asking, the next time I write a Mises Daily, is it worth devoting a column to this issue?

I won't be posting much until the weekend. I am outside of San Antonio to give a talk on the Great Depression and other bits of Americana. In the meantime, just remember that the government is not your friend.