Over the weekend I was in San Fransisco for a Mises Circle. (Next stop: Seattle.) We had a surprisingly large crowd of around 175 (not an exact count), in an area that you would think would be slim pickings. A special surprise was that Edward Gonzalez showed up. I also met "Lilburne" (his secret identity will remain a secret, at least until you show me a power drill), Robert Blumen, and some Google guys who thought I was wrong in my debate with Mish. (Is it a debate if Mish ignores me?)

I won't dwell too much on the official proceedings, since the audio is already posted at Mises.org, and I think even the video may be at some point. (?) Anyway, here are the talks, in order, and note these links are all mp3s: Walter Block, Tom DiLorenzo, Doug French, Bob Murphy, and all of us on a panel. If you're not sure whether to click on them, let me say that I had some pretty good jokes in my talk, and we were very anal about repeating the questions during the Q&A of the panel.

I flew in the day before (Friday) and hung out for several hours with Robert Wenzel (the man, the myth, the legend). He refers to the proceedings here, and perhaps he will grace us with more thoughts as he is so moved.

But the humorous event occurred Friday night. I'm ordering another round of gin and tonics (gins and tonic?) when Wenzel goes up to these two girls sitting at the end of the bar. I can hear him referring to me as "famous" and tells me to come over. This is really bad, because you would think I should be super confident since I'm married and no longer trying to pick up girls in bars, but actually it's even worse: Now I get the pleasure of being rejected when I'm not even trying to hit on girls, and to boot they think I'm a real scumbag for "hitting on them" while brazenly wearing a wedding ring. Suh-weet.

Anyway, Wenzel motions for me to swoop in as the wingman but here's how it went down:

Girl #1 [who looks like she actually doesn't hate men]: So why are you famous?

Bob: [inaudible]

Wenzel: He's a famous economist. He's been on Fox.

Girl #2 [who definitely hates anything that pees standing up]: You're on FOX?!

Bob: I don't work for Fox, I've just been on it.

Girl #2, informing Girl #1: He's been on Fox. (!!)

Girl #1 [who apparently spends more time trying to socialize with others rather than hating men and Sean Hannity in particular]: ??

Girl #2: FOX News, they like, defend the Evil Empire. [Telling Wenzel and Bob, without really looking at us.] You know, people in San Fransisco are really liberal, so that's not something to brag about around here.

At this point I went back to get the drinks that the bartender had mercifully poured by now. I was going to tell Girl #2 that I had probably done more to criticize the Iraq invasion than she had, but decided I didn't need to prove anything to her. I am not sure if this decision was based on self-esteem or humiliation.

Psychoanalysts, let me let you in on a little secret: I was no ladies' man when I was single. Are you surprised?

In a previous post, I praised Glenn Beck for getting the word out about what's going on regarding the open praise for communism by members of the federal government. On the other hand, let me relate a particularly ridiculous statement by Mark Davis--today's guest-host for Rush Limbaugh--that shows talk radio is only afraid of Democratic Big Brother.

Davis was talking about the recent allegations of interrogator abuse of detainees and said something like, "Give me a break, are these people serious? Now it's torture just to use the sound of a drill? V-v-v-v-v-v-v-v-v, did I just torture the audience?"

Something I've never heard when Limbaugh et al. defend torture--or should I say "enhanced interrogation techniques"--is that the government concedes that some people died during this hardball treatment. Such an admission wouldn't really play in with their "these ACLU types are a bunch of sissies" refrain.

Despite his flaws, Glenn Beck is doing a great job alerting Americans to the Marxist takeover of the federal government. You say, "Give me a break, Bob, just because someone wants everyone to have access to health care, doesn't make him a communist." That's true, but look at how many people in the federal government are now openly praising actual communism.

Beck played the following clip starting from about the 1:45 mark. This isn't mere, "Hey let's reform some of the abuses of naked capitalism."

Based on this favorable review (and funny anecdote) by Robert Wenzel, I got David Falk's The Bald Truth a few months ago. It makes for great bathroom reading.

Falk is a sports agent, whose most famous client was Michael Jordan. (Jordan's ghostwriter did the foreword for the book.) This book is good because it shows exactly how Falk was able to negotiate such lucrative contracts for his clients; it doesn't just say, "And so then I went in there, and really drove a hard bargain." No no, Falk explains the back-and-forth, and how he got the teams to pony up what seemed at the time to be ludicrous sums of money.

Falk actually has a very good intuition about economics and game theory. When I hit the following passage, I knew that I had to stop reading and blog it, since I doubt there will be a better illustration of what I mean:

I was presented with extraordinary opportunities like these starting with James Worthy in 1982...then Patrick Ewing in 1985 and Danny Ferry in 1989. There were unique situations in the marketplace that demanded a unique response. I think the Ewing and Ferry deals, along with Michael's Nike deal, cemented my reputation not so much for being a hard-driving negotiator, but for being someone with a creative vision, or perspective on the value of players and where those valuations were going. Nobody ever believed Danny would be Larry Bird, and nobody believed Patrick would be Kareem, but Danny and Patrick made more as rookies than either Bird or Kareem was making at the time. And that's what was demanded in those situations.
...
A talented player on one team may not be worth as much as a less talented player on another team. James Worthy was a good example. He was a great player, one of the fifty greatest of all time, according to the league's experts. He was the first player selected in the 1982 draft, a remarkable performer in the playoffs, an all-star, a great teammate, and an extremely hard worker. Yet he was the third-best player on his team behind Magic Johnson and Kareem Abdul-Jabbar. James was probably one of the ten best players in the league. Another player, let's say the twenty-fifth best player in the league, might have been the best player on his team. Even though that player wasn't as good as James Worthy, without him his team would be in the lottery. On the other hand, the Lakers were going to be a great team with or without Worthy. Worthy's incremental impact wasn't as great on the Lakers as that of a lesser player on another team. As a result, the twenty-fifth-best player might have had a greater value to his team than Worthy did to the Lakers. (pp. 120-121)

I pick on monetary maverick Scott Sumner a lot, but only because I care. (In fact, Scott himself gets this; see the opening paragraph of this post.)

So it is merely in the spirit of loving correction that I bring to your attention a recent profundity from Scott. The context is (a very interesting) discussion of the difference between the quantity theory of money and the equation of exchange, which are often conflated.

The equation of exchange is the familiar MV = PQ, which is just the accounting tautology that the total money stock times the "velocity of circulation" must equal the "average price level" times the quantity of real output. Some people use different letters, and people like Rothbard get mad over the nonsense placeholders like "V" which only serve to complete the equation. But if we put aside such complaints, the equation is an identity and so has to be true.

In contrast, the quantity theory of money is just that, a theory, and so could be falsified in principle. Scott says that different people mean different things by the theory, and he lists four popular contenders:

1. The ratio of P and M is relatively stable.

2. The ratio of P*Y and M is relatively stable.

3. An exogenous, one time, permanent increase in M causes a proportional rise in P*Y

4. In the long run an exogenous, one time, permanent increase in M causes a proportional increase in P.

Does everyone see the difference? Just to give you an example, when Friedman famously said that price "inflation is always and everywhere a monetary phenomenon," he wasn't just relying on the equation of exchange. Yes, MV = PQ must always be true--it's an identity--but it doesn't mean that increases in M correspond to increases in P, or that a big jump in P must be due to a big increase in M. (For example, many economists right now believe that a big jump in M would cause a big jump in Q--this would also keep the equation in balance.)

So finally we can review Scott's illustration of the problem:

But I also think the quantity equation can get in the way of clear thinking. For instance, people worried that current Fed policy will lead to much higher future inflation sometimes cite the quantity theory. But this is a misuse of the theory. It does not imply that any increase in the money supply is inflationary, but rather that permanent, exogenous increases are inflationary. For instance, suppose the Fed adopted a policy of targeting the expected inflation rate at 2%. Assuming their policy was efficient, i.e. the errors were unforecastable, then there should be zero correlation between the money supply and inflation. Of course the Fed doesn’t have a precise 2% inflation target, but they certainly have some inflation target in mind. If so, then changes in the money supply are partly endogenous, and the [quantity theory] does not predict much correlation between the money supply and inflation.

I think Scott has here performed the classic economist trick of assuming his conclusion, but doing it in a such a jargon-laden way that few can see where the rabbit gets put into the hat. The easiest way for me to demonstrate is a physics analogy. So suppose a physicist at Bentley College started a blog called The Gassy Illusion and wrote:

We're all familiar with Boyle's law of gases, which states that for a gas at a fixed temperature, Pressure and Volume are inversely proportional. Now many people assume that if we started shrinking the size of this airtight room, that the air pressure inside would increase. However, what if Ben Bernanke could perfectly anticipate the rate at which the room's volume were decreasing, and cooled the room accordingly? Why, then there would be no observed correlation at all between Pressure and Volume. So people worried about the shrinking room need to be more careful when invoking Boyle's law.

So yes, Scott is right that if the Fed could commit itself to 2% inflation, and could do so without systematic errors, then...we would get on average 2% inflation, regardless of what happened to the money supply. But does that really help us? Note that Scott is NOT merely saying, "If the Fed commits to 2% inflation, then we'll get it." Because the Fed could commit and then be horribly wrong, year after year. So the real rabbit is where Scott innocently says, "Assuming their policy was efficient..."

By the same token, assuming central planning could work, then Lange whupped Mises in the socialist calculation debate.

In the comments to this post, "Magnat" reminded me of an episode in the Bible where my initial reaction was ridiculous. In I Samuel 4:1-11 we see that the Israelites have a setback against the Philistines, and so try to raise morale by bringing the Ark of the Covenant to the front lines of the battle. (The Ark housed the stone tablets on which the Ten Commandments were written, as well as other extremely significant items. It was incredibly holy and powerful. You may remember that the Nazis all melted when they opened it up in the first Indiana Jones movie.)

But this petulant move by the Israelites--in effect trying to force victory not by seeking God's counsel, but by bringing in the Ark--led to disaster:

 ¹ And the word of Samuel came to all Israel.   
Now Israel went out to battle against the Philistines, and encamped beside Ebenezer; and the Philistines encamped in Aphek. ² Then the Philistines put themselves in battle array against Israel. And when they joined battle, Israel was defeated by the Philistines, who killed about four thousand men of the army in the field. ³ And when the people had come into the camp, the elders of Israel said, “Why has the LORD defeated us today before the Philistines? Let us bring the ark of the covenant of the LORD from Shiloh to us, that when it comes among us it may save us from the hand of our enemies.” ⁴ So the people sent to Shiloh, that they might bring from there the ark of the covenant of the LORD of hosts, who dwells between the cherubim. And the two sons of Eli, Hophni and Phinehas, were there with the ark of the covenant of God.
⁵ And when the ark of the covenant of the LORD came into the camp, all Israel shouted so loudly that the earth shook. ⁶ Now when the Philistines heard the noise of the shout, they said, “What does the sound of this great shout in the camp of the Hebrews mean?” Then they understood that the ark of the LORD had come into the camp. ⁷ So the Philistines were afraid, for they said, “God has come into the camp!” And they said, “Woe to us! For such a thing has never happened before. ⁸ Woe to us! Who will deliver us from the hand of these mighty gods? These are the gods who struck the Egyptians with all the plagues in the wilderness. ⁹ Be strong and conduct yourselves like men, you Philistines, that you do not become servants of the Hebrews, as they have been to you. Conduct yourselves like men, and fight!”
¹⁰ So the Philistines fought, and Israel was defeated, and every man fled to his tent. There was a very great slaughter, and there fell of Israel thirty thousand foot soldiers. ¹¹ Also the ark of God was captured; and the two sons of Eli, Hophni and Phinehas, died. (1 Samuel 4:1-11, New King James Version)

Now the first time I read that, I had a ridiculous reaction. I was really worried, thinking "Oh no! How will the Israelites get it back? What if the Philistines desecrate it?"

But as it turns out, the Creator of the universe doesn't need a bunch of human bodies to protect His sacred objects. Here's what happened to the Philistines:

 ¹ Then the Philistines took the ark of God and brought it from Ebenezer to Ashdod. ² When the Philistines took the ark of God, they brought it into the house of Dagon and set it by Dagon. ³ And when the people of Ashdod arose early in the morning, there was Dagon, fallen on its face to the earth before the ark of the LORD. So they took Dagon and set it in its place again. ⁴ And when they arose early the next morning, there was Dagon, fallen on its face to the ground before the ark of the LORD. The head of Dagon and both the palms of its hands were broken off on the threshold; only Dagon’s torso was left of it. ⁵ Therefore neither the priests of Dagon nor any who come into Dagon’s house tread on the threshold of Dagon in Ashdod to this day.
⁶ But the hand of the LORD was heavy on the people of Ashdod, and He ravaged them and struck them with tumors,both Ashdod and its territory. ⁷ And when the men of Ashdod saw how it was, they said, “The ark of the God of Israel must not remain with us, for His hand is harsh toward us and Dagon our god.” ⁸ Therefore they sent and gathered to themselves all the lords of the Philistines, and said, “What shall we do with the ark of the God of Israel?”
And they answered, “Let the ark of the God of Israel be carried away to Gath.” So they carried the ark of the God of Israel away. ⁹ So it was, after they had carried it away, that the hand of the LORD was against the city with a very great destruction; and He struck the men of the city, both small and great, and tumors broke out on them.
¹⁰ Therefore they sent the ark of God to Ekron. So it was, as the ark of God came to Ekron, that the Ekronites cried out, saying, “They have brought the ark of the God of Israel to us, to kill us and our people!” ¹¹ So they sent and gathered together all the lords of the Philistines, and said, “Send away the ark of the God of Israel, and let it go back to its own place, so that it does not kill us and our people.” For there was a deadly destruction throughout all the city; the hand of God was very heavy there. ¹² And the men who did not die were stricken with the tumors, and the cry of the city went up to heaven. ¹ Now the ark of the LORD was in the country of the Philistines seven months. ² And the Philistines called for the priests and the diviners, saying, “What shall we do with the ark of the LORD? Tell us how we should send it to its place.”
³ So they said, “If you send away the ark of the God of Israel, do not send it empty; but by all means return it to Him with a trespass offering. Then you will be healed, and it will be known to you why His hand is not removed from you.”
⁴ Then they said, “What is the trespass offering which we shall return to Him?”
They answered, “Five golden tumors and five golden rats, according to the number of the lords of the Philistines. For the same plague was on all of you and on your lords. ⁵ Therefore you shall make images of your tumors and images of your rats that ravage the land, and you shall give glory to the God of Israel; perhaps He will lighten His hand from you, from your gods, and from your land. ⁶ Why then do you harden your hearts as the Egyptians and Pharaoh hardened their hearts? When He did mighty things among them, did they not let the people go, that they might depart? ⁷ Now therefore, make a new cart, take two milk cows which have never been yoked, and hitch the cows to the cart; and take their calves home, away from them. ⁸ Then take the ark of the LORD and set it on the cart; and put the articles of gold which you are returning to Him as a trespass offering in a chest by its side. Then send it away, and let it go. ⁹ And watch: if it goes up the road to its own territory, to Beth Shemesh, then He has done us this great evil. But if not, then we shall know that it is not His hand that struck us—it happened to us by chance.”
¹⁰ Then the men did so; they took two milk cows and hitched them to the cart, and shut up their calves at home. ¹¹ And they set the ark of the LORD on the cart, and the chest with the gold rats and the images of their tumors. ¹² Then the cows headed straight for the road to Beth Shemesh, and went along the highway, lowing as they went, and did not turn aside to the right hand or the left. And the lords of the Philistines went after them to the border of Beth Shemesh.
¹³ Now the people of Beth Shemesh were reaping their wheat harvest in the valley; and they lifted their eyes and saw the ark, and rejoiced to see it. ¹⁴ Then the cart came into the field of Joshua of Beth Shemesh, and stood there; a large stone was there. So they split the wood of the cart and offered the cows as a burnt offering to the LORD. ¹⁵ The Levites took down the ark of the LORD and the chest that was with it, in which were the articles of gold, and put them on the large stone. Then the men of Beth Shemesh offered burnt offerings and made sacrifices the same day to the LORD. ¹⁶ So when the five lords of the Philistines had seen it, they returned to Ekron the same day.
¹⁷ These are the golden tumors which the Philistines returned as a trespass offering to the LORD: one for Ashdod, one for Gaza, one for Ashkelon, one for Gath, one for Ekron; ¹⁸ and the golden rats, according to the number of all the cities of the Philistines belonging to the five lords, both fortified cities and country villages, even as far as the large stone of Abel on which they set the ark of the LORD, which stone remains to this day in the field of Joshua of Beth Shemesh.
(1 Samuel 5-6, New King James Version)

Now for my own take on these things, I actually don't think the Ark was covered in germs, which is how one might explain these events (if he believed the stories). I think that if a modern doctor had taken the proper measurements and so forth back then, the various forces (such as a growing rat population etc.) would have been in motion in the Philistine population centers to yield such devastation, even before their warriors brought the Ark back from battle. (It's also possible that the slaughter of thousands of Israelites introduced some new germs on the Philistine fighters who then brought them back to camp.) So to an atheist epidemiologist who had access to all the facts, he would say, "No no, there wasn't some being in the sky zapping people. I can explain everything with our normal methods. It was just a coincidence that when the Philistines captured this box that had superstitious meaning attached to it, that that was also when the outbreak occurred. It's not as if all these people just suddenly dropped dead for no reason."

So for those readers who have grasped my view of God's design of the universe, the above is just a particular illustration. In the broadest sense, everything that occurs at any time in the universe, is "caused by" events that were set into motion beforehand, and ultimately can be traced back to the very beginning of time. (Even if you think quantum effects make the future indeterminate, it's still the case that the state of the universe at time t has a huge influence on what the universe can look like at t+1.)

So for me, it's a meaningless distinction to say, "Oh, did God actually punish the Philistines with His intervention, or was it just a natural outbreak?" (Notice that the Philistines wondered that too, and how much of a non sequitur their "test" was--after all, why couldn't the cows' decision of which way to take the cart also just be a coincidence?) Everything in the natural world is in direct accordance with God's will. Before our sun even existed, God knew precisely when the Philistines would capture the Ark and bring it to their camp. So He had that episode (as well as everything else that would occur in all of human history) in mind, when He designed the physical universe and its laws, and when He designed how cells work, how disease is transmitted, and so forth.

And His design was so incredibly complex and perfect, that it "just so happened" that the Philistine population was decimated when the Ark was in their possession.

I was waiting for my connecting flight to San Fransisco (for tomorrow's Mises Circle) when I first heard of the awful Jaycee Dugard 18-year imprisonment story. (Here is an opinion piece with a bunch of new facets, both in the piece and the links on the sidebar. I don't know if they are accurate; I actually am not even clicking on them because this story really troubles me.)

The thing that I don't understand in this, though, is how did the guy keep someone prisoner for so long, in a regular neighborhood? I can understand if a fairly young child is taken, that the kid doesn't really get what's going on and might grow up thinking the abductor is his/her parent.

But this girl was 11 when she was taken. (I'm not using "alleged" since the guy admits he did it. And incidentally, his self-absorbed "this was really a heartwarming story about how I turned my life around" actually horrifies me almost as much as his behavior; it's another manifestation of the banality of evil.)

Readers, please don't freak out; I'm not blaming the girl for not running away. I'm just trying to make sense of this. Wouldn't she tell her children (presumably fathered by the abductor) what their situation was, and that if they ever had an opportunity, to make a break for it to get help?

So it seems that either this guy must have had a standing threat, like, "If any of you tries anything..." or that over time the original victim just accepted her fate.

But again, that just seems impossible to me, since she was in what, fifth or sixth grade when she was taken? Even though to adults, 11 seems tiny, think back to when you were that age. You certainly knew what a kidnapper was, and that if you were taken you would devote your life to killing the guy / escaping.

Well I just had to get that off my chest. I wonder if other people have wondered that too, but were hesitant to bring it up since, again, it sounds like I'm blaming the girl, when that's not what I'm doing.

This disgusting story just doesn't make any sense to me. I don't understand how this is even possible.

This is the first paragraph in a WSJ story--on page A4--from earlier this week:

WASHINGTON -- The CIA lacked clear safeguards to prevent abuses in some instances in its network of secret prisons for terror suspects, and some interrogators had inadequate training and oversight, a long-withheld 2004 report found, according to current and former officials who have read the document.

So what does this single paragraph tell us?

(1) The CIA had at least one prison for terror suspects.

(2) The CIA had a network of prisons for terror suspects.

(3) The CIA had a SECRET network of prisons for terror suspects.

(4) The abuses in said network of secret prisons were so rampant that there was actually a report issued on the matter.

(5) The report on abuses in the CIA's secret network of prisons has been suppressed for five years.

And Matt Yglesias says Hayek's Road to Serfdom was a "nutty alarmist book." Hey Yglesias, suppose we were on the road to serfdom? Isn't this what it would feel like?

In response to a reader request (who is probably now horrified), at the Mises blog I addressed an old Krugman post on what he called the "Dark Age" of macroeconomics. Here's the news you can use:

Krugman is totally right. (!!) Fama and Cochrane are wrong in spinning out what appear to be tautologies above. And I say this, knowing full well that plenty of free marketeers--myself included--critique deficit-spending using the exact same arguments when writing an op ed or getting interviewed on the radio.

To a first approximation, and especially if you're dealing with somebody who doesn't know the first thing about scarcity, then yes I think it's fine to say, "Every dollar the government spends just means one fewer dollar spent in the private sector." But that's actually not correct, at least not in the way most people believe. And it's also not literally true to say, "If the government creates a job in industry X with a subsidy, then there must be an offsetting job destroyed in industry Y because of higher taxes or interest rates."

This is actually quite simple: Suppose the government imposes a one-shot head tax on Bill Gates of $1 million, and then uses the revenue to hire 50 people at $20,000 each to work for a year scrubbing graffiti off bridges. Do Austrians really want to say that it's an accounting necessity that this causes Bill Gates to adjust his behavior such that precisely 50 other people lose their jobs, but only for a year? Of course not--it would be a miracle if exactly that happened because of the new tax on Bill Gates. In fact, no matter how many people are initially laid off because of changes in Gates' spending and investing, if wages adjust quickly enough, then that excess unemployment can be whittled away.

So does my concession to Krugman mean that he is right to champion government deficits as a way to prop up aggregate demand, to get "money circulating," to create jobs and start using idle resources?

Of course not. In contrast to the all-clearing-all-the-time view of markets held by Fama and other Chicago School believers in the "efficient markets hypothesis," Austrians know that it takes time for the market to adjust after the bursting of an unsustainable boom. So yes, during a deep recession, it's possible for the government to reduce the unemployment rate through various means, especially through printing money. But that doesn't mean it's a good thing. The idle period of spare capacity (in both capital and labor) serves a definite purpose in a market economy, and the government sabotages the cleansing process by forcing those resources back to work on any old project that's "shovel ready."

I elaborate on this point in some detail here, and Arnold Kling (with a nod to the Austrian School) comes to the same conclusion from a different angle here.

In conclusion, free marketeers shouldn't focus their efforts on trying to prove that the government is incapable of boosting "total spending." For one thing, that's a false proposition, so it's a bad move to try to prove it. But more important, it concedes that boosting "total spending" is a good thing. No, the important thing is for the economy to steer resources to their most efficient uses. If that process requires, say, prices in general to fall--and hence nominal aggregate expenditures--then who cares? You consume goods and services, not a flow of green pieces of paper.

Now what I didn't say at the Mises blog--for fear that my posting privileges would be revoked--is that Krugman's post was actually quite impressive. In other words, not only do I agree with almost everything he said, but I enjoy the way he said it (except for the arrogance). In particular, his analogy with international trade was great, and his chart title ("a case of mistaken identity") was pretty clever as far as econ jokes go.

*sigh* I don't think I'm turning into a commie, but I really do understand why leftists think they're so much more clever than their typical opponents: they are. If you doubt me, let me put it this way: Can you possibly imagine any right-wing production zinging its opponents the way Jon Stewart destroys Fox News in the clip below? Inconceivable.

And note that Krugman's not picking on some associate econ professor from Bob Jones University. No, he and DeLong tackle big guns, some of whom have Nobel prizes. As readers of this blog know, I think Fama and Friends really have said some pretty ridiculous things lately.

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Fox News: The New Liberals
www.thedailyshow.com
Daily Show Full Episodes Political Humor Healthcare Protests

For some time now I've been meaning to document the prices I paid at the grocery store for some staple items. (At least, they're staples in our house because of our son.) For the record:

* Half-gallon of Silk "Very Vanilla" soy milk, $3.49 on sale for $2.99.

* 32 oz. of Stonyfield's "Banilla" (sic) yogurt, $6.79. (I had no idea that's how much those things cost!! They stock them on the bottom of the dairy case, so I've never bent down far enough to read the price tag. I think it's time to introduce the boy to the joys of Saltine crackers.)

* 12 oz. bag of Dole "American" salad, $3.29 on sale for $2.50.

I'm watching you, Ben.

Wow. Chris Martenson was the guy who snooped around bond CUSIPs and realized the Fed bought up 47% of the freshly issued Treasurys from primary dealers the week after the auction. Now on his website he has made available a blockbuster report (that his paying members got a few weeks ago). (HT2EPJ) Really, if I hadn't been blessed with such a phenomenal ability to speak in public, I would have to work like Martenson and write analyses like this.

I am still checking on some definitions with various experts, to make sure I really understand all the capital flows etc. that Martenson throws around in this thing. But check out this graph and tell me if you aren't a little more concerned about the strength of the USD. (And note that right now, there is apparently a net outflow of capital from the dollar coupled with a current account deficit. I had thought this was an accounting impossibility, so that's one of the things I'm still checking on.)

Here are some salient excerpts from the report:

Since the start of 2009 and continuing through the month of May, private investors sold [on net] $364 billion dollars worth of US assets, while central banks purchased $50 billion dollars worth (source is a .csv file available here from the Treasury)...

Here we note that agency bonds peaked in October of 2008 at nearly a trillion dollars but have declined by $178 billion since then. Treasuries, on the other hand, have increased by over $500 billion over that same span of time. A half a trillion dollars! If you were wondering how the US bond auctions have managed to go so smoothly, here's part of your answer.

What is going on here? How is it possible that central banks are buying so many Treasury bonds, at the fastest rate of accumulation on record?

It would appear that foreign central banks have been swapping agency bonds for Treasury bonds, but that's not how the markets work. First, they would have to sell those bonds, before they could use the proceeds to buy government debt. So to whom did they sell those Agency bonds in order to afford the Treasury bonds?

Here we might recall that the Federal Reserve has been buying agency bonds by the hundreds of billions.

Martenson is my hero; he has solved the mystery (or at least a big chunk of it). I could not fathom how it was that anybody--even foreign central bankers--could allow CNBC to write a headline today, "Foreigners Snap Up Treasurys Even as US Debt Keeps Rising." I mean, it just didn't make any sense. Why would the Chinese and Russians be talking about a new global currency, if they intended to keep on stockpiling dollar-denominated assets?

Well, if Martenson's right, the answer is the Fed. (That's probably the only time you will ever see me end a sentence with those 5 words.) I'll save the punchline for Martenson, as he deserves the honor:

Shell #1: Foreign central banks sell agency debt out of the custody account.

Shell #2: The Federal Reserve buys those agency bonds with money created out of thin air.

Shell #3: Foreign central banks use that very same money to buy Treasuries at the next government auction.

As I read Martenson's report, I was reminded of Ralphie's father from A Christmas Story when he beheld his prized lamp and declared, "It's indescribably beautiful."

Jeff Tucker passes along this story:

NEW YORK (Reuters) - Americans think the Federal Reserve is doing a worse job than even the much-maligned Internal Revenue Service.

Only 30 percent of Americans think the Federal Reserve's Board of Governors is doing a good job despite the central bank's unprecedented efforts to battle a crippling recession, according to a Gallup Poll released on Monday.

That makes the Fed the worst reviewed of nine key agencies -- including the tax-collecting IRS -- the Gallup poll of more than 1,000 Americans between July 10 and 12 showed. Twenty-two percent of Americans said the central bank was doing a poor job.

Wow, that's pretty impressive if you poll worse than the IRS. And what's funny is that the public is right: After all, it takes some effort for the IRS to steal your money. First of all they have to find out that you have it, and then they have to send you letters, make scary phone calls, freeze your bank account, contact your employer about garnishing wages, and finally they have to tap some scarce labor power by sending armed guys to your house.

In contrast, if Bernanke wants to steal half your wealth, all he has to do is press a few buttons.

From CNBC:

Federal Reserve Chairman Ben Bernanke is one of hundreds of victims of an identity-fraud ring, according to Newsweek magazine.

The ring is run by a scam artist known as "Big Head," the magazine said on its website. The ring has been known for stealing more than $2.1 million from consumers and at least 10 financial companies around the U.S.

If you write a post saying "Big Head" is really running monetary policy, turn to page 48.

If you write a post arguing that Bernanke is the "Big Head" of the whole financial system, turn to page 87.

If you write a post wishing that Bernanke had only stolen $2.1 million from consumers, turn to page 95.

I have an unhealthy obsession with Paul Krugman's blog, and something I've noticed is that when he gives somebody a compliment, sometimes you can tell it's completely phony and political. For example, here's his tribute to Big Ben:

Generally, I’m pleased. Bernanke has done a good job in the crisis — he’s been far more aggressive and creative than almost anyone else would have been in his place, partly because he’s a scholar of the Great Depression, partly because he took Japan’s lost decade seriously and was therefore intellectually prepared for a liquidity-trap world.

I do have one qualm, though, which isn’t really about Bernanke, but rather about the broader symbolism of the reappointment...

...[Y]ou’re not considered serious about economic policy unless you dismissed warnings about a housing bubble and waved off worries about future crises.

That said, Ben Bernanke’s performance over the past year deserves praise, and there’s nobody I’d rather have in his position. Congratulations, Ben.

And in case it's not obvious, that link is to a very embarrassing 2005 Washington Post story reporting that Bernanke didn't think there was a housing bubble.

And as far Krugman's closing lines, c'mon, he obviously doesn't mean that. There's nobody on the entire planet that Krugman would rather have as Fed chair than Bernanke? Give me a break, everybody knows Krugman is insincere.

I googled "Bernanke" appearances in Krugman's blog to see how he's been in the past. And you see the same pattern. E.g. in this post, Krugman opens up by thanking his lucky stars that Bernanke is at the helm, but by the end of the post you realize Krugman is saying Bernanke doesn't realize his own impotence.

In this post, Krugman says deteriorating credit markets have undone everything Bernanke tried to do. True, he didn't rip Bernanke per se, but it's hardly a compliment to the guy.

In this post he refers to the wussy testimony of Bernanke, showing that he and Paulson don't have the guts to nationalize the banks and thus spare us a repeat of Japan's lost decade. The title of the post? "All the President's Zombies." Again, not exactly flattering.

In this post, "A $700 Billion Slap in the Face," Krugman says that Paulson and Bernanke are grasping at straws trying to justify their approach to the financial crisis. Again, not a single word of praise in here for Bernanke, except that Krugman credits him with at least coming with a theory (that Krugman then tells us is stupid) for the TARP.

At long last--near the bottom of my hits for the advanced Google search--I think I found a blog post from January 2008 where Krugman might actually be praising Bernanke. But go ahead and read it. You have to infer the praise; I had to click on Krugman's link to a news article to get the full context, in order to even offer my opinion that I think Krugman is actually complimenting Bernanke in this one (before going on to rip Bush and Paulson). Again, hardly flattering.

In this post, Krugman praises Bernanke for dropping his prepared remarks and letting the cat partially out of the bag concerning the "fundamentally disingenuous" line that he and Paulson had been pushing at the time. Again, to say someone slipped up a bit and admitted he had been trying to rob taxpayers, is not exactly congratulatory.

Well I reached the end of the first page of my Google search results. I'm sure we all see now why Krugman said that there is no one he would rather have at the Fed than Ben Bernanke. My gosh, it's bad enough when Krugman plays loose with the facts when ripping his enemies--but he can't even congratulate someone with sincerity?

If you want another example of a non-flattering "compliment," check out his post on Larry Summers. If I were Summers, I would have gone through the roof when reading that. Krugman did the equivalent of saying, "Now I want to draw everyone's attention to this claim I got emailed to me from a self-identified prostitute, saying that Larry Summers visits her weekly and has a microscopic wee wee. And folks, let me tell you, that is just crazy. We played racquetball once, and showered afterward, and I didn't need a microscope. If you want to say it was tiny, I'm prepared to talk. But microscopic? No ma'am, you are mistaken."

Does anybody trust Krugman?

* Another Murphy joint op ed with Jason Clemens of PRI, on the state of California's economy. (Warning: You will see a lot of teeth if you click the link.)

* David Hanson tells WorldNetDaily readers about the biggest threat to liberty, and it's not socialized health care. (Hint: It's a three-letter word that's not good for much.)

* David Kramer links to this story that illustrates my view of government perfectly: Government is an institution that gets to do things that would be criminal if anybody else did them. In this case, UK police take things out of unlocked cars. Yeah sure, they give the stuff back when you claim it, but still, that is stealing. If you don't think so, try implementing this program of "awareness raising" yourself, in your own neighborhood, and see what happens to you.

* David R. Henderson emailed me his own review [.pdf] of Jeff Madrick's case for big government.

* You know what ThinkMarkets is missing? Some Bohm-Bawerkian price theory. Oh wait, no it isn't.

In response to a Wonk Room hit piece on young people trying to make a change in the world for the better--and if that's not a hit piece, I'm not sure what would be worthy of such a description--I was first going to use my rapier-like wit to issue a stinging rebuke. But then I counted to 500 and decided to go Rodney King on everybody. (Meaning "can't we all get along," not "I bet you pigs can't catch me.") Here are the last three paragraphs from my Kumbaya blog post:

Now that I'm preaching, let me generalize it a bit: Earlier I mocked Paul Krugman for actually claiming that senior citizens were rioting. But since then, I've come to realize that Krugman really doesn't understand the people at these Town Hall meetings, or the tea parties. After all, Krugman doesn't get goosebumps thinking about property rights or checks on government power. So when he sees a bunch of angry people mouthing such concerns, he is suspicious and thinks they're either a bunch of racists or paid stooges of the health insurers.

So, by symmetry, I think people on "our side" should realize that the great masses of Americans who are for health care reform and climate legislation (and it pains me to not put scare quotes around those phrases) aren't actually closet socialists who want to bring America to its knees. Don't get me wrong, it is still perfectly consistent to think the elites in Washington are power-hungry liars. I'm just saying that, as ridiculous as Krugman's paranoia over old people is, that's how ridiculous some of our side's rants against Obama fans must seem to people who know that they are really just trying to stem abuses they perceive in the health care system and so forth. They know they're not socialists, just like we know "our guys" aren't Nazis.

Ah, and the ultimate irony is that actual socialists (and the particular offshoot of Nazism) were real, and actually did seize control of governments and kill millions of people. Isn't life funny.

The author of the original hit piece, Brad Johnson, cross-posted it at Grist, and then added an update in light of my own post. He drew an excerpt from what I've reproduced above. Here is how Brad presented the new development to Grist's readers:

UPDATE: At Free Advice, Institute for Energy Research economist Bob Murphy writes that Paul Krugman doesn’t understand tea party protesters because he doesn’t care about checks on government power like they do, and continues:

So, by symmetry, I think people on “our side” should realize that the great masses of Americans who are for health care reform and climate legislation (and it pains me to not put scare quotes around those phrases) aren’t actually closet socialists who want to bring America to its knees.

Hmm, I'm not so sure that's fully in context. (That's what I told the IER CEO when his Google Alerts on "AEA" tipped him off and he emailed me saying, "Grist is linking to Free Advice.")

I'm curious to see how many hits that Grist link draws in, though. If it's pretty big, maybe I will go the Bruce Bartlett route. I see the light! Sure we can trust the DC politicians with saving the planet! They've done such a knock-up job on inner city poverty and Afghanistan.

NOTE: I am not accusing Brad Johnson of anything dishonest with his link to my post. I'm just saying, it was rather misleading.

I've been meaning to say this for awhile, but it's especially relevant now, since I'm hitting the Mises Circle circuit starting this weekend.

I read all emails, and I catch most comments on blog posts, but I really don't have the time to answer everything at this point. But if I tell you I will blog something, and then you don't see it for a week, feel free to pester me. I have allowed more emails to run off the front page of my inbox, than most people get by 9 am (or something like that).

Bob Roddis sends this encouraging video. Remember back during the Bush years, kids, when those of you who think like me were so mad at being lumped in with the "conservative" nation-building, deficit-exploding, Big Brother Bush administration. Well by the same token, we should give credit where it's due. There are a lot of leftists (whose preferred programs would be awful, don't get me wrong) waking up to the truth about Barack Obama. The below video is very well done, because it weaves in campaign promises that Obama is now completely ignoring. Also, I love how the host calls him "such a charming liar."

And she's right, he is. It's a very pleasant contrast to the cocksure lying of the last guy.

Yeah, their argument is that given that the feds are going to torture people to prevent American deaths--and really, can any libertarian be for American deaths? isn't it unlibertarian to blow up a building?--then it makes sense to allow trained professionals, under the direct supervision of the Cabinet, carry out the electroshocks, waterboarding, and mock child-execution. After all, if you're going to torture people, you want it to be in the open, with Hillary Clinton watching. You don't want some CIA goon doing it in a foreign country.

Ha ha, fooled you! Alex and Tyler would never advance such an argument. No, the closest you'll ever see is that in back-to-back posts, they support government bailouts of banks and government provision of health insurance. Man those guys are hardcore. It's great that we've got free marketeers in higher education, to combat the socialism being peddled in our elite universities.

You know, it would really make my life easier if all of you readers would get your brother to start reading. Then I could quit my day job and blog full time. As it is, I keep accumulating interesting tidbits until the width of each tab on Firefox bumps up against the Heisenberg uncertainty principle, and I am forced to issue another "Potpurri"...

* David Gordon saw my debate with Jeff Madrick, and sent along his review of Madrick's The Case for Big Government. Quick! Guess whether David liked the book.

* Robert Wenzel (who saw it on Mankiw's blog) emailed me this pretty funny description of publishing a negative Comment. People often ask me if I miss academia. Skim the link and guess my answer. BTW, I had formed some opinions about the type of guy who would write such a thing. I figured he had to be tenured, probably very well published, and also a bit odd on a personal level. Here's his homepage; you tell me.

* Yuri Maltsev actually lived under socialized medicine. No thanks.

* Scott Sumner proudly linked to this puzzle on opportunity cost, and explained that he (Scott) knew the "right" answer. But Scott, the answer is, cost is subjective and you can't make interpersonal utility comparisons. It doesn't make any freaking sense to ask how much something cost (in the opportunity cost sense) for Mary versus John. True cost isn't even realized, as Buchanan showed. Somehow I don't think that's what our Benthamite friend Scott had in mind. (Fortunately he is in China and so can't impose costs on me.) (And yes I know that you can't "impose costs" on somebody else.)

* Does Arnold Kling know he's an Austrian macroeconomist? Search your feelings, Arnold. You know it to be true. Join me, and together we will rule Jackson Hole.

* Not sure where to put your money? Stocks? Real estate? Gold coins? Postage stamps? I know, federally guaranteed green bonds! Woo hoo!

* Here's a great example of how you can prove anything you want in economics/finance, in order to make your boss happy. Incidentally, when I get suspicious of the BLS' inflation numbers, it's not that I'm imagining the analyst grunts doctoring numbers. No, I think they know what the "official story" is, and they (perhaps subconsciously) make decisions on how to adjust for hedonic changes, how many years back to look when calibrating the seasonal adjustment, blah blah blah, so that the answer is what their bosses want. You don't have to be pure evil to behave that way at work, and things (especially in economics/finance models) are so arbitrary that it doesn't even feel like lying. You don't view yourself as falsifying data, you rather view yourself as the hero who comes up with the best way to illustrate the story the team is working on. If you are shocked and don't have any idea what I'm talking about, then good for you. But I think anybody who has worked in an office knows what I mean.

I'm thinking this isn't legal, so if your conscience bothers you buy a copy of the book. But anyway I just came across this online reading of my book, The Politically Incorrect Guide to Capitalism. If you have a colicky infant, I suggest playing this along with chirping birds. It soothes and educates at the same time.

Earlier I was happy that Paul Krugman had "definitively" (you'll understand the quotation marks in a sec) said we were in a recovery, since I am predicting that the economy is going to be in the toilet for years. Just to refresh our memories, here's how Krugman opened his August 21 blog post: "Barara Kiviat asks, is this a recovery or isn’t it? The answer is yes."

OK, that seems pretty definitive, right? For most people it would be, but not with our Nobel laureate. The very next day he wrote:

Reading comments, I see that some readers think that by saying that we may be in a recovery by the usual definition, even though jobs are still being lost, I’m either (a) shilling for Obama (b) radically changing my views.

Um, no.

And just to reinforce his claim now that we may be in a recovery, Krugman says today (August 24):

Judging from comments I’ve received, there’s still a lot of confusion about how it’s possible to be in economic purgatory, aka a jobless recession. Also, a lot of readers seem to think that by saying that the recession is probably over I’m somehow changing my position from a few weeks ago — when actually something like this is what I’ve been expecting all along.

No Dr. Krugman, I don't think you're changing your position from a few weeks ago. I think you changed your position from the previous day.

OK I must confess that this Wonk Room hit piece on my compatriots really ticked me off. I had originally wanted to blog it with the title, "Definition" and the comment, "If you want to know what 'ad hominem' means, just check out this Wonk Room piece on the AEA bus tour."

But then I calmed down a bit, realizing that the Wonk Room piece is really just the mirror image of what Glenn Beck did with Goldman Sachs, which I praised.

So if you truly believed that the Waxman-Markey bill was the last hope for averting global disaster, then yes I can understand that you would think the Wonk Room piece was just adding useful knowledge about your enemies...as opposed to a complete hit piece that has no substantive arguments at all. Because I must admit, Glenn Beck's hit piece on Goldman didn't have any arguments at all; it was just giving the biographies of the various players. At other places Beck of course gave his substantive objections to TARP etc., but then again the Wonk Room people would say the same thing about cap and trade.

Now that I'm preaching, let me generalize it a bit: Earlier I mocked Paul Krugman for actually claiming that senior citizens were rioting. But since then, I've come to realize that Krugman really doesn't understand the people at these Town Hall meetings, or the tea parties. After all, Krugman doesn't get goosebumps thinking about property rights or checks on government power. So when he sees a bunch of angry people mouthing such concerns, he is suspicious and thinks they're either a bunch of racists or paid stooges of the health insurers.

So, by symmetry, I think people on "our side" should realize that the great masses of Americans who are for health care reform and climate legislation (and it pains me to not put scare quotes around those phrases) aren't actually closet socialists who want to bring America to its knees. Don't get me wrong, it is still perfectly consistent to think the elites in Washington are power-hungry liars. I'm just saying that, as ridiculous as Krugman's paranoia over old people is, that's how ridiculous some of our side's rants against Obama fans must seem to people who know that they are really just trying to stem abuses they perceive in the health care system and so forth. They know they're not socialists, just like we know "our guys" aren't Nazis.

Ah, and the ultimate irony is that actual socialists (and the particular offshoot of Nazism) were real, and actually did seize control of governments and kill millions of people. Isn't life funny.

I know this sounds impossible, but I actually don't like the radio stations in Nashville. And no, it's not because they play all country. Would you believe that there's not even a reliable Oldies station? Or how about this--in the entire time I've been here (since fall of 2006), I swear I've heard maybe three Elvis songs on the radio. I am not exaggerating.

Anyway, out of desperation I stopped my Scan last night when it hit Billy Ocean's "Suddenly." And this line jumped out at me:

Girl, you're everything a man could want, and more
One thousand words are not enough to say what I feel inside
Holding hands as we walk along the shore
Never felt like this before, now you're all I'm living for.
Say what? I've written Mises Daily articles that are a lot longer than that! One thousand words are not enough to say what I feel inside about Paul Krugman.

C'mon Billy, kick it up a notch. Other guys tell their sweethearts they'd walk a thousand miles for them--can you spit out a word per mile?! Or that they've been in love for longer than there have been stars up in the heavens. I get the honest approach, but c'mon. You're not going to hang on to that Caribbean queen at this rate.

Although my dissertation was in capital and interest theory, my "field exam" at NYU was in "theory," which basically meant micro/game theory. This was definitely an example of studying something for its sheer elegance, because I think whenever game theorists pontificate on the actual real world, they usually give horrible advice. (E.g., "Yes, sir, it would be a good idea to build hundreds of nuclear warheads for the U.S. government, but only if we deploy them according to this formula.")

But yesterday I actually benefited from my years of training. On the radio there was some goofy commercial with kids on a road trip. The kids are bored and the brother says, "Let's play 20 Questions" and the sister immediately agrees and throws out the first question. So there was no way the brother could have had time to think of his pick, before hearing the question about it.

So that got me to thinking: Would there be an advantage to either player, doing it this way? In other words, if someone says, "Let's play 20 Questions!" should you immediately blurt out a question, before the person can think up his pick? Or does it give an advantage to the other player, because then he can choose the thing based on your question (and then answer appropriately of course)?

At first, I thought there was no way to really answer this definitively. But then I realized that actually, the answer is straightforward, and all you have to do is make a very weak assumption that wouldn't even upset Murray Rothbard on a good day.

I leave it to the reader as an exercise.

In reference to my post on David vs. Goliath, Gary emailed to ask a riddle: What killed Goliath? Gary thinks it's obvious, but I don't. Here's the link to the chapter again.

This is one of those Bible stories that has spilled over into secular lore, but the original tale is pretty cool. So here it is, with some parts in bold that I will come back to at the end. Keep in mind that at this point, David is just a punk kid who plays the harp to soothe King Saul (the first king of the Israelites) when the latter is vexed. Not exactly the next Achilles, in the eyes of his older brothers or anyone else for that matter.

1 Now the Philistines gathered their armies together to battle... 2 And Saul and the men of Israel were gathered together, and they encamped in the Valley of Elah, and drew up in battle array against the Philistines. 3 The Philistines stood on a mountain on one side, and Israel stood on a mountain on the other side, with a valley between them.
4 And a champion went out from the camp of the Philistines, named Goliath, from Gath, whose height was six cubits and a span. 5 He had a bronze helmet on his head, and he was armed with a coat of mail, and the weight of the coat was five thousand shekels of bronze. 6 And he had bronze armor on his legs and a bronze javelin between his shoulders. 7 Now the staff of his spear was like a weaver’s beam, and his iron spearhead weighed six hundred shekels; and a shield-bearer went before him. 8 Then he stood and cried out to the armies of Israel, and said to them, “Why have you come out to line up for battle? Am I not a Philistine, and you the servants of Saul? Choose a man for yourselves, and let him come down to me. 9 If he is able to fight with me and kill me, then we will be your servants. But if I prevail against him and kill him, then you shall be our servants and serve us.” 10 And the Philistine said, “I defy the armies of Israel this day; give me a man, that we may fight together.” 11 When Saul and all Israel heard these words of the Philistine, they were dismayed and greatly afraid.
12 Now David was the son of that Ephrathite of Bethlehem Judah, whose name was Jesse, and who had eight sons... 13 The three oldest sons of Jesse had gone to follow Saul to the battle... 14 David was the youngest. And the three oldest followed Saul. 15 But David occasionally went and returned from Saul to feed his father’s sheep at Bethlehem.
16 And the Philistine drew near and presented himself forty days, morning and evening.
17 Then Jesse said to his son David, “Take now for your brothers an ephah of this dried grain and these ten loaves, and run to your brothers at the camp. 18 And carry these ten cheeses to the captain of their thousand, and see how your brothers fare, and bring back news of them.” 19 Now Saul and they and all the men of Israel were in the Valley of Elah, fighting with the Philistines.
20 So David rose early in the morning, left the sheep with a keeper, and took the things and went as Jesse had commanded him. And he came to the camp as the army was going out to the fight and shouting for the battle. 21 For Israel and the Philistines had drawn up in battle array, army against army. 22 And David left his supplies in the hand of the supply keeper, ran to the army, and came and greeted his brothers. 23 Then as he talked with them, there was the champion, the Philistine of Gath, Goliath by name, coming up from the armies of the Philistines; and he spoke according to the same words. So David heard them. 24 And all the men of Israel, when they saw the man, fled from him and were dreadfully afraid. 25 So the men of Israel said, “Have you seen this man who has come up? Surely he has come up to defy Israel; and it shall be that the man who kills him the king will enrich with great riches, will give him his daughter, and give his father’s house exemption from taxes in Israel.”
26 Then David spoke to the men who stood by him, saying, “What shall be done for the man who kills this Philistine and takes away the reproach from Israel? For who is this uncircumcised Philistine, that he should defy the armies of the living God?”
27 And the people answered him in this manner, saying, “So shall it be done for the man who kills him.”
28 Now Eliab his oldest brother heard when he spoke to the men; and Eliab’s anger was aroused against David, and he said, “Why did you come down here? And with whom have you left those few sheep in the wilderness? I know your pride and the insolence of your heart, for you have come down to see the battle.”
29 And David said, “What have I done now? Is there not a cause?” 30 Then he turned from him toward another and said the same thing; and these people answered him as the first ones did.
31 Now when the words which David spoke were heard, they reported them to Saul; and he sent for him. 32 Then David said to Saul, “Let no man’s heart fail because of him; your servant will go and fight with this Philistine.”
33 And Saul said to David, “You are not able to go against this Philistine to fight with him; for you are a youth, and he a man of war from his youth.”
34 But David said to Saul, “Your servant used to keep his father’s sheep, and when a lion or a bear came and took a lamb out of the flock, 35 I went out after it and struck it, and delivered the lamb from its mouth; and when it arose against me, I caught it by its beard, and struck and killed it. 36 Your servant has killed both lion and bear; and this uncircumcised Philistine will be like one of them, seeing he has defied the armies of the living God.” 37 Moreover David said, “The LORD, who delivered me from the paw of the lion and from the paw of the bear, He will deliver me from the hand of this Philistine.”
And Saul said to David, “Go, and the LORD be with you!”
38 So Saul clothed David with his armor, and he put a bronze helmet on his head; he also clothed him with a coat of mail. 39 David fastened his sword to his armor and tried to walk, for he had not tested them. And David said to Saul, “I cannot walk with these, for I have not tested them.” So David took them off.
40 Then he took his staff in his hand; and he chose for himself five smooth stones from the brook, and put them in a shepherd’s bag, in a pouch which he had, and his sling was in his hand. And he drew near to the Philistine. 41 So the Philistine came, and began drawing near to David, and the man who bore the shield went before him. 42 And when the Philistine looked about and saw David, he disdained him; for he was only a youth, ruddy and good-looking. 43 So the Philistine said to David, “Am I a dog, that you come to me with sticks?” And the Philistine cursed David by his gods. 44 And the Philistine said to David, “Come to me, and I will give your flesh to the birds of the air and the beasts of the field!”
45 Then David said to the Philistine, “You come to me with a sword, with a spear, and with a javelin. But I come to you in the name of the LORD of hosts, the God of the armies of Israel, whom you have defied. 46 This day the LORD will deliver you into my hand, and I will strike you and take your head from you. And this day I will give the carcasses of the camp of the Philistines to the birds of the air and the wild beasts of the earth, that all the earth may know that there is a God in Israel. 47 Then all this assembly shall know that the LORD does not save with sword and spear; for the battle is the LORD’s, and He will give you into our hands.”
48 So it was, when the Philistine arose and came and drew near to meet David, that David hurried and ran toward the army to meet the Philistine. 49 Then David put his hand in his bag and took out a stone; and he slung it and struck the Philistine in his forehead, so that the stone sank into his forehead, and he fell on his face to the earth. 50 So David prevailed over the Philistine with a sling and a stone, and struck the Philistine and killed him. But there was no sword in the hand of David. 51 Therefore David ran and stood over the Philistine, took his sword and drew it out of its sheath and killed him, and cut off his head with it.

To correspond with the parts I've put in bold above, here are my comments:

v. 16: Goliath taunted the Israelites for forty days. Can you imagine how demoralizing that would have been, and how everyone on both sides would have known that the Israelites clearly had no match for Goliath?

v. 26: What infuriates David is not that his brothers and the other Israelite soldiers are cowards, but that the pagan ("uncircumcised") Goliath is insulting the living God.

v. 28-29: David has clearly been the runt of the family his whole life; this makes his courage even more impressive. It would be one thing if the eldest of a noble family thought he had what it took to square off with Goliath. But the youngest of eight brothers, who up till now has been in charge of watching the sheep while the "real men" wage war against Israel's enemies?

v. 33-37: This is actually a very sympathetic portrayal of King Saul, in contrast to later events. Initially he doesn't want to let a young kid get slaughtered by Goliath, but then David speaks so boldly that Saul gives it a shot.

v. 38-39: I love this part. Saul thinks he is helping by giving David his armor and other accoutrements of battle, but obviously David can't fight Goliath in the standard way; he'd get destroyed. David's advantage is that he can sling a rock while Goliath doesn't perceive any threat; he needs to be unencumbered when he lets it fly. (For an analogy, the Confederate States should have easily staved off Union attacks, had they relied on unconventional warfare like the colonists used against the British troops. But the Southern generals were trained at West Point and so knew the "proper" way to wage a war was to line your men up in neat columns and march them into the other side's cannons.)

v. 40: This is an interesting part too. David grabs five stones, even though he kills Goliath with the first one. So it shows that even though David knew the Lord would deliver him victory, he didn't know exactly how it would play out.

OK my Firefox browser has accumulated far too many tabs. Time to clean house:

* Bill R. found another neat item in the WSJ from 1930. It seems that back then, they were comparing their slump to the 1920-1921 depression. But they recognized the important difference: "While the 1920-21 depression and stock market pattern has been cited as remarkably similar, some are pointing out that whereas now credit is cheap and market valuation still relatively high, in 1920-21 opposite conditions applied" (my emphasis). This is exactly the point I made in this essay.

* Tim Swanson sends along this very helpful New York Fed paper [.pdf] on excess reserves. The authors have a few numerical examples that are really good, if you want to truly understand the relation between balance sheets, loans, reserves, and excess reserves. However, I think the authors fail on their thesis. In particular, in both the intro and conclusion they say, "[W]hile the lending decisions and other activities of banks may result in small changes in the level of required reserves, the vast majority of the newly-created reserves will end up being held as excess reserves almost no matter what banks do." But this is only true if the central bank keeps ratcheting up the interest rate it pays on excess reserves; the authors' examples don't give any other reason (as far as I could tell) for a bank to refrain from lending out excess reserves. So their wording is a bit weird. They are making it sound as if banks can't really decrease excess reserves, just like banks can't decrease total reserves. But that's not right at all; the way you decrease excess reserves is by issuing more loans to bank customers. The authors' statement, quoted above, is incredibly misleading.

* For those of you who still think Abe Lincoln was a cool guy, let me ask: Did you know that in 1862 Union General Benjamin Butler issued an order to his men "decreeing that any New Orleans woman showing contempt for his occupying troops 'shall be regarded and held liable to be treated as a woman of the town plying her avocation' — i.e., the city's outspokenly Confederate belles were to be treated as prostitutes"? Honest Abe ignored calls to rescind the monstrous order. You do what you have to do, to save the Union.

* Orthopedic surgeon, free marketeer, and fellow Aquinas '94 alum Matthew DiPaola has started his own blog.

* I must confess, I like the way Mankiw deals with Krugman. And if you're a real punk, this is your treatment.

* I have been saying that rather than focus purely on theoretical issues, maybe the best way to anticipate what's coming is to see what the elites are up to. Well that's exactly what Daniel Estulin claims to have discovered, in his sleuthing around the Bilderberg meetings. Estulin reports that at the May 2009 meeting, the discussion involved a prediction of US unemployment hitting 14% by the end of the year. Unfortunately there were no clues in Estulin's article as to the direction of the dollar. (One interesting thing is that he talks about the Lisbon Treaty and the problem of my people, the Irish. I don't know whether to be reassured or horrified that the members of the Bilderberg group have a whole world full of malcontents that they need to knock into line.)

* And finally some comic relief: My wife passes along the following.

In an earlier entry I posted the concerns of a skeptical reader of my pamphlet Chaos Theory [.pdf]. The event turned into a proverbial town hall meeting, with 47 heated comments as of this writing, not to mention an old guy with a swastika declaring that God would judge me and my anarchist cronies in Auburn. I thought some of the points raised by critics Blackadder and Bobby1011 were worthy of this standalone essay. --RPM

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

Anarchy, the Mafia, and Somalia: Clearing Up the Confusion
By Robert P. Murphy

When confronted with a sketch [.pdf] of how a truly voluntary society might work, with private companies providing judicial and defense services along with education and Big Macs, the critic often replies, "That arrangement could never last in the real world. The mafia would take over and become the new government."

This typical view actually gets things backwards. Contrary to popular belief, the government doesn't hinder the mafia, it actually helps it. (Note that for this essay, I am going to use "mafia" as shorthand for "organized crime." I am not impugning Sicilians specifically in this post.)

Stop for a moment and consider which sectors of the economy the mafia occupies. Prostitution, gambling, loan-sharking, narcotics, labor unions, and of course simple robberies and homicides. What do they all share in common? They are activities that are either heavily regulated or downright prohibited by the State. In contrast, in sectors that are relatively free from government interference, the mafia has no foothold.

The classic experiment to show that we've put our finger on the true explanation, is alcohol Prohibition. When it was illegal to sell liquor, gangsters such as Al Capone engaged in bootlegging, and shot up other competitors in turf wars. Yet after Prohibition was repealed (in one of the few decent things that FDR did upon taking office), organized crime left the alcohol industry and focused on the remaining sectors that were still prohibited.

Now if the above analysis is correct, and the mafia (and violent gangs in general) thrives only in those areas infested with heavy State intervention, then it seems obvious that market anarchy would emasculate such criminal groups. To put it in other words, as the government legalized more and more sectors, the mafia would have to concentrate its activities in fewer and fewer businesses. In the limit, as everything were legalized (from a State legislative point of view), the mafia would have no special advantages at all. Just as the mafia can't withstand open competition with Budweiser, it would also lose market share to honest entrepreneurs in judicial and police services, if only the State would lift the ban on producing such services.

A Rival Explanation of the Prohibition Episode

In the comments of a previous post on Free Advice, critics Blackadder and Bobby1011 offered a rival interpretation to my theory above. They argued that I was wrong to interpret the repeal of Prohibition as a reduction in State intervention into the liquor industry. On the contrary, they viewed it as a resumption of government provision of property protection for the producers of alcohol.

I must confess that this alternate explanation took me by surprise; I thought my Prohibition example was airtight, but my critics did at least offer a plausible comeback. However, on balance I still think my interpretation is far superior. This is a crucial point so allow me to belabor it.

I am saying that the mafia benefited from alcohol Prohibition because the police effectively chased away legitimate businessmen from the industry. If the State were to literally declare that Al Capone had a monopoly in Chicago liquor distribution, and sent any competitors to jail, then the price of alcohol in Chicago would shoot up, and Capone would make exorbitant profits. This is obvious. So by the same token, I argue, when the State threatens to put any liquor distributor in jail--but then actually looks the other way when Capone pays bribes--that is economically very similar to the outright, legislated monopoly.

I am using Capone just to make an illustrative point. I haven't done any particular research on him, but it is certainly true that in modern times, big-time crime families regularly pay the police "protection money." If any reader doubts this, then he or she really doesn't understand the first thing about the drug trade. For a low-effort introduction, rent the movie Serpico, which is a great Al Pacino movie based on the true story of a NYC narcotics officer who didn't want to take dirty money. (Come to think of it, you can rent just about any Al Pacino movie to learn that big-time drug dealers routinely pay off the police.)

The Marginal Costs and Benefits of Violence in Markets

It should be quite obvious empirically that violence goes hand-in-hand with markets that suffer from extensive government prohibition. Again, the classic experiment is alcohol Prohibition. It would be inconceivable that executives at Budweiser would order a drive-by shooting of their rivals at Heineken. Yet when the State stamped out most producers in this industry, killings were common. This insight shows that the gangland turf wars in inner cities today are due to drug prohibition, and not to the intrinsic "craziness" of cocaine selling.

But even though most libertarians recognize the association of government prohibition and violence, its causes are rarely spelled out. Very briefly, the answer is simple: Government prohibition raises the marginal benefits and lowers the marginal costs of using violence against one's competitors in a particular industry.

Let's start with the cost side, since that's easier to grasp. Right now, if you are going to become a cocaine distributor, you are already breaking laws that could send you to prison for life. Moreover, if you're big enough, you regularly give bag(s) of money to the local police. So on the margin, the cost to you of killing a rival dealer is much lower than it would be if you ran a Thai restaurant. When you're a normal restaurateur, the worst that the government can do is audit your tax returns. But if you're a cocaine dealer, if you fall out of the good graces of the cops they can give you life. So it's really not such a reckless move to kill somebody, when you're a cocaine dealer, even though it would be insane for a restaurant owner to order a hit of the guy opening a sushi shop down the street. The cocaine dealer already has dirty cops on his payroll, who presumably would be willing to overlook a homicide too for an extra payoff, and the cocaine dealer also is a lot more connected and able to bribe judges should he ever go to trial.

On the other hand, the marginal benefits of violence are much higher for the cocaine dealer than for the Thai restaurateur. Drug dealers aren't (completely) reckless; they do it for the money. In order to compensate for the huge risk, the monetary returns on dealing cocaine must rise to astronomical levels. (If you like charts, when the government threatens to imprison cocaine sellers, the supply curve shifts way way to the left, whereas the demand curve shifts left but not nearly as much. So the equilibrium price of a kilo of cocaine skyrockets, far above the monetary costs of production.)

Because of the above considerations, the benefit of gaining market share in the cocaine business is huge. Every new customer might mean thousands of extra dollars per month in monetary profits. In sharp contrast, if the Thai owner "steals" a customer from the Japanese restaurant, that might add only $100 per month to the bottom line. This is because there's a much lower (monetary) profit margin in the restaurant industry. It might make sense for drug dealers to hang around schoolyards, selling their products to kids, or possibly even giving some of it away for free to newcomers (though I don't know if that really happens, outside of anti-drug commercials). But you never see representatives from General Mills hanging around the monkey bars, selling the single-serve boxes of Cheerios. Because of this huge difference, gaining additional customers means a lot more in the prohibited industry than in the free sector. That's why killing off a rival--and thereby gaining access to his customers--is so much more profitable in the prohibited sector.

So we see that when the State threatens to imprison the producers of a certain good, it alters the incentives so that violence is now much more lucrative in the industry. Naturally, people in the real world are not simply robotic utility calculators. It's not so much that the same entrepreneur will be either a hard-nosed businessman, versus a ruthless killer, depending on the DEA's policies. No, what happens is that people who are predisposed to being cold-blooded killers are allowed to thrive and grow very rich in a society with strict drug laws. So rather than being some isolated sociopath, who kills a guy in a bar for looking at his girlfriend and then goes to jail, instead the asinine drug laws allow this same sociopath to make millions per year selling cocaine, with which he buys automatic weapons and hires cronies, and also buys off the police so he stays on the streets.

Does the State Actually Protect Private Property?

What's really ironic about the rival theory of Blackadder and Bobby1011 is that it assumes that government is actually good at protecting property rights. In other words, their theory assumes that the honest folks at Budweiser couldn't compete with Al Capone in 1930, because he would threaten to kill them and the bootlegging people of Bud couldn't very well call the cops and complain. But once Prohibition was repealed, now all of a sudden the legitimate producers of alcohol could press charges against gangsters for wrecking their stores or for shooting their employees.

I suppose there is a grain of truth to this, but I stress that it really is a grain. We know that the government does a horrible job in every other enterprise it touches, be it education, road paving, electricity provision, and intelligence gathering. But we're supposed to believe that it does a really great job in protecting people from gangsters? If that's true, then why the growing reliance on private arbitration efforts? Isn't it obvious that government courts and police are just as inefficient and counterproductive as everything else the State does?

To truly test the different theories, we need to come up with an activity where the government (a) doesn't interfere with producers but (b) doesn't defend the property rights of those same producers. If such areas are rife with theft and violence, then Blackadder and Bobby1011 are right. But if those sectors are generally orderly and peaceful, then I'm right.

I can think of a few examples where I'm right. (Maybe in the comments my critics can counter with examples that suit their theory.) For example, commerce over the internet is hardly regulated. Sure, in principle if you bought a book from a third party through Amazon, and the guy never sent it to you, you could bring him to small claims court. But that's not what makes the system work. It's clearly reputational effects, not the threat of government lawsuits.

Other examples are the "Not So Wild Wild West" [.pdf], where prospectors in California respected the claims of earlier arrivals, even though there was (initially) no formal government establishing the property rights. And Ed Stringham has done great work (see his 2002 and 2003 papers [.pdf]) explaining how fairly sophisticated financial markets operated in the 17th century even without official law enforcement.

I can give a personal anecdote here as well. After I graduated a semester early from Hillsdale, I had to kill seven months or so before starting at NYU. So three of us rented an apartment in a very shady neighborhood west of Chicago. One morning I went outside and saw that my truck's window had been smashed and my CD player stolen. So I went back in, called the cops, and they said they'd send out a car. (I had to warn my one roommate to hide his pot.) But guess what? The cops never showed up. And I daresay no detectives were burning the midnight oil, trying to crack my case wide open.

So in this neighborhood, I think the police really didn't care too much about protecting the residents' property rights. And although I guess I can't really prove it, I'm pretty sure that the mob didn't run all the grocery stores in the area. Now it may be true that criminal organizations were involved with the bars, but guess what? You need a liquor license to run a bar. But when it came to something that was fairly wide open to competition, like a grocery store or a restaurant, I am pretty sure those were run by legitimate businesspeople, who didn't use violence to keep out would-be competitors. And this is true, even though I don't believe the police would have been rushing over to protect these businesspeople from mob harassment.

Confusing Correlation and Causation in Somalia

Besides claiming that the mafia (or insurance companies) would take over and become the new State, critics of my writings on market anarchy will often say, "Well why didn't your utopia rise out of the ashes in Somalia? History shows that when the State stops providing security services, chaos breaks out."

I need to wrap this essay up, so I must be brief. But a few quick responses:

* As far as the "lessons of history" go, yes it's true that a Rothbardian paradise has not developed and proved its stability. But by the very same token, we have not a single example in world history of a stable, limited government. The best attempt was the government set up by James Madison and friends, and we all know how that turned out.

* Somalia is not a fair illustration of what I described above, in terms of a State legalizing more and more activities. No, the government in Somalia fell; it didn't disband itself because the public became Rothbardians. This is also true in regions in Colombia where the government exercises no authority. It's not that the State ceded its power, but rather that it was beaten back by a rival gang. To give an analogy, suppose I say that lowering taxes as a share of GDP is good for the economy. Would it really make sense to say, "Well, I agree that after a certain point, if the government takes too much in taxes, that's bad. But if the government takes too little in taxes, that hurts the economy too. Why, look at Somalia, where central government tax revenues are 0% of GDP. That place is a hellhole. Yet according to your supply-side theories, Somalia should be booming!"

Conclusion

The proponent of market anarchy is making the simple claim that systematic violation of acknowledged property rights does not help a society. Standard economic theory tells us that monopolies enforced through violence (or its threat) lead to lower quality and higher prices; this analysis holds true even when the monopoly refers to judicial, police, and military services. Libertarians generally recognize that the government does a horrible job educating children, maintaining roads, and sending telescopes into space. Why in the world would we want to entrust politicians and bureaucrats with protecting us from thieves and killers? After all, they're the worst thieves and killers in the world!

Robert P. Murphy holds a Ph.D. in economics from New York University. He is the author of The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009), and is the editor of the blog Free Advice.

Arnold Kling has a great post on the importance of heterogeneity in macroeconomic theory:

I think it is misleading to speak of the output gap. It is part of what I call "hydraulic macro," which thinks of the economy as producing a single good with a single type of labor and a single type of capital...
...
...I think that the simplifying assumption of homogeneous output, labor, and capital is...dangerous. My claim (which is not original with me--it is recognizably Austrian) is that a recession can be thought of as a recalculation. Imagine a central planner who decides to radically change plans. He has a huge recalculation to make in order to figure out where to allocate labor and capital. He says to some people, "Wait a minute. I am thinking. Some of you just have to stand idle while I figure this out."

The market economy is like that central planner. We are undergoing a Great Recalculation.
...
In conventional, hydraulic macro, we think in terms of this one good called GDP, and the output gap is the difference between how much of this GDP stuff we could produce if everybody were working and how much we are actually producing with all the unemployment over and above "normal." We assume that "normal" unemployment, which is structural and frictional, is some roughly constant fraction of the labor force.

The way I look at things, we have a huge amount of structural and frictional unemployment these days. There is very little cyclical unemployment--limited to autos and household durable goods. If you measure the output gap using my definition of cyclical unemployment, then the output gap is tiny.

But I think it is better to drop the concept of the output gap altogether. Let us just say that we are in the middle of a Great Recalculation. Before the housing bubble popped and we figured out that our housing and financial sectors were messed up, we had something like full employment. Now, we need a Great Recalculation to figure out a new allocation of skills and jobs that gets us back to full employment. Because we got so messed up before, it will take years for the recalculation to be completed. Meanwhile, if you insist on thinking in terms of a large output gap, you are talking about an imaginary world in which the Recalculation takes place instantaneously. What you are not talking about is a gap that can be closed with government action, unless the government miraculously does the Recalculation faster and more effectively than the market.

Now it's official: Krugman has definitively said we are in a recovery. (In his previous writing, he technically didn't say we were, just that it seemed as if we were, and if we were it was because of Big Government.)

Now what's ironic in all this is that even if unemployment is in double digits for 2010 through 2013--which it very well might be--Krugman would actually weasel out of the post I've linked to above. He would say, "Yes this is unfolding exactly as I predicted. Real GDP started rising again for a few quarters in the summer of 2009, and I said at the time that it would be a jobless recovery."

So just to be clear, when I say we are nowhere near coming out of this, I mean it in the same way as an economist speaking in 1932. Yes, the official recession dating of the NBER shows that there were two recessions in the 1930s--one from 1929-1933, and another from 1937-1938.

But c'mon, that's ridiculous. We all know that "the Great Depression" lasted from 1929 until at least World War II. (And readers of Bob Higgs know that it actually lasted through World War II.)

When it comes to dating business cycles, I am a man of the people. If a tenth of the labor force can't find work, the economy is broken. Don't let those MIT economists like Krugman fool you with their fancy jargon.

This is pretty exciting, as far as these things go. Usually the Wall Street Journal doesn't allow an op ed writer to respond to somebody else's op ed, except in the most indirect ways. But Alan Reynolds' piece today opens as if it's one of my Mises.org Daily Articles:

‘So it seems that we aren’t going to have a second Great Depression after all,” wrote New York Times columnist Paul Krugman last week. “What saved us? The answer, basically, is Big Government. . . . [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.”

This is certainly a novel theory of the business cycle. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts.

Well, I actually take that back. My articles tell you what the punchline is, within the first two paragraphs.

Anyway, Reynolds does a good job explaining that there is basically no empirical support for the claim that deficit spending avoids (or cushions) recessions, or for the opposite claim that the Great Depression was caused by inadequate spending. My favorite part:

Proponents of Big Government can't say we avoided the next Great Depression due to hypothetical stimulus money that is mostly unspent. So they argue it's more important that the federal government merely continued spending and didn't "slash" spending as in the early 1930s. But the federal government didn't slash spending in the early '30s. Federal spending rose by 6.2% in 1930, 7.7% in 1931 and 30.2% in 1932. Since prices were falling, real increases in federal spending were huge during the Hoover years.

As of 10:30 PM EST Friday night, Krugman hadn't responded on his blog to Reynolds.

So let's have another Reader Contest. Whoever can come up with the closest approximation to Krugman's response (and it must be time-stamped before his answer, of course) will get a free copy of the book that made Reynolds' case months ago.

Let me take up the two most obvious answers: (1) Krugman ignores Reynolds. (2) Krugman brings up the recovery with FDR's inauguration (and slightly higher deficit spending), and then the collapse when FDR tried to rein in the deficit. I.e. Krugman might play the Romer card, demonstrating that he really needs to read the Mises Daily.

I'm actually not predicting that Krugman will do either of the above. In a clear violation of rational expectations, Krugman's responses continue to surprise me. For example, when Barro wrote a WSJ article saying that the multiplier was very low during World War II, Krugman came back and basically said, "What are you talking about? No Keynesian ever claimed that wartime deficit spending got us out of the Great Depression." Could anyone have predicted that?

In his last guest essay, Edward Gonzalez explained why post-invasion Iraq made him question the feasibility of Rothbardian free-market anarchy. In this post, Gonzalez describes a case where limited government--as opposed to brutal strongman rule--emerged out of the chaos after Saddam's regime fell.--RPM

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

Limited Government in the al Anbar Province of Iraq
by Edward Gonzalez

In a deployment to Iraq, I served in a number of villages in the al Anbar Province of Iraq. All these villages were dealing in their own ways with the consequences of war. Organized crime, terrorism, murder and intimidation campaigns were just a few negative aspects I witnessed while on deployment. I also witnessed some very encouraging scenes in the form of communities uniting in order to provide for their security. Although there is obviously a very large difference between the modern day United States and a farming village in Iraq, I believe the actions I witnessed merit examination, for in my opinion they represent both community and government at its most basic level.

There was a village where I served that developed a system of limited government that I believed to be just. It was a small fishing and farming village along the Euphrates River. This village had a collection of honest, intelligent elders, the most senior of which was the Sheik. Although it was a farming and fishing village, the Sheik owned four rock quarries. He had been running the quarries since he was a young man. He was older; my best guess is early 70s, had four wives, seven children, over a dozen grandchildren, and was a natural leader and entrepreneur. This village was also thrown into chaos in the early months of the war. Al Qaeda cells had made a home in their small village and killed a great many people. I visited a mass grave site that used to be the favorite execution spot of the extremists. I don’t know at what point, but the Sheik did eventually take action.

He gathered the families together and convinced them it was time to retake their town. He outfitted every fighting age male with a rifle, and the Sheik’s eldest son, who was in his mid thirties, led the battle to throw al Qaeda out of their village. The town was retaken. Here, the community decided to take collective, violent action in order to protect their lives and property. That collective action was the birth of their government.

I arrived at this village almost a year later. The system the elders had set up was truly impressive. Every young man was a police officer. Once a week each man had the responsibility of one patrol which usually lasted three to four hours. Apart from that one duty, the rest of the week the young men did their normal jobs of farming, fishing, or working at the rock quarry. There were only three full-time police officers who manned the radio at the police station, a small building with no furniture at which the patrols met. The Sheik's youngest son, who was 17, was the main radio operator. The people of the village paid no taxes, aside from the “time tax,” all the young men had to pay in a weekly patrol. The Sheik supported the only three full time police officers. The Sheik’s oldest son served as the Captain of the police, but his full time job was running the family rock quarries, and he only went to the police station to plan patrols and check in with his baby brother once in a while. However, in case of attack, every one knew he ran the show.

The elders of the village gathered at least once a week to discuss village business. In truth, they gathered almost every night to drink tea. During these meetings, if anything of importance needed to be decided all the men would give their opinion and a collective decision was made. There was no official vote per se, but the amount of people present made it easy to tell what direction the majority was leaning.

The Sheik was the village judge. When neighbors had disputes they went to see him. He was recognized as the wisest, shrewdest man in the village and people did accept his judgment. The Sheik did not accept money for the service he provided. He said it was his responsibility as an elder of the village. If he was away or sick, one of the other elders served as the judge. The Sheik had first established his leadership as a businessman and entrepreneur. He was certainly the richest man in the village, but people did not respect him for his money. They respected his judgment and decision making skills, which had as a great benefit also made him wealthy. Although the Sheik’s eldest son was Captain of the police force, I never witnessed nor heard any rumor of the Sheik’s judgments needing to be enforced. People abided by his judgments out of respect. Note that it was respect for his wisdom, not power.

This was their basic government: The elders of the community acting as leaders and decision makers, the young providing the brute force of police and military action, and the senior elder acting as judge.

The system had many great benefits. There was no divide between police and the people because everyone either was or lived with a police officer. Since every household had a police officer, if a stranger came to town, someone always noticed and notified the patrol. Although surrounded by violence on all sides, in my seven months in Iraq that is the only town where I could walk the streets without body armor and enjoy relaxing dinners without fear of being attacked.

There was a strongman directly to the north of the village who dominated his area as a tyrant extorting money from businesses and households. He never once made a move against this village. If he had attempted to extort money from one house or shop, every able-bodied man would have emerged armed with an AK-47 ready to fight.

As a result of the system in place, there was not a single attack while I was there so I did not see first hand how they dealt with murderers. However, speaking to the Captain of the police I learned how they handled it in the past. I also had a friend serving a few hundred miles away in a very similar village who witnessed it first hand. Two insurgents planted an IED that resulted in the death of a local man. The police captured the two insurgents immediately. The elders of the town and older police officers gathered in the center of town. They held court, had a vote, and the two insurgents were executed.

I also questioned the Sheik and his eldest son on how judgments were enforced and what repercussions a young man would face if he refused to conduct security patrols of the village. In both cases the answers were the same. All individuals were part of the community and had a duty to that community. This meant protecting the village in time of danger and abiding by the judgments of the elders in case of personal disputes. Those who chose to ignore this were shamed. Other individuals and families would look down upon them, refuse to do business with them, and give no assistance in case of need. Then the individual had one of two choices: Become completely self-sustaining and live outside the community or do his part. They both said that police enforcement in either of those cases would be a waste of time and energy. The Sheik also emphasized that forcing an individual to be part of a community that they did not wish to be apart of would be against God’s Law.

The village also had public roads. However, there were no taxes imposed on people for the construction. As security improved in and around the village, the market slowly started to see more people showing up for trade. One evening the elders decided it was time for a good road in and out of the village. The building of the road was decided on because it would provide a path for trucks to move large amounts of fish and crops from the village to the cities. The Captain of the police, the man running the rock quarries, got his trucks together and organized the construction of the road. All the men that stood to benefit financially from the construction of the road, which as far as I could tell was almost everyone, donated personal resources and lent a hand in the construction. It was finished in a single day.

This was also the time of the Awakening in the al Anbar province. Meetings were being called in the larger cities and representatives from villages were being asked to attend. I was not surprised that the Sheik was selected as the village representative. When representatives gathered for these types of meetings, the talks and discussions were on the overall security of the province and how security might be improved along the highways between the villages. The types of things discussed were: What tactics was al Qaeda using throughout the province? What police actions had been most effective in dealing with the threat? If an individual from one village commits a crime in another, how will he be tried? How will the police from one village coordinate with the police of another so there are not unintentional fights? What procedures will be abided by to make coordination more efficient? At no time in any of the meetings that I attended, were there laws established on how cities or villages were to handle their internal affairs. The focus was on coordination.

Although no taxes were collected from the villagers, tax money did come into play. American military personnel provided the towns with standardized police uniforms, a couple of ford pick up trucks painted as police vehicles, training and training ammunition for the young men.



From war and chaos this village, and many others like it, was able to emerge as a free society with a free market and an increasing quality of life. They were able to accomplish this not by treating the use of force and violence as a normal service to be provided by the free market, but by community decision and action. Please do not mistake my obvious concentration on the positive aspects of this village as an implication that everything was perfect. There were many hardships and problems both in the village and in the coordination with other towns and organizations. However, as a whole, this village I served in had the safest and happiest people I met in my time in Iraq.

I am certainly not saying that we should look to adopt this style of village government in the United States, but there are some elements in this style of limited government that I believe to be important to any free society.

First: The use of force was not treated like any other service in a market economy. Justice and police/military action were collective actions taken by the communities as a whole. The power of this government was not focused with a single individual but spread across the community. The process was intentionally inefficient so that no one individual would take hasty/emotional action that would have negative and dangerous repercussions for the community.

Second: Government only used force for community defense. They drew a distinction between what police/military needed to protect with violence and what community needed to enforce with shame. A violent assault on a person’s life or property was collectively defended by the use of force. A “crime” or broken rule of the culture was dealt with through shame and exile from the community.

Third: Government power was decentralized. When the Sheik, as the representative from the village, met with other representatives from other cities and towns, it was to discuss how the towns and cities might work together to deal with shared hardships. They established rules and procedures so that the individuals from neighboring villages and cities might deal more effectively with one another. There were no laws passed dictating to villages or cities how they must run their internal affairs.

Fourth: Government was not a money making, for-profit organization. They were all entrepreneurs who supported themselves. Government was a duty each individual had to his community. The fact that they were all entrepreneurs who supported themselves lent to decisions that were pro free market.

I will not launch into my full theory of limited government here. However, I do believe that certain fundamentals in a just society apply to all societies from a small farming village to a modern day nation.

Edward M. Gonzalez is a graduate of New York University and served on active duty in the United States Marines Corps from January 2004 to August of 2008. He is currently a Captain in the reserves and works for a private school in San Jose, CA. The views expressed in this article are not necessarily endorsed by the United States Marine Corps.

Tyler Cowen brings to our attention this revealing passage from Yglesias:

At the same time, I’ve come to be increasingly baffled by the high degree cynicism and immorality displayed in big-time politics. For example, Senators who genuinely do believe that carbon dioxide emissions are contributing to a global climate crisis seem to think nothing of nevertheless taking actions that endanger the welfare of billions of people on the grounds that acting otherwise would be politically problematic in their state. In other words, they don’t want to do the right thing because their self-interest points them toward doing something bad. But it’s impossible to imagine these same Senators stabbing a homeless person in a dark DC alley to steal his shoes. And what’s more, the entire political class would be (rightly!) shocked and appalled by the specter of a Senator murdering someone for personal gain. Yet it’s actually taken for granted that “my selfish desires dictate that I do x” constitutes a legitimate reason to do the wrong thing on important legislation.

Making it all the odder, the level of self-interest at stake isn’t all that high. Selling the public good down the river to bolster your re-election chances isn’t like stealing a loaf of bread to feed your starving children. The welfare rolls are hardly stocked with the names of former members of congress. [Emphasis in original.--RPM]

Wow. Where to begin?

First of all, Mr. Yglesias, it would be incredibly reckless to kill someone with your own hands, in order to obtain a pair of shoes. If a senator got caught doing that, his peers would be amazed all right, but only because of the ridiculous risk/reward judgment involved. (And yes, they would all say their moral sensibilities were ruffled, but that would be for show--just like everything else they publicly say.)

Second of all, Mr. Yglesias, the reason retired senators (and Fed chiefs etc. etc.) are loaded when they lose office, is that they played along while in office. That's how the game works. When you're, say, a Pentagon general in charge of procurement, you make sure Defense Contractor X (not naming names here) gets the $3 billion project to breed sharks with laser beams attached to their heads. Then when the general retires, he becomes a "consultant" and gets paid millions to show up on Fox News and CNN and explain that yes indeed, it would be very useful to deploy sharks with laser beams attached to their heads in the Mediterranean.

Ironically, Friedrich Hayek explained "Why the Worst Get On Top" in perhaps the most famous chapter of his gigantic political classic, The Road to Serfdom. You would think that Yglesias surely read such a book--especially since in this blog post Yglesias says, "But I’ve been back-and-forth on the main issues long enough that I’m pretty sure I could switch this blog’s point of view and do a credible job of offering critiques-from-the-right of the progressive liberal health reform movement and the progressive liberal approach to domestic policy generally."

And yet we can't be certain Yglesias has bothered to read something as crucial as Hayek's slender classic, since in another blog post our commentator referred to it as a "nutty alarmist book".

Pacific Research Institute (PRI) has released part one of a new series called, California Prosperity Project. This particular study is, "Assessing the State of the Golden State." In this one, we are just trying to get California citizens and policymakers to admit there is a problem.

This is a two-part argument. First:

U.S. Federal Reserve chief Ben Bernanke on Friday said prospects for a return to global economic growth looked good "in the near term," the clearest signal yet the world's most powerful central banker thinks a recovery is at hand.

"After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good," Bernanke told an annual Fed conference here in the shadows of the Grand Teton mountains.

Now the second part of the argument:



Note: If you're an important person and are rushed for time, just watch, say, the last minute of the above video. It never gets old.

Jesse Johnson passed along this story--and he actually did it days ago, when it was fresh!--about the FBI hiring "right-wing" bloggers. I called them up, but they explained that I am serving their false-flag purposes just fine, for free. They assure me that several agents read my blog religiously.

All joking aside, here is the story:

A notorious New Jersey hate blogger charged in June with threatening to kill judges and lawmakers was secretly an FBI “agent provocateur” paid to disseminate right-wing rhetoric, his attorney said Wednesday.

Hal Turner, the blogger and radio personality, remains jailed pending charges over his recent online rants, which prosecutors claim amounted to an invitation for someone to kill Connecticut lawmakers and Chicago federal appeals court judges.

But behind the scenes the reformed white supremacist was holding clandestine meetings with FBI agents who taught him how to spew hate “without crossing the line,” according to his lawyer, Michael Orozco.

“Almost everything was at the behest of the Federal Bureau of Investigation,” Orozco said in a 45-minute telephone interview from New Jersey. “Their job was to pick up information on the responses of what he was saying and see where that led them. It was an interesting dynamic on what he was being asked to do.”
...
Bill Carter, an FBI spokesman, said in a telephone interview the bureau’s policy is “to neither confirm nor deny whether an individual has an association with the FBI.”

Turner’s alleged 5-year-long bureau stint ended sometime in 2007, Orozco said, the year the mischievous online group, Anonymous, briefly shuttered his site — turnerradionetwork.blogspot.com — with a denial of service attack. At the time, hackers also posted what appeared to be private e-mails between Turner and the FBI.

The e-mails are legitimate, said Orozco. The FBI approached Turner, now 47, in 2002, and he spewed rhetoric about politics, white supremacy, immigration, abortion and other hot-button issues for years in exchange for government cash.

Turner was arrested in June at his apartment in suburban New Jersey.

According to court documents, (.pdf) after a three-judge panel of the Chicago-based 7th U.S. Circuit of Appeals upheld a Chicago handgun ban, he blogged that the judges should be “killed.”

“Let me be the first to say this plainly: These judges deserve to be killed. Their blood will replenish the tree of liberty. A small price to pay to assure freedom for millions,” he wrote.

A day later he posted addresses, photos, maps and other identifying information about Chief Judge Frank Easterbrook and Judges Richard Posner and William Bauer, the authorities said. State charges are also pending in Hartford, Connecticut, where Turner is accused of inciting readers to “take up arms” against state lawmakers.

Though the alleged threats came after his FBI service ended, Orozco said Turner’s relationship with the FBI is relevant to his defense.

“It is not trivial that the very government that trained an individual where the line was is prosecuting him when he has not stepped over the line,” Orozco said.

If the guy really did get paid by the FBI--and elsewhere I've seen a figure of $10,000--then that is surely relevant. But this I thought a rather lame defense by his attorney: “It’s a protected political statement. He opined,” Orozco said. “He said they deserved to be killed. He did not say grab a gun and go out and do what is necessary.”

To be clear, I'm simply saying that the attorney's argument deserves to be ridiculed. I am NOT saying, "Start your own blog and say the guy is a moron."

So I want to read up on the German hyperinflation, what with that old adage about history repeating itself. I asked (who else?) David Gordon for a book recommendation, and he suggested Adam Fergusson's When Money Dies.

But when I look it up on Amazon, there is one copy, priced at $761.29. Am I somehow missing the main selection, or is this some kind of publicity stunt to acclimate us to hyper-depression?

As CNBC reports:

A new global reserve system is needed after the global financial crisis exposed the U.S. dollar-based system as flawed and risky, Nobel Prize-winning economist Joseph Stiglitz said on Friday.

The "dollar now is yielding almost zero return," Stiglitz said in a speech at the United Nations regional headquarters in Bangkok. "The current global reserve system is fraying. It's falling apart. The issue isn't whether we go to a new system.

The question is do we do so in an orderly or disorderly way." The build up of the U.S. deficit, debt and "the boiling up of the balance sheet" is cause for anxiety, he said.

But don't get excited, Stiglitz isn't a Free Advice reader:

Stiglitz urged rich nations to provide funds to help poorer countries avoid a steep crash during the financial crisis.

The group has called for global coordination to avoid competition to cut taxes, and for a worldwide increase in tax on high earners. Dubbing itself the "Shadow GN," the group has urged governments to opt for bank nationalisations rather than bailouts in order to drive the pace of fresh lending.

More "unexpected" bad news from CNBC... Jobless claims show "surprise" gains, and mortgage delinquencies aren't confined to subprime borrowers:

Late payments on U.S. mortgages increased to a record in the second quarter, with almost one in eight homeowners delinquent or in the foreclosure process, the Mortgage Bankers Association said Thursday.

A sharp drop in subprime adjustable-rate mortgages entering the foreclosure process offset a surge on other types of loans, particularly prime fixed-rate loans, the MBA said in its National Delinquency Survey.

The percentage of loans on which foreclosure actions were started fell to 1.36 percent in the second quarter, down from an all-time high of 1.37 percent in the first quarter, but up sharply from 1.08 percent in the second quarter of 2008.

What's really depressing is that I think most Americans--including supposedly no-nonsense businesspeople--can't understand why this downturn doesn't just bottom out, for crying out loud. I mean really, all the other recessions ended after a while, so surely this one has to, any day now?

And what's really crazy is that if you pushed the average business owner or investor, and said, "Actually, this time is different--the government and the Fed have been doing things that they haven't done since the 1930s," then the response would probably be, "I know! That's what's so perplexing! Even with all of the government stimulus and Fed easing, for some reason this particular recession is dragging on forever. What the heck?!"

This has been floating around the internet (e.g. LRC), but I just watched it this evening. Rarely have I seen such a video clip packed so densely with economic fallacies and simple lies. But for our purposes, note the emphasis on protecting American workers and the dollar from international speculators. I think we will be hearing the same justification for some more government interventions into the financial system very soon.



UPDATE: After I posted this, I listened to it again. Wow, what a liar. At around the 2:00 mark, he says, "The effect of this action, in other words, will be to stabilize the value of the dollar." In context, he is talking about domestic purchasing power; he at least admitted in the previous sentence that the dollar would buy less in terms of foreign goods.

OK Mr. President, let's see how well your promise held up. You took the dollar off gold ("temporarily"...) in August 1971, in order to stabilize its domestic purchasing power. Let's check out what happened to the annual percentage increases in the Consumer Price Index (CPI) twenty years before and after your merciful move:



Surprise surprise. It looks like when Nixon took away foreign central banks' ability to turn in dollars for gold, that the Fed decided to print up a lot more dollars, which in turn caused US prices to soar. How odd.

A reader asked me to investigate this Krugman blog post. Echoing DeLong, Krugman is arguing that the fiscal conservatives are wrong to worry that Obama's deficits will push up interest rates:

Brad DeLong has been writing about the falsity of the claim that large-scale government borrowing in a liquidity trap will lead to soaring interest rates. I was looking for some corroborating data, and came up with a picture that surprised me, though it shouldn’t have. Here it is:


Net federal saving is, roughly, the budget surplus (so it’s negative if there’s a deficit.) It turns out that there’s a strong correlation between budget deficits and interest rates — namely, when deficits are high, interest rates are low.

On reflection, it’s obvious why: a weak economy both drives up deficits and drives down the demand for funds, while a strong economy does the reverse. Thus the surpluses of the late Clinton years were associated with high interest rates, while the current recession has depressed both rates and revenues.

OK now I'm not sure that Krugman of doing this on purpose, but the time frame he chose for his data is very convenient. (On the one hand, I want to give him the benefit of the doubt, because the FGDEF series that he chose only goes back to 1999. On the other hand, I'm not sure how he even found that series on FRED; if you go through the obvious categories, the first series you find is FYFSD, which goes way way back.)

Anyway, regardless of how he ended up with the above graph, it is nonetheless very misleading. As I alluded to in the parentheses above, we can't use the exact same series to go back further in time, since the one Krugman chose for federal net savings doesn't go back any more. However, we can switch to the nearly equivalent FYFSD (federal surplus or deficit), and we can see just how robust the apparent relationship above is.

First, let's switch the series but keep the same time scale, so it's clear that I'm not rigging the game. So below is the same chart as Krugman has above, except I've taken out his FGDEF series and put in the FYFSD series:


Not a perfect match, but close enough, right?

OK great, now let's go back to 1962, instead of stopping at 1999 as Krugman did in his blog post:


Well how 'bout that. Over the whole period--as far back as the 10-year Treasury rate series goes on FRED--you don't see the two lines moving in lockstep. If anything, they move in opposite directions. That is, in periods when the government borrows heavily, interest rates tend to go up, and in periods when the government runs a big surplus, interest rates tend to dip down.

Now of course, you could try to explain away the big moves. For example, in the early 1980s Volcker jacked up interest rates, and this pushed the country into a severe recession which then put strains of the federal budget.

OK that's fine. But clearly, Krugman's initial surprise was correct. In general, interest rates and federal savings rates do not move in lockstep. Supply and demand work, even when it comes to the government.

One last point: Brad DeLong did not, as far as I can tell, make a general claim about the two series. Rather, DeLong was merely saying that in a liquidity trap you get the abnormal result that government borrowing doesn't push up interest rates. So DeLong is unscathed by the above.

But we can't say the same for Krugman. Even though he used DeLong as a springboard, his explanation for his (initially surprising) graph was a general one about recessions and interest rates. He wasn't limiting the discussion to rare periods of liquidity traps, unless every recession features a liquidity trap.

Back in late October, I wrote:

In a previous post, I admitted that I now feel quite foolish for being afraid that if Gore won the White House, he would have "wrecked the economy." (Again, I didn't vote for Bush, but I was rooting for him against Gore. I rooted for Kerry, though again I didn't vote for Kerry.) I warned that those who are pro-Obama because he's the "peace candidate" may have similar feelings, a few years from now.

So as a fun exercise, I would like the pro-Obama people to come up with specific things that would make them admit they are mistaken right now, in their advocacy of Obama. For example, if Obama orders the use of nuclear weapons on Iran, surely that would count, right?

The traffic shot up 732% that day, because the mighty blogger Andrew Sullivan took up my gauntlet, responding to the above by saying:

Er, yes. Jim Henley has made his list. Mine would include almost everything George W. Bush has already done. It couldn't get any worse, could it? I mean: no liberal Democrat could spend and borrow more than this Republican could he? Pretty close to impossible. And conservatives would go nuts - unlike their shameful indifference for last eight years.

Now I'm not a regular reader of Sullivan, so I can't tell if his post was 100% pure sarcasm. But if we take it at face value, then Sullivan has to disavow Obama. On the foreign policy and civil liberties stuff, Australian journalist (and socialist) John Pilger pulls no punches in his denunciation of Obama (HT2EPJ).

And on the spending side, it's not even close. We already know that the deficit this year (FY 2009) will be at least $1.8 trillion, which I'm pretty sure is the biggest in world history, at least in nominal terms. (Here's a cute story from last July 2008, in which the Democrats were freaking out when the Bush administration predicted that the FY 2009 deficit would be $482 billion. Note, $482 billion << $1.8 trillion.)

Now yes, President Obama is not responsible for the entire $1.8 trillion deficit this budget year, which started back in October 2008. So perhaps a fairer assessment of his deficit hawkishness is the projections of his fiscal plans many years into the future. There are a bunch of different ways to gauge this, but here's a quick and easy one: From the Summary page (Acrobat page 11) of the March 2009 CBO report [.pdf]:

The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions).

Now wait, hold on, don't start looking up numbers to figure out the comparable stats for the Bush administration. If Obama is expected to raise the explicit federal debt as share of the economy, from 41 points to 82 points, then that means there must have been no federal debt when George Bush took office, in order for them to be equally profligate. So I don't think we even need to consult the Statistical Abstract. Clearly Obama is going to add far far more to the debt--even adjusting for the size of the economy--than George Bush did.

Sullivan is definitely right that many conservatives who are freaking out about Obama's deficits, were strangely silent during the Bush years. I am not one of those hypocrites; I called out Bush's reckless deficits at the time.

Has Sullivan done the same with Obama? Does he now regret his support for the Senator from Illinois?

As long-time readers know, I am very skeptical of the big deflation scare. The raw CPI numbers have risen at an annualized rate of 4.2% since December. The "seasonally adjusted" CPI numbers--what the press reports--are up only 2.4% (at an annualized rate) over the same period. Now it's possible that it will all even out by December, but I have my doubts. (More precisely, I think they will revise the earlier "adjustments" so that the official headline inflation numbers won't need to be as big in the last half of 2009 in order to reconcile the two series.)

Things are also fishy if we turn to the Producer Price Index (PPI). According to the latest press release, both the raw and the seasonally adjusted PPI fell 0.9 percent from June to July. I'm wondering when the positive seasonal adjustment is going to start kicking in, because here are the NSA and SA numbers for the year:

Monthly Changes in PPI Index
Month	NSA		SA		Difference
January	+0.9		+0.8		-0.1
February	-0.1		+0.1		+0.2
March	-0.7		-1.2		-0.5
April	+0.6		+0.3		-0.3
May	+0.5		+0.2		-0.3
June	+1.9		+1.8		-0.1
July	-0.9		-0.9		0.0
Cumulative					-1.1

Unfortunately FRED doesn't have both the seasonally and non-seasonally adjusted PPI series, so to generate the above table I had to go through the BLS archives of the PPI press releases each month.

Just to make sure you understand the significance of the above table: So far this year, the BLS has underreported the actual changes in the PPI by a cumulative 1.1 percent. (It's probably not correct to just add those differences up, but you get the idea.) The whole rationale of seasonal adjustment is that price changes in one direction tend to be concentrated in certain months. So if, say, prices typically rise very quickly in the beginning of every calendar year, and then remain flat during the third and fourth quarters, the BLS doesn't want to shock people by reporting the big jumps in the first quarter. So instead they smooth out the yearly increase, by adjusting the early months down and bumping up the later months. Since there had already been a cumulative 1.1 percent deficit going into this month, that's why I was surprised to see no bumping up of the July numbers.

While looking through the BLS archives of previous PPI releases, I confirmed another suspicion I had had, regarding this month's press release. I thought the 0.9 percent drop from June to July seemed excessive, so I wanted to look at the breakdown of the overall index into its categories. For example, I could look at what the BLS said happened to fuel costs, and I could compare that with the EIA's records of actual gasoline prices.

Now in previous months, this would have been easy. Near the bottom of each press release, you can find Table 1 which has all kinds of information. (Check out July's press release, for example.)

But even though the press releases from January through July 2009 all have a Table 1 with this non-seasonally adjusted breakdown, for some reason this month's press release doesn't have it.

That information is presumably still available somewhere in the bowels of the BLS website, but if it's difficult to find, it discourages people from looking. Is that the point?

Last issue: I was also puzzled as to why the CPI numbers came out first this month, followed by the PPI. In previous months I thought the PPI always came out a day ahead of the CPI. I called the BLS and the guy there told me that yes, the PPI generally comes out first, but they are independent groups working on these numbers, and for whatever reason the PPI people were delayed this month.

Michael Pettis seems to think so, in this blog post (HT2 Tim Swanson):

...I was recently interviewed for a TV show about – yet again – the awful continuing prospects for the dollar as a the dominant reserve currency. Besides expressing my deepest skepticism that the most recent hullabaloo about the dollar was likely to be more reasonable than during all the previous the-sky-is-falling-on-the-dollar periods, I also said that it seems to me that the argument had somehow gotten backwards as far as its proponents and opponents were lining up.

In my view it is the US who should be agitating for an end to the US dollar as the default reserve currency, because this means that any time a country needs to grow reserves or turbo-charge domestic growth with mercantilist industrial policies, thanks to the flexibility of the US financial system and the foreign desire to accumulate dollars, it is almost always the US tradable goods sector that is forced to adjust. In a similar vein it should be foreigners, especially Asians, and most especially China, that should want to maintain the existing currency system.

Wow, isn't that ironic? The US government shows the world who's boss during World War II, and as its hegemony becomes apparent, it pushes through a new worldwide monetary system based on the US dollar. Normally when one country gains global dominance, you'd expect it to change the rules to favor its own interests. But we apparently had either altruists or dopes at the helm in 1944.

Pettis is relying on crude mercantilist and Keynesian notions in his post. Rather than pick apart the fallacies, let me try this approach: Suppose you have two printing presses. One of them cranks out US dollar bills, which are indistinguishable from the real thing. The other cranks out Monopoly money.

According to Pettis, you should prefer the latter machine, because there isn't much demand for Monopoly cash. In the awful scenario where you were stuck with the machine that cranked out US currency, here's what could happen: You print up say $400,000 in new currency this year, which other merchants are happy to accept. But if you don't feel like consuming or investing more than $400,000 this year, you will have to quit your job, because of all the cash piling up in your house. Thus that cursed machine has thrown you out of work! Oh the humanity!

During a meeting with my co-author Carlos Lara yesterday, he raised a point that is obvious but that I had never considered: As the US population ages, this will exert huge selling pressures on the US stock market. Why? Because 401(k)s and other IRS-created retirement vehicles have a built-in exit point. As Nelson Nash explained in his recent LRC piece:

According to all Tax-Qualified Plans, when one turns 70½ you must begin to take income (taxable) from your plan. That means you have to sell your stocks or mutual fund shares. Pray tell, who will you sell them to? Where are the buyers in the next generation?

Everyone see the problem? If the age cohorts were always uniformly distributed, it wouldn't matter. As one group hit 70, they'd start taking their mandatory withdrawals from their 401(k)s and other holdings. But at the same time, a fresh group of comparable size would enter the workforce, and they would start socking money away into their own (tax-deferred) retirement accounts.

But that's not going to happen over the next few decades. As we all know in the context of Social Security's insolvency, the US age distribution is becoming lopsided toward the elderly, as the Baby Boomers move through the age distribution. The first Boomers were born in 1946. Right now they are 63 years old. That means in seven years a wave of stock selling will ensue, due to the arbitrary tax incentives of government-sponsored retirement plans. But of course, smart investors will anticipate this, and start unloading their shares in six years. But the super-smart investors will anticipate this, and start unloading their shares in five years...

A Robert Lucas would tell us not to worry, that the market has already priced all this information in. I doubt it. To see just how significant the demographic shift will be over time, check out this cool link, where the age distribution morphs on your screen (HT2MR).

Here's another article making the same point I am here.

* A review of Gene Callahan's novel, Puck. Incidentally, I read Gene's book and thought it was cool. But it's a bit weird. (Basically, my opinion of Gene.)

* A scathing review of Transformers 2. My friend warned me off this (over the phone) when I was standing outside a movie theater during a recent business trip. Judging by the review (which takes the form of a FAQ), I made the right call. (Warning there are some naughty words.)

* I take on Krugman's critique of high-frequency trading.

* A pretty funny critique of libertarianism (from a libertarian, I think) that involves Monty Python quotes. (HT2 MarginalRevolution) And yes, now that I re-read the sentence I just typed out, I realize why I didn't date much in college.

This is amazing; a Bloomberg article explains why we don't need to fear falling prices! (HT2 Jeff Tucker) I almost wonder if the guy read my book the Depression, because here his analysis is very similar to mine:

In reality, anyone with a sense of economic history would have been aware that the whole deflation story was oversold. In the U.K., the House of Commons Library publishes data on prices going back to 1750. From 1814 to 1914, prices rose a bit in some years, and dropped a bit in others, so there was no real change in the price level over the century.
...
In other words, there were plenty of deflationary years. Yet over that period, the U.K. became the greatest economic power in the world: Its relative decline only started once inflation took hold. Deflation didn’t stop the Industrial Revolution, one of the most sustained times of economic creativity ever seen.

Likewise, a 2004 study by the Federal Reserve Bank of Minneapolis looked at the data on deflation across 17 countries over 100 years. It found that although the Great Depression of the 1930s was linked with falling prices, that wasn’t true of any other historical period. There was, it said, “virtually no evidence” that deflation caused a depression.

Why should it? We are constantly told that deflation is bad because it makes consumers hold off from buying things, thinking they will be cheaper tomorrow. But that is just silly.
...
Everyone knows that a computer or an iPod will be both better and cheaper in six months. And people really want one right now. Torn between those two impulses, plenty of shoppers go out and buy computers and music players. It is true in the electronics industry, and, once they get used to falling prices, it will be true for other industries as well.

I didn't realize they were so blatant about it... Anyway the Nevada Development Campaign makes a compelling argument to business owners to relocate out of the Golden State. I'll be writing an op ed on this in the next few days, which will have the relevant stats (like how many people moved out of California and into neighboring Nevada, and what the difference in after-tax earnings are).

Conservative columnist Bob Novak has died at 78. Below is my favorite Novak clip, where he decided that James Carville wasn't worth any more of his time.

This doesn't seem like a good sign:

A Manhattan judge ruled yesterday that a blogger can't hide behind a web of anonymity while flinging the ugly words "skank" and "ho" at somebody online.

The sternly worded ruling orders Google to give up the identity of an anonymous blogger-assailant who inexplicably devoted an entire blog -- titled "Skanks in NYC" -- to maligning beautiful blond model Liskula Cohen.

Once she learns her attacker's name -- possibly as early as today -- the model can serve the anonymous blogger with a defamation lawsuit.

Obviously the blogger is a jerk, but give me a break. It's not like he (I'm assuming it's a man) said, "I have video proof that Ms. Cohen ran over a three-year-old and fled the scene." His remarks were clearly just generic insults. As far as those insults hurting her career, how many more people have heard them because of her desire to file suit?

But the real danger here is using this pretext to get Google to give up a customer's name. What happens when Geithner decides that I need to stop spreading vicious rumors about the amero, thereby causing the dollar to lose value?

The feds are breaking down all the remaining obstacles to their power. Swiss bank accounts and anonymous bloggers must go.

In the previous post, I relayed some (good) objections from a reader of my pamphlet [.pdf] describing a stateless society. One of the objections went like this (paraphrasing): "In Murphy's vision, 'crimes' are actually codified contractually, and the punishments are typically monetary. So that means rich people could go on killing sprees, and just pay off the families of the victims."

Back in 2002, I wrote an essay for the site Strike-the-Root where I took this objection head on. I think many readers will be surprised at the power of free markets to solve such problems. Remember, the good economist doesn't stop at Step 1; he follows the thought experiment out to its long-run effects.

Without further ado, here is the excerpt from an essay I wrote in 2002:

=============
...This issue has consequences for the stateless society. A typical objection to a private legal system based on restitution rather than retribution, is that rich people could commit crimes with impunity, since they could easily afford the “fines.”

In the first place, this objection overlooks the fact that right now rich people (not to mention politicians) literally get away with murder, through direct bribery or other unsavory mechanisms. At least in market anarchy, the payment would be made in public.

But there is a more sophisticated response to the objection. Let’s take the caricature to the extreme, just to prove a point. Let us suppose that, in a hypothetical anarchist society, the only punishment for murder is a $1,000 fine. What would happen in such a world?

The statist recoils in horror at the thought: Why, Bill Gates could slaughter guests at a cocktail party to reenact his favorite scenes from Clue!

Well, he could, but how many people would go to his next party? Indeed, how many people would deal with him at all after such horrific behavior? People can still condemn the immoral, even in the absence of strict “official” sanctions.

But even these arguments miss the truly intriguing angle. If it’s legal for Bill Gates to kill, then it’s also legal for others to kill Bill Gates. After his homicidal conduct, outraged guests could take up a collection. Once they hit $1,000, they could afford his murder.

Of course, the analysis can’t stop there. Rich people and other public figures would alter their wills to reflect the new circumstances. In the event of their murder, people could establish trust funds to finance revenge upon their killers. Soon enough, people would find that the “official” sanction of $1,000—which is clearly below the level that would be set in an actual private system—would be supplemented with other retaliatory costs. It would be incredibly reckless for anyone, even the rich, to engage in murder sprees.

And what about the pauper, who can’t afford bodyguards or setup trust funds? Well, who wants to kill such a person? Is it really worth $1,000? Keep in mind, we are assuming that every killer is fined, which is different from the present system in which killers serve jail time only in a fraction of the cases. For a simple example, there would be virtually no robbery homicides. It would defeat the purpose to mug someone and shoot him, if the mugger knew he’d be out $1,000 for his crime.

This sort of “economist” talk will surely cause eyes to roll. Skeptics may point out that people commit crimes for all sorts of reasons, and that pecuniary motives do not determine an individual’s conduct. This is true, but in the aggregate, it would certainly make a difference if people knew they’d be fined (however lightly) for every crime. After all, women consider many factors when deciding to have a baby. But surely the welfare state leads to far more births than would otherwise have occurred.

Of course, the commodification of man would do the most good in the arena of politics. If government officials could only be made to feel even a fraction of the human cost of their actions, their worst excesses would be curtailed. Imagine if Harry Truman viewed Japanese civilians, not as his enemy, but as pieces of property. In that case, Hiroshima would never have happened; the residents could have offered a perpetual stream of millions of dollars as ransom on their continued existence.

But no, such a scheme would never have worked. The tender hearted American voters would have vomited at the thought of their fearless leader extorting protection money from helpless women and children. Why, that would be tantamount to slavery! How crass! How inhumane!

So instead Truman nuked them all to smithereens.

Daniel Cotter is debating a minarchist buddy and told him to read my pamphlet, Chaos Theory [.pdf]. Below is a list of questions that the minarchist had. These are great questions, but unfortunately I am too swamped with "real work" to answer them anytime soon. So I hope some of you can help Daniel in his proselyti--educational efforts.

Let me remind everyone that two important sequels to my thoughts in Chaos Theory are these Mises Daily articles: "But Wouldn't Warlords Take Over?" and "The Possibility of Private Law." In retrospect, I think the last essay comes logically before the beginning of Chaos Theory. --RPM


Questions From a Skeptical Reader

I meant to glance at Chaos Theory but I ended up reading the whole thing. All in all I found it very interesting but I wrote a list of issues that I have with Murphy's analysis:

-The system of apprehension of criminals requires the criminal to approve their own detention by accepting the terms of a contract to enter a premises (in his example a movie theater). This seems to imply that if a criminal did not leave his own property, he could not be apprehended.

-If criminals can only be jailed voluntarily in order to keep down the costs of their insurance, then they would probably prefer to live under house arrest. That way they wouldn't need to enter into contracts with others and wouldn't need insurance.

-Murphy points out that the costs of combat are high so conflict between security providers is unlikely, but I believe that using force against the competition is still profitable if you can eventually establish a monopoly. I suppose that is a matter of conjecture, but he didn't address it.

-In the footnotes he mentioned that it would be unlikely for parents to collude in mistreating their own child, but it certainly has happened. He does not account for children born out of wedlock or for children that have only one parent present for whatever reason. His assessment of markets in which children are traded neglects the fact that when children are abused for gratification, especially sexual gratification, or forced to perform other work they are economically valuable outside of their value as a loving child. Such a market would also probably lead to various derivatives like future trading in children.

-I found the comments on abortion to be quite strange. Ultimately, I suppose, this system would make abortion a matter of choice. That being said, those that don't approve, would probably not be satisfied with simply locking themselves into a gated community and pretending that abortion doesn't happen. There is no prohibition on pro-lifers forming exclusive gated communities now, but I'm yet to come across one. They tend to get out and about and make their disapproval known.

-With various companies providing their own title registries, there would be a myriad of different lists that you'd have to check before buying property. The whole idea sounds unworkable. I think that it would lead to a monopoly or at best a small oligopoly since people would not want so many registries complicating every major purchase.

-The fact that very wealthy individuals could afford massive insurance premiums means that they could, if they so desired, kill people and just pay out the victim or pay the higher premium. Putting a price on the value that is to be paid out is in itself problematic in that in some circumstances it may be profitable to kill someone. Basically, this insurance based system doesn't prohibit the use of force. It just associates a cost with the use of force.

-Insurance companies that are meant to defend an anarchist society would likely collude with an invading army since the aggressive state could nullify their contractual obligations. So the company could just collect insurance premiums from it's customers until a state invades and then surrender and collaborate with the new state so it doesn't need to pay its customers out. The company would loose its income stream, but there would still be opportunities to trade with the formerly anarchist market under the new regime. And the state could even legislate it a monopoly.

-Murphy also asserted that if a defense firm initiated aggression against a neighboring state, that the insurance company which covers the defense firm would need to make payouts to the victims. This seems unlikely. The insurance companies are only used so that other actors in the anarchist economy will trust and therefore trade with the defense company. People residing outside of the anarchist economy would not be covered by the insurance contract. Why would the defense company pay higher premiums to cover deaths in the neighboring state with whom it doesn't trade. Even if it did trade with them, it could set up a subsidiary to attack the neighbor. As long as it honors contracts with those who reside within the anarchist economy, it would not have any problems.

At a reader's suggestion, I checked out the Fama/French website, which is a neat set of Q&A on the implications of the "efficient markets hypothesis" (EMH) way of viewing the world. This particular question--and French's answer--threw me:

Question: Firms often pay a substantial premium to the market price when making acquisitions. Does their willingness to pay a premium suggest the shares of target firms were mispriced?

Now here's Fama's answer, which is perfectly reasonable from an EMH point of view:

FAMA: The empirical evidence says that all the gains from mergers are eaten up in the premiums paid to acquire firms. On average, the acquiring firm gets nothing. This doesn't necessarily imply that the shares of the acquired firm were mispriced since there can be synergies (real business gains) from mergers.

So to translate into an example, suppose Jim's Wooden Sticks (ticker JWS) right now is selling for $25 per share. They get acquired by Jane's Icy Sugar Cyclinders (ticker JIC) for $30 per share. The newly merged corporation can now crank out popsicles at a much lower cost than before, and so JIC has higher earnings as a result. However, after taking into account the $5 per share premium they paid to the original shareholders of JWS, it's a wash.

I think that's the kind of thing Fama has in mind. It still seems that "the market" made a pricing mistake, in the sense that a shareholder of JWS would have been furious had he liquidated his position the day before the announcement. But you can at least see where Fama is coming from, and why he thought his answer was a good one. In other words, Fama was trying to explain why JWS shouldn't have been viewed as free money waiting to be snatched up, since the costs of acquisition exhausted the gains from the merger.

Now if Fama's above response seems a little incomplete, French's response (to the same question) is downright incomprehensible to me at least:

FRENCH: Takeover premiums do not imply that the target firms were mispriced. Since we do not expect the market to accurately forecast every acquisition that will create value, we should not be surprised that prices rise when tender offers and mergers are announced.

Help me out here, fans of the EMH. It sure sounds like French is saying, "We don't expect the market to accurately price everything, so that's why we shouldn't conclude that a given stock is mispriced."

Tony Crescenzi reports on CNBC:

New data on international capital flows into U.S. financial assets were released Monday indicating that in June China was a net seller of $25.1 billion of U.S. Treasuries. Many will put the sale in the context of China’s $38 billion buying splurge in May, but the better metric is put the net purchases for May and June in the context of its $122 billion accumulation of international reserves during the two months. In other words, China invested very little of its new money in Treasuries in May and June—just over 10%, a sharp contrast to the 60% to 70% figures seen in recent years.
...
In total, China accumulated $177 billion of reserves from April through June, yet its net purchases of Treasuries were just $9 billion. In 2008, China’s reserves increased $418 billion and its net Treasury purchases were $250 billion, about 60% of the reserve accumulation. The recent pattern suggests China hastened its effort to diversify its international reserves, which totaled $2.132 trillion at the end of June. China, which has spoken openly about its diversification imperative, has put its money where its mouth is.

So let's see... The US Treasury is going to be borrowing several trillion dollars over the next few years, just as the Chinese are backing off on further acquisition of US government debt. What does that mean for US interest rates?

I'm thinking they will go up, way up.

Here is a good Forbes article about "becoming your own banker" through the proper use of (mutual) whole life insurance policies.

Now is probably a good time to announce that I am working on a book on this very concept with L. Carlos Lara. We are going to marry the traditional Austrian affinity for insurance with R. Nelson Nash's brilliant "infinite banking concept."

If you're skeptical, that's fine; so was I. (And Carlos tells me it took him more than a year to finally get on board with Nash's IBC message.) For me, the real ah-ha moment came when I realized that this isn't an investment, but rather it's an alternative to keeping your checking and saving account at a bank. (Because of tax and other advantages, it actually is a decent investment, but you aren't limited to keeping your wealth socked away in the whole life policies you take out. You can borrow from those policies and invest in pork bellies if you want to.)

Mr. Nash has invited me to speak at one of his conferences in February. Carlos and I are planning on unveiling the book at that time.

UPDATE: Here's a recent Nash article on LRC.

The American Energy Alliance's bus tour is underway! If you live in a coal producing state, it might be stopping outside a fair near you!

We are still working on logistics, but I might be spending a few days on the bus if there is a speaking opportunity. I just hope they don't want me to parallel park it.

Here's something that surprised me:

Millions of Afghan women will be denied their chance to vote in landmark presidential elections this week because there are not enough female officials to staff the single- sex polling stations.

Despite more than £147million being spent on election aid, the shortage is threatening to undermine the legitimacy of the polls, which are the pinnacle of western efforts to build a peaceful democracy.

Women are not normally allowed to vote in male-run stations in the Muslim country. Afghans will select a president and members of provincial councils at the polls on Thursday.

The Taliban has threatened to attack voters as President Hamid Karzai battles to win another five-year term. Women's activists said the Independent Election Commission, which is organising the polls, still needs to recruit 13,000 women before election day but the shortfall may be more than 42,000.

Without female staff to operate the strictly segregated stations, and more importantly, without female searchers to frisk women voters as they arrive at those stations, conservative men across the country will ban their wives and daughters from taking part. 'If half of the population can't participate, the election is illegitimate,' said Orzala Ashref, of the Afghan Women's Network.

No, I'm not saying that life must have been sweet under the Taliban. But I wonder how many Americans would support our continuing efforts in Afghanistan, if they knew the actual conditions of their democratic system.

I don't have it handy, but recently I saw an astounding figure, where US and other forces were spending far more on military operations in Afghanistan, than that country's entire GDP.

I always like it when young punks pay their respects to the old masters. (And no I'm not referring to Austrian economics.) I don't remember the show, but the band EMF ("You're Unbelievable") did a Tom Jones song, and vice versa, with him present. And they were in awe of Tom Jones doing one of their songs.

Anyway I just came across Red Hot Chili Peppers doing my favorite (classic) Beach Boys song:


I also checked out this 2Pac video, but he had a different take on the whole thing. (And plus, he apparently didn't realize his underwear was showing! How embarrassing! I can't believe the director or somebody didn't bring it up.)

CNBC tells us:

The Federal Reserve said Monday it will extend its Term Asset-Backed Securities Loan Facility another six months though it said conditions were improving in some areas.

In a joint announcement with the Treasury Department, the central bank said the TALF, as the program is known, now will run until June 2010, from its original cutoff date of December 2009.

"Conditions in financial markets have improved considerably in recent months," the Fed and Treasury said in their statement. "Nonetheless, the markets for asset-backed securities backed by consumer and business loans and for commercial mortgage-backed securities are still impaired and seem likely to remain so for some time."

The extension will cover newly issued commercial mortgage-backed securities but will not be expanded to cover assets not already eligible.

The program targets primarily students loans and credit cards but extends to other financing as well.

The TALF started in March and figures prominently in efforts by the Fed and the Obama administration to ease credit, stabilize the financial system and help end the recession.

Gee, isn't it ironic that the economy keeps getting worse, "despite" the unprecedented rescue efforts of the Fed and Treasury? I mean, it's almost as if printing up green pieces of paper, and having politicians borrow trillions of dollars, actually makes it harder for the economy to re-coordinate itself after a bursting asset bubble. If we didn't have fact-based economic scientists on the case, I'd start to worry.

Not to beat you over the head with this graph, but it's relevant in this post too:

Whether by accident or design, the federal government and Federal Reserve have joined forces to systematically paralyze the US financial sector. We now have have a czar saying he can take back money that executives have already been paid:

Kenneth Feinberg, the Obama administration's pay czar, said on Sunday he has broad and "binding" authority over executive compensation, including the ability to "claw back" money already paid, and he is weighing how and whether to use that power.
...
Feinberg has been consulting with seven companies that have yet to pay back money they borrowed from the government, including Citi, American International Group, Bank of America, Chrysler Financial, Chrysler Group, General Motors and GMAC.

Those companies faced a deadline of Friday of submitted proposals to Feinberg for their top 25 employees.

Feinberg said on Sunday that decisions he makes will be "binding," but the law limits his power over contracts signed before Feb. 11, 2009.

He also said he has the authority to use a "clawback" provision to go after compensation for executives from any company that received money from the U.S. Treasury's Troubled Asset Relief Program (TARP).

"I have the discretion, conferred upon by Congress, to attempt to recover compensation that has already been paid to executives not only in these companies, but in any company that received federal assistance," Feinberg said during his remarks.

Asked by Reuters if he could use that ability to target a firm like Goldman Sachs which paid back $10 billion in bailout money, Feinberg said: "Anything is possible under the law."

"I can claw back, but we haven't focused on that at all," he said.

Pretend for the moment that you are in charge of AIG or Citi or another big financial institution that is teetering on the edge of bankruptcy. If you are to have any chance of coming back from the brink, what do you need? Why, you need very talented people. And how are you supposed to attract and retain those people, when you're already broke? Why, you can offer them a low base salary, with huge performance bonuses if they do really well.

Now pretend for the moment that you are a really talented financial executive, the kind of person that could actually turn AIG or Citi around. Just how insane would you have to be, to sign a contract with them? Chances are, the firm will sink, and on the off-chance that it doesn't, you will have Chuck Schumer reading your home address during Congressional hearings so that ACORN knows which house to paintball.

Let's be clear, I am not defending the bonuses that the TARP firms have been handing out. But my point is, even the 1% chance that these bailouts might work, has been eradicated by appointing a pay czar who will chase away any true talent. AIG and all the rest are now hulking shells propped up by the taxpayer, serving no economic purpose except to crowd out competing mechanisms for allocating capital.

The below chart shows what happened to bank lending to businesses, after Bernanke's "heroic" injections of reserves. There's a credit crunch on, all right, courtesy of the Fed.

I've been really disappointed in economists taking the Robert Lucas / Bill Easterly approach in answering the Queen of England's perfectly good question, "Why didn't you economists see the financial crisis coming?"

To refresh your memory, here is what Easterly (a big-name economist at NYU who has done some cool work on development) said:

First, Your Majesty, economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it. The most important part of the much-maligned Efficient Markets Hypothesis (EMH) is that nobody can systematically beat the stock market. Which implies nobody can predict a market crash, because if you could, then you would obviously beat the market.

In other posts, I have pointed out that this reasoning is only true if you frame investing the way an economist using a rational expectations model would frame it. It's analogous to game theorists concluding that the only "rationalizable" strategy is to immediately defect in a 3000-round prisoner's dilemma, even though "irrational" players in the real world will end up making a lot more money following their ad hoc strategies.

But in this post, let's take Easterly's response at face value. The Queen could and should come back and say:

Yes, gentlemen, very well. So I'm asking you, why didn't you forecast these things back in 2004, so that housing prices would have popped back then? You wouldn't have beaten the market; you would have spared the market trillions in losses.

Everyone with me? If you're still not seeing it, let's switch examples. Let's suppose that George Bush was taken utterly surprise by the attacks on 9/11. (I realize there are some who would dispute that, but go with me on this--I'm just making a point.) Bush is furious and calls in all the intelligence gurus. He takes them out to the woodshed, demanding to know why they get funded billions per year if they can't even see an attack on US soil coming that takes out the Twin Towers and hits the Pentagon, for crying out loud!!

Now can you imagine if somebody said, "Well Mr. President, we all feel awful about this, but it really wasn't our fault. By its very nature, an attack like 9/11 couldn't have been forecasted. If any of us had predicted it--even as late as 9/10--then we would have foiled the plot--we're all patriots, after all."

Now wouldn't the above excuse have been worthy of an Atomic Wedgie? Well that's what Easterly said to the Queen. But by dressing it up with fancy terms like "efficient market hypothesis" Easterly's answer sounds deep, rather than patently absurd as the above quote is.

One last way of putting it, to make sure you get my point here: If the gurus on CNBC and in the bowels of the ratings agencies had realized how fragile things were in, say, 2005, then history would have been averted. Things wouldn't have gotten even more fragile in 2006. So in the alternate universe, it's not the case that the housing bubble still would have been just as severe, except that Bill Easterly made billions shorting the market. No, the bubble wouldn't have been pumped up as much.

In that alternative universe, it still would have been true that "no one beats the market" (in the tautologous sense that Chicago School economists use that incantation). But "the market" wouldn't have lost trillions of dollars.

The mainstream economists screwed up big time during the housing bubble years. The people interviewed on CNBC, and advising the government, weren't saying, "What are you coming to us for? We have no special insight on the stock market." No, they were assuring investors that the boom would last. (And I regret to say that I contributed to this madness before seeing the light [.pdf] in the summer of 2007.)

Lucas and Easterly are saying nothing more profound than, "It's true we economists didn't predict the crash, but then again neither did most of the big-money people around the world." This is true, and the Queen's correct response should be, "Fine, so my question is, why not? What did you--and most of the rich people--do wrong, so that we can try to prevent this from happening again?"

People were already suspicious of economists before this crisis. Now it's downright embarrassing.

* Mario Rizzo on the issue of whether economists should have predicted (forecast) the financial collapse.

* The Economist on the experience of John Law and fiat money. (HT2TAE)

* Paul Green offers practical tips for Internet privacy. I have been urging techie/security guys I know, to write up such an article. What do people think of Green's suggestions? I would like a second (and fifth) opinion before I go changing my antivirus software.

A lot of people are emailing me about the controversy. What can I say? I run into some old timers telling me how great socialized medicine is, and I just lose it.

Alex Tabarrok links to this Bill Maher rant:

Or take the health care debate we're presently having: members of Congress have recessed now so they can go home and "listen to their constituents." An urge they should resist because their constituents don't know anything. At a recent town-hall meeting in South Carolina, a man stood up and told his Congressman to "keep your government hands off my Medicare," which is kind of like driving cross country to protest highways.

I'm the bad guy for saying it's a stupid country, yet polls show that a majority of Americans cannot name a single branch of government, or explain what the Bill of Rights is....

Can Bill Maher explain what the Tenth Amendment to the Bill of Rights is?

That practice has bothered me for a while now. It's true, I definitely fall into the "open borders libertarian" camp, but that's not really the point in this post.

If someone says, "I am concerned that there are so many immigrants coming in, and I think that wouldn't happen if the border lands and roads were all privately owned," then OK let's have that discussion. (Anthony Gregory does a great job laying out the view I endorse.)

What I'm complaining about is when a person says, "Our government no longer listens to the will of the people! We clearly told them we want border enforcement, and they don't listen to us. Instead they let in these millions of illegals, and educate their kids for free."

I've been trying to put my finger on it, and I think my problems are twofold. First, to call an entire group of people "illegals" is the same dehumanizing trick as to call others "birthers" or "truthers."

Second, a lot of these people using the term don't really care about the official statutes coming out of Washington. If the politicians suddenly voted to turn all the "illegals" into "legals," the rabble rousers wouldn't be placated. No, they would call back in to the talk shows going nuts because, "Those fools in DC gave amnesty to all the illegals!"

So it's not really their illegal status per se that is at issue. I've never heard anyone call in to Sean Hannity and refer to the signers of the Declaration as "illegals."

An unanticipated drawback to writing this unorthodox book review is that Amazon now suggests some very childish books when I visit the site. (When I wrote the review, I had to get the picture of the Smash! Crash! cover from Amazon.)

Picture this: An Iranian man finds himself washed ashore a California beach. He stands up, dusts himself off, and starts announcing to people that they are going to die because of their fornication. He delivers the message with such conviction and lack of sympathy that it just clicks and people actually believe him. He's not trying to reform them; if he were, then they would think he was bluffing. But no, he's just informing them that they are going to be wiped out for their iniquities. He actually convinces all of Hollywood to empty their liquor bottles down the drain. The Iranian man's warnings were just that compelling.

The above scenario would be impossible, right? Well, it's true, it would be impossible for any man we've ever encountered to pull off such a stunt. But what if it were a man, who had just spent three days inside a whale?

Jonah must have been terrified of what the Ninevites would do to him, if he actually carried out God's instructions. But after realizing his predicament, and knowing that God had every right to punish him by making him die of thirst over the course of days inside a pool of whale bile, Jonah was no longer so afraid. It was only after experiencing his aquatic trauma that Jonah had the ability to execute God's plan for him.

Even God's rebukes are designed to improve us.

The government (including the Federal Reserve) has paralyzed the credit markets. It has attacked the markets in many ways, but one particularly insidious move was the inject a massive amount of new reserves, and then pay interest to keep them bottled up.

This is one of the most perverse outcomes of the Fed's combination of decisions. Because nominal interest rates have been pushed so low, it is relatively cheap for the Fed to turn itself into the ideal place for banks to park reserves. In a booming economy with nominal interest rates at 7%, it would be very expensive for the Fed to bribe backs into restricting their loan portfolio. But not now, with the fed funds rate hovering at 0%.

In yet another case where the government creates the very problem it was (supposedly) trying to solve, check out this graph. Remember, the unprecedented actions were justified as a way to patch up the "credit crunch" and to unclog or unfreeze the credit lines on which businesses rely.

Isn't it ironic, then, that--as the graph shows--bank lending didn't go down until after Bernanke shot the moon? There was no "credit crunch" before that intervention.

There is one group of people in America who truly care about social injustice, but they don't consider the violation of property rights to be high on the list. That's why they approve government programs that involve redistribution.

On the other hand, there are Americans who take property rights seriously; they get tingles when they watch Russell Crowe tell his boy in Cinderella Man(paraphrasing) "We don't take food from the butcher that isn't ours, because that's stealing, and we don't steal. Not ever." And yet, these same people don't really get all worked up about police brutality, or the fact that some people are living under bridges while others eat filet mignon.

(Note that the above two groups aren't exhaustive--there are Americans who care about property rights and want to help the sick and the poor. But the above two groups catch a lot of people.)

What's ironic is that both groups would see their objectives better satisfied, if they paid more heed to the concerns of the other. If the first group really took property rights seriously, and therefore couldn't support any government "social" programs that relied on coercion, then as if by magic there wouldn't be so many people living under bridges, and there wouldn't be millions of people who couldn't afford health insurance.

By the same token, if people in their capacity as private citizens got more involved with "making the world a better place"--through voluntary means--then their opponents on Election Day might be more willing to let things run their course, rather than voting in a political "solution."

==> Related to the above musings, Anthony Gregory has an article at LRC explaining how the power elites have used the two-party system to constantly grow the size of government with every successive administration. (Those are my words, not his.)

Someone who is working on these matters emailed me in regard to this article. Here is a self-explanatory portion of my response. I'm trying to show the problems of "treating our grandchildren as just as entitled to happiness as we are." In other words, I'm trying to show why you need to use market interest rates when comparing present costs of emission cutbacks, with future benefits of averted climate damage. (You might want to do a rights-based approach, not a cost/benefit. That's fine, but if you are going to do a cost/benefit, then you need to use a discount rate, arguably the market's.)

OK so let's say that we have decided we're going to limit GHG
emissions today and this will cause our (conventional) GDP to drop by
$1 billion. Someone says, "Wow, that's a lot of money. Is the program
worth the high cost?"

The proponent says, "Yeah, it sure is! Our scientists tell us that our
policy will spare our grandchildren climate change, and our economists
tell us that the damage we are thereby averting would be priced at $3
billion at the time it occurs. So we're spending $1 billion today to
spare our kids $3 billion in damages, as they would have appraised
them."

Then the critic says, "Are you nuts? Instead of cutting back our
output, let's go ahead and produce that $1 billion in extra GDP, but
then we'll put $200 million of it into a safe investment earning 3
percent (after inflation) per year. One hundred years from now, that
will be worth $3.7 billion, which we'll bequeath to our grandkids. So
everyone is better off! We only lose $200 million this year, instead
of the $1 billion you suggested. And our grandkids are happier too.
Sure, they've got $3 billion in climate damages to deal with, but
they've got an extra $3.7 billion in wealth to deal with it."

As Oprah-esque as it sounds to say this, I think there were really just a handful of teachers who really influenced the way I now view the world. And one of them was Gary Wolfram, in his Public Choice class at Hillsdale College.

I am still amazed at Wolfram's abilities. If my memory serves, he had to give an opening lecture in the big auditorium to the incoming freshmen class. And not only was he hilarious, but he was hilarious in the midst of giving a lecture on political economy. In particular, he pointed out the crazy, unintended consequences of government measures.

For example, seatbelt laws can actually do little to reduce traffic injuries, while they definitely put bicyclists and pedestrians in more danger. (I leave the proof as an exercise to the reader.)

But my favorite example of the night, was his discussion of "three strikes and you're out," some feel-bad (get it?) law-and-order gimmick that had recently been put into effect. This was a while ago, but I think I have the details right: Under this new rule, a federal judge had to automatically give life in prison to anyone convicted of his third felony. At first that sounds OK, but then somebody informs you that a high school senior was charged with a felony for bringing a smokebomb to school. I found that story after 45 seconds of googling.

Do you really think it's right to take away all discretion from judges during sentencing, if someone has committed the equivalent of three smokebomb pranks? Is it really just that that person gets life in prison? Because that's what will happen, if "three strikes" is in place. You can't hope that "oh they'd override the rule" to prevent that outcome. That's the whole point; you're taking away the judges' ability to use commonsense, to realize that the statutes as written were not intended to yield this massive punishment on this particular defendant, and so the judge will ignore the sentencing guidelines. "Three strikes" takes away this power, so as to keep those effete liberal justices from legislating from the bench. "Three strikes" removes yet another buffer between the people and the raw, arbitrary actions of the federal government. I feel much better knowing that the mandates coming from the 535 members of Congress first get refracted through the prism of scores of "activist" judges who don't do as they're told. Yes, in a free judicial market, where judges competed for clients who wanted to have cases heard in a reputable court, the judges would likely be extremely fastidious and could back up every decision with precedent. Their reputations--and hence livelihood--would depend on it. But when the federal government has a monopoly on the entire judicial system in the country, I'm not sure that you want the people applying the rules to do what their told.

But I digress. Wolfram's main argument against "three strikes" was that it gives the guy with two felony convictions an incentive to kill all the witnesses if he decides to hold up a liquor store. That person knows that if he gets arrested again, he's spending life in prison. So he's going to make darn sure he does what he can to prevent that. The marginal cost, if you will, of killing an additional person is zero, at least in a state with no death penalty.

So even from a purely pragmatic viewpoint, if the goal is to minimize "crime," we have to realize that the deterrence effect may indeed reduce the commission of many types of felonies. But it will probably push up the number of homicides. It's not clear, a priori, whether "three strikes" actually decreases crime. When you throw on all the injustices that it will occur in terms of harsh penalties, it seems an obviously bad policy.

And just to round out the title of this post, let's not forget that if you lock someone up for life, then you have to siphon yet more money from the taxpayers, to keep the slave, er, prisoner, alive. The third and final strike against "three strikes."

This is a great example of where suspicion of the other side's motives can really juice up a conflict. The global warming debate is chock full of this tendency. Check out this story, which is based on true facts (as I understand them):

The world's source for global temperature record admits it's lost or destroyed all the original data that would allow a third party to construct a global temperature record. The destruction (or loss) of the data comes at a convenient time for the Climatic Research Unit (CRU) in East Anglia - permitting it to snub FoIA requests to see the data.

The CRU has refused to release the raw weather station data and its processing methods for inspection - except to hand-picked academics - for several years. Instead, it releases a processed version, in gridded form. NASA maintains its own (GISSTEMP), but the CRU Global Climate Dataset, is the most cited surface temperature record by the UN IPCC. So any errors in CRU cascade around the world, and become part of "the science".

Professor Phil Jones, the activist-scientist who maintains the data set, has cited various reasons for refusing to release the raw data. Most famously, Jones told an Australian climate scientist in 2004:

Even if WMO agrees, I will still not pass on the data. We have 25 or so years invested in the work. Why should I make the data available to you, when your aim is to try and find something wrong with it.

In 2007, in response to Freedom of Information Act requests, CRU initially said it didn't have to fulfil the requests because "Information accessible to applicant via other means Some information is publicly available on external websites".

Now it's citing confidentiality agreements with Denmark, Spain, Bahrain and our own Mystic Met Office. Others may exist, CRU says in a statement, but it might have lost them because it moved offices. Or they were made verbally, and nobody at CRU wrote them down.

Now don't get me wrong, there are some kidney shots in the above--like calling Phil Jones an "activist-scientist." But even so, you can get why the "global warming is a hoax" crowd would look at this and think their worst fears had been vindicated decisively. I mean, just think of it: The group that is the caretaker of one of the most venerable global temperature series, is basically just asking us to trust it!

That was actually Roger Pielke's take on the whole sordid affair. And I have to confess, it did seem crazy to me that Jones gave his excuse with a straight face. But then Chip Knappenberger, a climate scientist who often blogs at MasterResource, posted a comment on Pielke's blog that made me doubt my quick conclusion:

I have plenty (probably the vast majority) of papers which I couldn't provide the raw data for if asked, much less many of my analysis routines. But, in my published papers, I include Data, Methods, and Results sections where I describe my work. And the fact that it is peer-reviewed means that someone, somewhere, with some qualifications in the field thought it was reasonable. So readers of my papers don’t simply have to “trust me” even if I can’t provide the data and/or the routines at some later date. If what I have done is wrong, it’ll be replaced by new and improved science, either by me or others—that is one of the primary ways that science moves forward—historically with our without the co-operation of all interested parties.

Perhaps my way of thinking about this is old-school and a new era is upon us (one which I have yet to fully embrace and not sure I ever will, especially the latter) in which everyone has to use the same data archiving techniques and the same analytical tools and reviewers will be required to precisely replicate the results before they are published—if not the reviewers themselves, perhaps a staff of analysts employed by the journals. But even if this will someday be the case, I don't see how it should be retroactively applicable. Will all the journals be wiped clean of all past material, only to have it reinstated once each and every article has been replicated?
...
So if the CRU is guilty of requiring people to just “trust them” them, I would imagine that so too are 90% or more of all the authors ever published in the scientific literature.

I should stress that there are two distinct issues in the global warming (aka climate change) debate: First, what is our understanding of the impact of human activities on the environment? Second, what (if anything) should the government do, in light of this scientific understanding?

Libertarians shouldn't be afraid to find out that the climate's true sensitivity to greenhouse gas emissions is on the high end of the range of guesses. And they certainly shouldn't rest their opposition to cap and trade legislation on the relatively fragile claim that "global warming is a hoax." I consider it a much safer argument to observe, "Politicians have never solved a societal defect in the history of the world."

Reader cypress brings this alarming story to our attention. I am not familiar with the website so I can't vouch for the claims, but here's what it says:

The Pentagon has approached Congress to grant the Secretary of Defense the authority to post almost 400,000 military personnel throughout the United States in times of emergency or a major disaster.

This request has already occasioned a dispute with the nation’s governors. And it raises the prospect of U.S. military personnel patrolling the streets of the United States, in conflict with the Posse Comitatus Act of 1878.

In June, the U.S. Northern Command distributed a “Congressional Fact Sheet” entitled “Legislative Proposal for Activation of Federal Reserve Forces for Disasters.” That proposal would amend current law, thereby “authorizing the Secretary of Defense to order any unit or member of the Army Reserve, Air Force Reserve, Navy Reserve, and the Marine Corps Reserve, to active duty for a major disaster or emergency.”

Taken together, these reserve units would amount to “more than 379,000 military personnel in thousands of communities across the United States,” explained
Paul Stockton, Assistant Secretary of Defense for Homeland Defense and America’s Security Affairs, in a letter to the National Governors Association, dated July 20.

The governors were not happy about this proposal, since they want to maintain control of their own National Guard forces, as well as military personnel acting in a domestic capacity in their states.

“We are concerned that the legislative proposal you discuss in your letter would invite confusion on critical command and control issues,” Governor James H. Douglas of Vermont and Governor Joe Manchin III of West Virginia, the president and vice president of the governors’ association, wrote in a letter back to Stockton on August 7. The governors asserted that they “must have tactical control over all . . . active duty and reserve military forces engaged in domestic operations within the governor’s state or territory.”

According to Pentagon public affairs officer Lt. Col. Almarah K. Belk, Stockton has not responded formally to the governors but understands their concerns.

“There is a rub there,” she said. “If the Secretary calls up the reserve personnel to provide support in a state and retains command and control of those forces, the governors are concerned about if I have command and control of the Guard, how do we ensure unity of effort and everyone is communicating and not running over each other.”

Yeah, I'm sure that's what the governors are worried about.

Every once in a while it occurs to me that it's possible my worldview has a serious flaw in it, and that the people who really drive me through the roof might actually be right. Fortunately, such moments soon pass and I can get back to blogging.

But just to make sure you guys realize that our opponents aren't morons, let me quote from a recent Brad DeLong essay in which he discusses the thought of John Hicks. After explaining the conventional mechanism through which central bank operations can stimulate an economy, DeLong says:

A little thought, however, will lead us to the conclusion that such open-market operations may fail. In them, the Federal Reserve is buying bonds, shrinking the supply of bonds out there--and thus pushing up their price and pushing down interest rates. For each amount that the Federal Reserve expands the money stock, therefore, it puts downward pressure on interest rates and thus on monetary velocity. In the limit where interest rates are so low that people don't really see a difference between cash and short-term government bonds like Treasury bills, open-market operations have no effect because they simply swap one zero-yielding government asset for another.

It is in this situation that a government deficit can be useful. A government deficit means that the government is printing and issuing a lot of bonds at exactly the same moment that private investors are looking for a safe asset to hold. As these bonds hit the market, people who otherwise would have socked their money away in cash--thus diminishing monetary velocity and slowing spending--buy the bonds instead. A large and timely government deficit thus short-circuits the adjustment mechanism, and avoids the collapse in monetary velocity that was the source of all the trouble.

Lately I have come to believe that the notorious "liquidity trap" is a legitimate phenomenon. The closer nominal interest rates approach zero, the more that government debt begins to resemble government fiat money. This surely can't be a good thing.

Think of it: The central government and central bank conspire to take the distinct markets of debt and money, and merge them into a common reality. It's like they divided by zero.

Naturally, I'm not endorsing the Keynesian policy prescriptions for "what to do when you're in a liquidity trap." But I'm saying that Keynesians have been saying for more than a year that something funky happens when central banks drive interest rates down to zero. And unfortunately, their Chicago School / monetarist critics have largely ignored their insights.

Lately I have been giving economic arguments that suggest the government will soon have to legalize marijuana. I've come up with an independent argument.

The authorities over the next few years will need to legalize marijuana in order to clean out the prisons. They will need to make room for people like you.

Walter Block sends along this amazing video. (If you aren't into it by 2:00, then you should stop it. But many of you will be hooked by that point.) Does anyone recognize this guy? Is this clip part of a show?

In a recent post, I discussed Robert Lucas' defense of mainstream macroeconomics. Lucas made excuses for why economists couldn't have predicted the housing crash, excuses that drove me to declare, "I'm starting to think the efficient markets hypothesis is a state of mind, a consciously chosen way of looking at the world. I'm not sure what it would mean to really falsify it."

I'm going to take another swipe at this, since others are adopting Lucas' line. For example, William Easterly recently wrote:

[E]conomists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it. The most important part of the much-maligned Efficient Markets Hypothesis (EMH) is that nobody can systematically beat the stock market. Which implies nobody can predict a market crash, because if you could, then you would obviously beat the market.

Picture a man who had watched CNBC faithfully through 2004 and 2005, and who had borrowed against his pension in order to buy six condos in Las Vegas. Then, after everything blew up in his face--what he had previously been assured was a "six sigma" event--the man asked, "How did you economists fail to see this coming?!" Can you imagine what that guy would do, if William Easterly happened to be there to give him the above answer?

Easterly, Lucas, and other economists think they are oh so clever, yet they're merely assuming their conclusion. They look out at the world, and see that it can be made consistent with the EMH if we assume certain other things about how the world works.

But by the same token, suppose that the critics of the economic forecasters are correct, and that groups of people--including economists and investors--are capable of making systematic errors for years at a time. Now if that alternate view of the world were correct--meaning the EMH had to be false--then what would the last five years have looked like? Well gee, they would have looked like what just happened. In other words, we can quite easily make the theory of "not-EMH" consistent with the observations.

For example, right now there are some people who are quite convinced that very large price inflation is imminent, while there are other people who are quite convinced that very large price deflation is imminent. The prices for gold, silver, and 30-year Treasurys are constantly shifting, but at any given time they do their part to balance the speculative powers in the camps of the dollar bulls vs. dollar bears. Especially in these unprecedented times, when people are unsure even what framework to use when anticipating the future, it is rather misleading to think in terms of an "equilibrium price" for a one-year put on oil futures. At any time, the put's price should be interpreted as a ceasefire, not as a "best guess."

Now let's suppose that the people worried about collapsing credit lines (e.g. Mish) turn out to be right. The CPI falls by about 10% a year for the next four years. If that happens, I promise that I will say, "I was wrong and Mish was right."

I'm not going to say, "I didn't predict this coming, but then again no one did. If Mish thinks he predicted it, he's sadly mistaken. His arguments and graphs were all taken up by the market, and yet gold remained above $900. Therefore Mish just got lucky; he really couldn't have known for sure that this would happen."

I am not being cute or making an analogy; I think the above paragraph is literally what Lucas and Easterly have done, albeit they could point to formal models with Greek letters to make their case less blatant. Even so, they are imposing the EMH on the world, and they don't even realize it.

Robert Wenzel sends me this tale of a Syracuse mom getting tased and arrested. She had been pulled over for talking on her cell phone, which made her indignant because she didn't have a cell phone in the car. (She had been holding her hand to her cheek while driving.) Apparently, the cop took her to jail and left the 15- and 5-year-old kids in the minivan on the road, where they sat for 40 minutes. This happened back in January, when it is friggin' freezin' in Syracuse.

(For you voyeurs, there is a video showing the arrest, narrated by the woman.)

* Here is a 15-minute interview with Lew Rockwell. (Remember, the LRC podcasts are regular hyperlinks that take you to a new page. Then you play the interview from the page.)

* Here [.mp3] is my Mises Circle talk on the first full day of this year's Mises University. It's about 45 minutes long, but if you're borderline, I'd nudge you over the edge to go ahead and listen to it. There were some good jokes, as far as a talk on monetary policy goes.

UPDATE: Oops I forgot to mention, the Mises Circle talk was held outdoors. So I was mic'ed and standing at the top of a short staircase, looking out to a crowd of 180 students as they wrapped up dinner. That's why I'm talking loudly in the beginning, because it took a few minutes for the young punks to settle down and start lapping up my wisdom. Tom Woods had to lay down the law for one group of chatterboxes near the back.

The CPI numbers came out today, and there was no smoking gun upon first glance. I still need to go through and make sure there was no hanky panky, but it seems that they did bump up the raw number. The reason the headline is flat is that (the BLS claims) raw prices actually fell from June to July, so that with their seasonal adjustment the headline number was the same.

Reader Joseph Webb emailed me the below video, and said I should watch near the end. They claim that the BLS is adjusting car prices down because of the "cash for clunkers" program.

However, I called the BLS myself and talked to Stephen Reed, the technical contact listed in the BLS press release. He sounded like he knew what he was talking about, and he said that the BLS is counting the actual price consumers pay for cars. Now the cash for clunker program could have an indirect effect, because dealers will presumably be willing to sell a given car at a lower price, if they are getting a check from the government for qualified transactions. But if you pay, say, $15,000 for a car, and the dealer gets a $4,500 check from the government because of your clunker trade-in, I understood Reed to say that the BLS counts that car's price as $15,000.

So, I have no smoking gun to report right now. My overall view remains the same: Last year Bernanke increased M1 at the fastest annual rate since the mid-1980s. Back then, there was a plausible reason that the Fed could expand the money supply without causing large price inflation: Volcker had killed the late 1970s inflation, and Reagan cut taxes. So there were plenty of objective reasons for the worldwide demand for dollars to go up. In our time, the demand for dollars went up, especially in September 2008, because of the financial panic. But as that subsides, people are going to reduce their demand for USD. I still think that is the big picture here, and it's why I still expect the BLS to pull rabbits out of hats in order to keep the CPI from going through the roof during the rest of this year.

I realize I can't gloat until my unorthodox views have been fulfilled. In the meantime, let me just note the following excerpt from the CNBC article:

Even as the worst recession since the Great Depression starts to bottom, inflation pressures will likely remain contained given high unemployment and weak demand, analysts said.

If I'm right, five years from now that will look like a particularly silly thing to be saying right now.

Guys, you're both right--Will is right that Arnold's definition of freedom leads you into contradictions, and Arnold is right that Will's definition leads you into contradictions.

Try defining freedom as a situation in which everyone's property rights are respected. Discuss.

In an outcome that was unexpected though not altogether surprising, I have read Jon Scieszka's Smash! Crash! for (if I'm not mistaken) at least the last four nights, generally in the 7:45pm - 8:15pm window. Each session consisted of an honest cover-to-cover reading; in fact, at times I felt almost compelled to turn to a previous page and begin resuming my reading from that prior point. Given my unusual week, I thought I would share my thoughts on Smash! Crash! as I have explored them. --RPM

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

Jon Scieszka's Smash! Crash!
(New York: Scholastic, Inc., 2008, 36+ii pages, illustrations)
A Book Review By Robert P. Murphy

Scieszka's latest [.jpg] has become something of a household name. And unlike other books achieving notoriety despite a weak plot line and poor character development, Smash! Crash! has got the goods.

The book follows two aimless young vehicles, Jack Truck and Dump Truck Dan (best friends, Jack and Dan), as they stalk from one awkward and irrational social scene to the next. Some readers may choose to interpret Scieszka as mirroring Kubrick in this respect; the young trucks seek out their "ultraviolence" in a way, though if one hopes that Scieszka's subtle clues give a straightforward confirmation or denial--well, one would hope in vain.

For my part, I reject the Clockwork Orange interpretation. Though the actions of the anti-heroes in both works are utterly incomprehensible, and though the anti-heroes' extremely anti-social behaviors are starkly present in both works, even so, there are tremendous differences.

For one trivial observation: Nobody dies in Smash! Crash!

A second, and perhaps more poignant observation, is that the redemption in Scieszka's tale is legitimate. It's true, Jack Truck and Dump Truck Dan never express remorse for their transgressions. The worst victim of their crimes, Cement Mixer Melvin, was simply covered from bumper to bumper in the sand/water mixture. (!) Yet despite this outrage, Scieszka depicts not even a moment's regret from our trucks.

But is that the end of the story? No, it's not. At the end of the story, we see Jack and Dan's aggression harnessed into socially useful behavior--they assist Wrecking Crane Rosie (who is huge and who is strong and who booms, "Follow Me") as she must smash and crash an abandoned building.

Let us be clear: Jack Truck and Dump Truck Dan are not "repaying their debt" to society, for they owe society nothing. As Jack explains in the book's final words:

"We can do that," says Jack. "We love to..."
SMASH! CRASH!

The use of violence and psychological warfare cannot contain the insanely criminal. We know this; Kubrick taught it to us. Yet the liberal who was relieved by this demonstration, also realized--deep down--that she had no solution for people such as Alex DeLarge.

Has Scieszka found the humane yet realistic answer? Do we just need to find the right jobs for these people?

Robert P. Murphy holds a Ph.D. in economics from New York University. He is the author of The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009), and is the editor of the blog Free Advice.

Jesse Johnson emails me the following puzzles:

* Which Rothbard book title can be rearranged as, "Hot Celebrity Fetish"?

* Which Rothbard book title can be rearranged as, "Bitchiest Elf Theory"?

The first to answer correctly will receive satisfaction.

The National Association of Manufacturers puts out an estimate of the economic impacts of Waxman-Markey (cap & trade)... The "Wonk Room" at ThinkProgress (Yglesias' stomping ground) puts a rosy spin on it... The wonks at IER put a dandelion spin on it... Excerpt from the IER rebuttal:

Because of this natural trend for secular growth, it would be quite shocking if U.S. GDP actually fell from the year 2009 through 2030. Maybe a return of the bubonic plague, or an attack on California’s fault line by Lex Luthor, could yield such utter devastation as to keep total output stagnant over such a long period. To give some historical context, recall that the great stock market crash occurred in 1929, after which followed a decade of Depression. Yet real GDP in 1950 was more than double what it had been twenty-one years earlier, in 1929. So the fact that real GDP will continue to grow despite the imposition of Waxman-Markey is hardly reassuring; such logic would have “proved” the harmlessness of the Great Depression.

CNBC announces the strong demand in the 30-year Treasury auction today. I bet I can guess what Chris Martenson's going to be working on next week...

Buckling to pressure from a certain critic--who was concerned more for more consistency rather than blogosphere modesty, I believe--I believe I have filtered out the absurd Evony ads. It actually is a lot easier to filter Google ads than I thought.

What clinched it for me was the realization that if I'm going to write a high school course, I don't want some kid to be looking at my blog when his mom walks in and sees racy Google Ad photos.

So now that I am going down the censorious route, I will zap other ads that do not align with my ministry.

(Note that it may take up to 48 hours for a filter to kick in, so you may have to shield your undefiled eyes for a bit longer when you visit Free Advice.)

CNBC reports with apparent surprise:

Sales at U.S. retailers unexpectedly fell in July and the number of workers filing new claims for jobless benefits rose last week, indicating the recession-hit economy faced a bumpy recovery.

A Commerce Department report Thursday showed total retail sales edged down 0.1 percent after increasing 0.8 percent in June, compared with market forecasts for a 0.7 percent gain.

Analysts had expected a boost in retail sales from the government's "cash for clunkers" program, which gives consumers cash to swap aging gas-guzzlers for new, more fuel efficient models.

A separate report from the Labor Department showed first-time applications for state unemployment insurance benefits climbed 4,000 to a seasonally adjusted 558,000 last week.

"Retail sales were unexpectedly weaker than expected, suggesting that the money spent on the 'Cash for Clunkers' plan wasn't spent on other things," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
...
There was more bad news on the home foreclosures front, where RealtyTrac reported that U.S. home loans failed at a record pace in July despite ongoing federal and state programs to avoid foreclosures.

Foreclosure activity jumped 7 percent in July from June and 32 percent from a year earlier as one in every 355 households with a loan got a foreclosure filing, RealtyTrac said.
...
Consumer spending fell at a 1.2 percent annual rate in the second quarter after edging up 0.6 percent in the January-March period. Despite signs the worst recession in over 60 years was winding down, companies have been reluctant to hire, though the pace of layoffs has slowed down markedly.

I think we just need to give it another month, and then Obama and Krugman will go back to explaining that the stimulus money hasn't hit yet (and was too small anyway) to get us out of the recession.

Someone please make it stop. People have been arguing for months over a V-shaped versus a U-shaped recovery--as if there were some scientific propositions behind each theory. And now, CNBC runs an article talking about a W-shaped recovery and a triple-U-shaped recovery.

My guess? A lowercase z--in cursive.

LRC reprints a pretty funny Matt Taibbi article where he (with some vulgarity) responds to a Slate defense of Goldman Sachs:

So, gosh, I stand corrected, I guess. Because I thought that Goldman made a ton of money this year because it got a special waiver (fast-forwarding through the usual five-day antitrust waiting period, thanks to their buddies in the Fed) to instantly switch to bank holding company status and make itself eligible for $28 billion in FDIC-backed lending. I thought it got $13 billion in public money via the AIG bailout and hundreds millions more in extra underwriting fees through its work underwriting stock for banks repaying TARP money. I didn’t know that it made all that money because it had internal safeguards in place to rein in egos. I feel foolish now.

Somehow over pitchers and wings we managed to bring up You Can't Do That on Television the other night. ("Daaaa I heeeeard that!") One member of our elite group remarked that if you watch clips of the show now, the Canadian accents are striking, whereas that was never something I had noticed as a kid.

In any event, here are some clips when Alanis Morissette was on the show. (You can tell it's her, because the other actors refer to her as "Alanis.")

It's almost crunch time! By early next week the new PPI and CPI numbers for July will be out.

I have been warning for months that actual prices are rising much more quickly than you would realize, had you simply relied on the official reports coming out of the BLS. I explained that after last month's numbers came out (for June-over-May price increases), the grace period is over. Since the BLS has "seasonally adjusted" the actual CPI increases down every month from January through June, now they will have to bump up the actual numbers, when giving the headlines to CNBC.

Because I'm very suspicious of the government, I predicted that they will revise the prior adjustments, in effect shifting some of the price inflation back onto the earlier months of 2009, so that they don't have to catch up so much in the 3rd and 4th quarters.

It's not the same thing, but here Jeff Hummel describes a massive revision that the BEA just undertook to the GDP figures going back to 1929. Here's an excerpt from Hummel:

Using new input-output analysis, the BEA has just completed a comprehensive revision of all the numbers in the National Income and Product Accounts going way back to 1929. Consider the slight difference this can make in the story of the current recession, which the National Bureau of Economic Research (NBER) dates as beginning in December 2007. The old estimates reported that real GDP fell by 0.2 percent in the fourth quarter of 2007, whereas the new estimates report that it rose by 2.1 percent. For the first quarter of 2008, the old estimate is a 0.9 percent rise; the new estimate is 0.7 percent fall.

And to show just how ridiculous these revisions can be, Hummel goes on to explain:

Richard K. Vedder and Lowell E. Gallaway caught probably the most egregious instance in their neglected Out of Work: Unemployment and Government in Twentieth-Century America (1993). The 1960 estimates of real Gross National Product (this was when the preferred aggregate was still GNP rather than GDP), using a 1929 base year, reported that output rose by 30 percent during World War II (1941-1944) and then fell by a modest 5 percent to 1948. In contrast, the 1990 estimates, using 1982 as a base year, had output rising by 50 percent during World War II and then falling by a massive 30 percent from 1944 to 1948.

In other words, the 1990 estimates discovered a massive post-World War II recession in the U.S. that absolutely nobody was aware of at the time and that failed to show up at all in the unemployment numbers. Yet most macro texts over the last decade have graphs that mindlessly depict this imaginary depression by statistical artifact. [Bold in original]

I can't believe I am actually anxious for a BLS report to come out. And yet here we are.

I am pleased to announce that the Mises Institute has officially given me the green light to start working on an economics course geared for the high school level. The main audience will be for homeschoolers, but the course materials will be "official" enough that any high school teacher with a friendly administration could adopt the course.

This will not be centered on Austrian economics per se, but rather economics in general. I will be guided by the notion that many of the students will get their one course in economics from this material. So I'm certainly not spending time on Average Total Cost curves. (The teacher's edition will have advanced topics and also sections on mainstream textbook analysis, for the students who plan to take econ in college.)

I will give more updates as the project matures. We are very excited about the whole thing. I have been in consultation with a fellow grad from Hillsdale College, who now teaches history to junior high students. We will work together to ensure that Lessons for the Young Economist is appropriate for the target age.

I'm sure most of you heard President Obama's ill-advised attempt to defuse critics of the health "reform" plans. Obama was trying to make the point that a public (government) health insurance plan wouldn't put private insurers out of business, and so he noted that FedEx and UPS were doing fine, whereas the Post Office was the one always in trouble. You can't see it in the clip above, but on the audio clips I've heard it seems that even the very friendly crowd was a bit nonplussed by this line of argument.

Anyway, I had a similar thing happen when I deposited a check at my local bank. I opened the account when I was a professor in Michigan, and now I live in Tennessee. Every once in a while the person at the desk urges me to open a checking account with them, so that everything will be in-state.

I have resisted doing so for two main reasons. First, we have most of our bills on autopay through the account, and I would have to switch everything over. Second, quite frankly the Fifth Third employees in Hillsdale, Michigan (where we opened the account) seem a lot more competent than the ones I've dealt with in Nashville, TN. (I'll just leave it at that. Not saying one group of people is good or bad in an absolute sense, but one group has to be relatively better, and I put my money--literally--on the Michigan people.)

Now here's what's funny: I know full well that there must be some sort of drive to get people to sign up with new checking Fifth Third checking accounts; they even have promotional gimmicks like you get an extra $25 in your account (with an initial minimum deposit). So today the branch manager comes up to me and urges me to switch, for the same reason they always give. But this time he added a little drama to it, saying something like, "We'd like to be able to say that nothing could go wrong, with your account being based out of Michigan, but in truth the Fifth Third computer network doesn't always work the way we wish it did. So just to spare you heartache down the road, you should really think about setting up an account here in Tennessee. You can at least just open one, and then over time move your activities over to it."

I didn't say this, but my internal reaction was, "Well, if you're telling me to open up a new checking account in Nashville because the Fifth Third system is unreliable, I would do it with another bank. What kind of sales pitch is that?"

* More lecturing for CA, this time in the Manhattan Institute's City Journal.

* If you hate downloading mp3s, here is my radio interview in the Bahamas broken up into YouTube segments. (Thanks to Damien Forsythe.)

* Ay caramba!

That's not the exact spin that CNBC gave to the story:

The Federal Reserve said Wednesday it will extend the duration but not the dollar amount of a program to buy long-term government securities, and said the economy was showing signs of leveling out after 20 months of recession.

The Fed, the US central bank, also kept its benchmark short-term interest rate steady near zero and said it would likely stay there for an extended period.

The Fed said it would gradually slow the pace of its program to buy $300 billion worth of Treasury securities so that it will shut down at the end of October, a month later than previously scheduled. It has bought $253 billion of the securities so far.
...
The program is aimed at lowering rates on mortgages and other consumer debt, a move to spur Americans to spend more. But its effectiveness has been questioned by some on Wall Street and on Capitol Hill who worry that the program makes it look like the Fed is printing money to pay for Uncle Sam's exploding deficits.

A fairly weak auction of $23 billion in 10-year notes sent a clear signal that investors were waiting to see what the Fed had to say at the before making any big moves. The 10-year auction's bid-to-cover ratio, a measure of demand, was 2.49 percent, down sharply from 3.28 percent at a similar auction in July. Indirect bids, an indication of foreign buying, were lower than at recent auctions.

US Treasury prices tumbled after the Fed statement in apparent disappointment that the Fed did not increase the amount of debt that it plans to buy.
...
Although consumer spending has stabilized, job losses, sluggish income growth, hits to wealth from tanking home values and still hard to get credit could make Americans cautious in the months ahead, the Fed said.

The Fed expressed confidence that its low rates and other aggressive actions so far will gradually help bolster the economy. Even so, economic activity probably will "remain weak for a time," the Fed warned.

Against that backdrop, the Fed said inflation is likely to stay "subdued." Fed policymakers predicted that idle factories and the weak employment market will make it hard for companies to jack up prices.

While unemployment dipped to 9.4 percent in July, the Fed says it's likely to top 10 percent this year because companies won't be in a rush to hire.

The Fed didn't make any changes to another program that aims to push down mortgage rates.

In that venture, the Fed is on track to buy $1.25 trillion worth of securities issued by mortgage finance companies Fannie Mae and Freddie Mac by the end of the year. The central bank's recent purchases have totaled about $542.8 billion. [Bold by RPM]

Folks, I am waiting for Mario Rizzo to slip up and post something dumb, just so I can pounce on him and prove I'm independent. But alas, he keeps knocking it out of the park:

The over-all theme of [Krugman's] article is that big government is our salvation. "[U]tter catastrophe no longer seems likely...Big Government, run by people who understand its virtues, is the reason why."

Post hoc ergo propter hoc?

How do we know that fiscal stimulus played a non-trivial or any helpful role in the apparent easing of the rate of decline in economic activity? I think we need a theory and evidence.

Now, of course, there is no dearth of Keynesian theories – all leading to [the] same policy conclusion. If recession, then more (government) spending. But what is the mechanism by which about $70 billion in extra spending (this is the amount of the total stimulus package now spent) reduces the rate of increase in unemployment and reduces the rate of decrease in output in a $14 trillion economy? If my advanced arithmetic is correct this is ½ of 1 percent of the GDP. What kind of Super Multiplier is that?

However, things are more disturbing than that. Just a couple (or so) weeks ago President Obama said that not enough of the stimulus had been spent yet and so it was too early to expect results. But mirabile visu! The Almost Recovery has appeared. (It seems more like political opportunism instead.)

Indeed, I think the only real goof Rizzo has made since starting his blog, was apparently giving Gene Callahan unrestricted posting privileges. Rookie mistake.

Today I am pleased to offer a response to Paul Krugman's arguments that the free market can't work in health care. The writer is Matthew DiPaola, who was in my high school class. More important, as his bio below indicates, Matthew is an actual MD and thus may actually know more than Krugman, me, and all the other economists put together on this issue. The below essay is a lightly edited version of a comment that originally ran on Jay Parkinson's blog. Matthew is willing to write future essays on these matters, so put your requests in the comments. --RPM


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

A Medical Doctor Responds to Paul Krugman on ObamaCare
By Matthew DiPaola

I completely disagree with Krugman and again believe that his NY Times pulpit and Nobel prize in economics inappropriately legitimize a weakly argued, soundbite point.

Krugman claims that health care is distinctive for 2 reasons: 1) no one knows "when or whether" they may need care (health events can be unpredictable) and 2) health care is complicated. He is wrong on both points. In order for his point to ring true, he would have to prove that free markets are incapable of efficiently distributing unpredictable and/or complicated services. Yet free markets efficiently distribute both unpredictable and complicated services all of the time.

Point 1. Free markets operate extremely efficiently to protect against the unpredictable events of death (life insurance), car accidents (automobile insurance) and fires (homeowners insurance). In each case there is a disincentive for the insurance company to pay--not unlike the case of health care. Well managed insurance companies such as Geico, through excellent planning and policy pricing are able to offset claim payouts by prudent float investment and either break even or turn a profit. Such insurance firms provide a solid protective service to countless people daily. Without free markets (and we can argue about how truly "free" some of these markets are) these people would surely be worse off.

Point 2. Free markets efficiently allocate complicated goods and services all of the time. The computer industry is an excellent example. I don't know how to create a microchip but I can certainly explain to a competent professional the types of activities for which I would use a computer. And in a free market, an honest, trained salesperson can help guide me to the appropriate computer, at a good price for my needs.

The same holds true for medicine. No patient needs to know the nitty gritty distinctions between various stents. They do, however need to be educated and guided appropriately regarding the qualities of that stent that most affect their decisions: "Doctor, how long does stent X last? What are the side effects? What are appropriate alternatives? What quality of life will this provide me?" The professional's role is to guide the patient through this complicated decision process and is their "value added" to the market interaction.

Krugman fails to delineate why health care is truly distinctive. Health care is distinctive because its practitioners are obligated through professional ethical standards to provide the highest level of care to ALL patients/consumers regardless of age, disease status and ability to pay. Certainly this differs from the flat screen TV market: this would be the equivalent of every TV shopper DESERVING the $5000 48-inch flat screen TV (assuming that the 48-inch was considered the highest quality). And this ethic may indeed raise costs, to the extent that high quality equals high cost. One can argue ad infinitum about what constitutes the "highest level of care." And I think Jay Parkinson makes good points in his writing that high cost does not ALWAYS equal high quality care.

Krugman's last point about there being no successful free market systems in health care is utter nonsense. There has been no such thing as a free market in health care in the US since at least 1965 and he woefully ignores any examples prior to this. Government intervention has perverted the free market to the extent that any conclusion about its true workings is impossible to make. This would be like the commissioner of baseball, prior to Jackie Robinson entering Major League baseball, saying "there is no evidence that black players can be successful in the Major Leagues." Rubbish.

Milton Friedman, a Nobel prize winning economist with a decisively different take on these issue is worth considering. For a look at why free markets in health care must be considered please read Friedman's 2001 article "How to Cure Health Care."

Matthew DiPaola holds an MD from Cornell University. His residency was in orthopedics at Thomas Jefferson University in Philadelphia. In September he will begin as Assistant Professor of Orthopedics at Wright State University in Dayton, Ohio. His views expressed here do not necessarily reflect the views of his employer.

I explain the unfortunate demise of Larry Kudlow in this Mises Daily.

Robert Wenzel has been doing a great job keeping his readers up to speed on just how awful the health care bill is. In particular, he has been repeating the remarks of some poor guy who actually read the whole thing. (!!)

Whenever I see "shocking" commentary like the one on EPJ, I like to go check up on the most outrageous thing. So in the list for the above post, I decided to go check out: "PG 844-845 OMG! This Home Visitation Prog. includes Govt coming in2 ur house & telling u how 2 parent"

In other words, that seemed like a claim that surely was being interpreted, rather than literally saying that.

You can decide for yourself, and actually you need to start on page 842 [.pdf] to get the full context. I don't think Fleckstein is exaggerating too much. But what I want to focus on in this post, is the following line from page 844:

‘‘18 (VII) activities designed to help
19 parents become full partners in the
20 education of their children;

Whoa, do you see that? Does that give you chills? They are going to try to help parents to become full partners with the government in the education of their children.

I know you want to go check out the context; no, don't do it just yet. If you do, you'll get distracted. I think we all need to go re-read the three lines I just quoted above.

How can any true liberal think that this bill is a good idea? Do you really want to give the author(s) of the above quotation, power over your health care?

William Grigg at LRC (sorry I lost the link) tips us off to this story. A couple in Austin saw a suspicious car (keys in ignition, windows rolled down, rope and bikini top in the back seat) parked on their street. They asked their neighbors, and nobody knew anything.

So they called the police, who showed up and left after seven minutes. The police told them not to worry about it because it wasn't parked illegally.

Well the couple got more and more curious (there was also broken glass in the back seat and they were concocting stories of a serial killer and a stripper in the trunk) and finally decided to see if they could identify the owner of the car.

I think you know how this turns out, right? The police showed up and handcuffed them, but then let them go once they explained what happened. Oh OK, problem over? No, sixteen days later the police showed up at the guy's house and arrested him, charging him with burglary (I think) which carried a year in prison and a $4,000 fine.

The car had been planted on their street by the police. Apparently this is a quite common tactic used by police nationwide to catch car thieves.

I am omitting some of the nuances; go read the story before repeating this. Some people commenting at the news site think the couple deserved arrest, since they were trying to open the trunk with a screwdriver.

And one commenter congratulated the 39-year-old guy for dating a 21-year-old. Ah the internet.

Tom Woods argues that just one would be great. Here he caves in to peer pressure and writes a response to the Pope's encyclical, Caritas in Veritate. Here's Tom's thesis:

Caritas in Veritate strikes me as at best a relatively unremarkable restatement of some familiar themes from previous social encyclicals. At worst, it is bewilderingly naïve, and its policy recommendations, while attracting no one to the Church, are certain to repel.

The response to the encyclical throughout the right-of-center Catholic world was drearily predictable: with few exceptions, it was a performance worthy of the Soviet Politburo, with unrestrained huzzahs everywhere.

It is one thing to receive a statement from the Pope with the respect that is due to the man and his office. It is quite another to treat his every missive as ipso facto brilliant, as if the Catholic faith depended on it. If his supporters are trying to live down to the Left’s portrayal of Catholicism as a billion-person cult, they could hardly do a better job.

And check out this fairly ominous quotation from the Pope, which Tom reproduces:

In the face of the unrelenting growth of global interdependence, there is a strongly felt need, even in the midst of a global recession, for a reform of the United Nations Organization, and likewise of economic institutions and international finance, so that the concept of the family of nations can acquire real teeth. One also senses the urgent need to find innovative ways of implementing the principle of the responsibility to protect and of giving poorer nations an effective voice in shared decision-making. This seems necessary in order to arrive at a political, juridical and economic order which can increase and give direction to international cooperation for the development of all peoples in solidarity. To manage the global economy; to revive economies hit by the crisis; to avoid any deterioration of the present crisis and the greater imbalances that would result; to bring about integral and timely disarmament, food security and peace; to guarantee the protection of the environment and to regulate migration: for all this, there is urgent need of a true world political authority, as my predecessor Blessed John XXIII indicated some years ago. Such an authority would need to be regulated by law, to observe consistently the principles of subsidiarity and solidarity, to seek to establish the common good, and to make a commitment to securing authentic integral human development inspired by the values of charity in truth. Furthermore, such an authority would need to be universally recognized and to be vested with the effective power to ensure security for all, regard for justice, and respect for rights. Obviously it would have to have the authority to ensure compliance with its decisions from all parties, and also with the coordinated measures adopted in various international forums. Without this, despite the great progress accomplished in various sectors, international law would risk being conditioned by the balance of power among the strongest nations. [Bold by RPM]

In a recent article on Free Advice, Iraq vet Edward Gonzalez explained how his experience with "anarchy" in Iraq made him doubt the armchair theorizing from people like Murray Rothbard and me. Obviously, I have been running Gonzalez's articles because he is quite possibly the only human on Earth who:
(a) Saw combat in Iraq,
(b) Is conversant with Austrian and libertarian theory,
and
(c) Is willing to blog about it.

Below I give my quick response to Gonzalez. --RPM


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

Anarchy and Iraq: Murphy Responds to Gonzalez
By Robert P. Murphy

When I talk about "market anarchy," that is shorthand for a society in which most people respect each other's property rights. There are still robberies, rapes, and homicides, of course, but they are relatively rare. Most Americans would say, "So we're currently living in market anarchy?" No, we're not, because the typical FBI crime statistics don't include taxes as part of how much is stolen every year in America. I am also pretty sure a city's homicide rate doesn't include people who were killed by police officers. For example, imagine what Waco's crime stats would look like, if a private gang had surrounded a building and burned everyone inside alive. I haven't actually verified this, but I'm betting if you get your hands on the crime statistics for Texas, you won't see a big spike in 1993.

So anyway, that's why our society today is actually infested with crime, and the respect for property rights in America (and all other "civilized" countries) is actually paper thin and lukewarm. People tell their kids "Don't steal," but to avoid hypocrisy they need to add "...unless you're at least 18 and you can convince 50% of those who turn out on election day to agree with you that stealing is OK under certain conditions."

A society existing in market anarchy would be one in which people really meant it when they told their kids, "We live in a civilized society where there are rules. We don't get to break those rules, even in an emergency. In fact, the rules are there precisely for those emergencies, when we otherwise might lose our heads and do something foolish."

Now obviously, the academic proponents of market anarchy aren't predicting that such a hypothetical society will spontaneously come into existence so long as people have brains. If that were our prediction, we would obviously be completely contradicted by almost all of recorded history.

No no, what I tried to do in this pamphlet [.pdf] was show that a society committed to true respect for property rights--if it were big enough--would be sustainable. And in fact, the requirements necessary for such a society to survive, would be much less than the comparable requirements for a group of people who were statists.

So yes, a group of 15 Rothbardians who declare themselves "free men" on a yacht are not going to repel the US Navy. But by the same token, 15 democrats on a yacht who vote in a president and a bicameral legislature, who then levy income taxes on the remaining 2 guys in the yacht's private sector, will also not be able to repel the US Navy. Surely I have not just proved the impracticality of both market anarchism and democracy.

So what I'm saying is that as you make the contest fairer and fairer, then the free people (of comparable population, wealth, technology, etc.) will be able to repel the US military much earlier than their equivalent statist counterparts.

And as far as domestic affairs go, the same holds: It's true that no matter the institutional arrangements, a society composed of cannibals, and imbued with a fear of machinery, is not going places. Even a society of Rothbardians would not do well by any objective measure, if those Rothbardians all just so happened to be cannibals and Luddites. But again, a group of Trotskyites who were similar in all other respects, would die off almost overnight.

Now as far as Iraq goes, it's not clear to me that it has relevance to the claims I'm making above. What follows will be a very simplistic summary, and I hope Gonzalez will correct any misconceptions I have. But here is my understanding of what happened in Iraq:

First, there was a functioning government in the Nation-State sense of the term. The population grew up with government-provided legal and police services. The people would naturally think this was a government function, and obviously no one would have any experience in running a private competitor.

The US military comes in and literally destroys all government institutions. With US soldiers patrolling the streets, any Iraqi male walking around with a weapon could legitimately fear being shot on sight.

Once it was clear that Saddam's rule was finished, and that the US forces were unstoppable, everyone with any lick of sense in the entire country knew that the Americans would install a friendly regime. That was the whole point of the invasion, after all. Had it even occurred to a single Iraqi in the entire country to try to start up a business selling defense services, he quickly would have scrapped the plan when he realized, "If nothing else, the American tanks would come up to my business office and demolish it."

So I really don't see why the lack of Rothbardian entrepreneurs constitutes even a challenge to the intellectual arguments for market anarchy.

People at libertarian events will say stuff like, "If you could press a button and eliminate government, would you do it?" The idea is to see how hardcore the other guy is. Like, only a wuss who drinks Bud Light would say, "Nah, I think we should first put in the Fair Tax and pay off holders of US Treasurys."

But I think that's a goofy question, like saying, "I'm not going to tell you what it does, but would you press a green button if I presented it to you--and you knew it was real?"

For example, if the button gets rid of the government by having Martians show up and disintegrate them, then no freaking way would I push it. The people running the political parties--who aren't actually politicians, so presumably they'd be spared the zapping--would organize emergency elections, that were rigged to install the people they wanted running the country. They'd then use the aliens as an excuse to declare martial law and seize 50% of everyone's wealth to fund the Giant Laser.

On the other hand, if the button somehow gets everyone to voluntarily agree that Rothbard was right, then heck yes I would press it. Except, I don't think such a button is possible; I don't know what it would mean to make someone truly agree with my case if I got the consent via pushing a button.

In closing, let me ask you to imagine "anarchy" breaking out because of a natural disaster. Let's say for example that during a police parade there is an earthquake, and everyone in the city realizes the next day that 99% of the police got wiped out, and that the rockslides will prevent the National Guard from getting in for days.

Now if this happened in Austin, those people would be fine. If it happened in the Bronx, maybe not. I think people in Northern big cities can't imagine market anarchy working, because their populations have been conditioned by the distortions from their interventionist governments. In the South, in contrast, people can definitely trust that their neighbors won't suddenly pull up with shotguns just because the sheriff died.

Robert P. Murphy holds a Ph.D. in economics from New York University. He is the author of The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009), and is the editor of the blog Free Advice.

Back at the end of May, I was really excited when Paul Krugman wrote that inflation wasn't going to be a problem anytime soon. Up until then, Krugman and my forecasts had been basically the same; I thought the huge deficits, power grabs, and monetary injections were going to wreck the economy, whereas Krugman had been saying the timid deficits, insufficient power grabs, and wussy monetary injections were not enough to save the economy from the reckless Bush policies. In other words, even if my predictions (prior to Krugman's May 29th article) came true, Krugman could have justifiably claimed vindication as well. So that's why his unambiguous "the people who are calling for inflation are liars or stupid" column was so pleasing to me.

In a similar vein, I am happy that yesterday Krugman came out and officially predicted that we are not in the beginning of the Great Depression II. Since I think we definitely are, this is yet another way to separate the economist from the ideological hack. (And oh oh oh I hope I end up being the economist. If I'm the sellout I'm not nearly as famous and rich as I should be.)

I liked this line:

"The mainstream media talks about government like Patriots fans talk about Tom Brady or Colts fans talk about Peyton Manning."

This interview was taped over the phone, and then they typed it up. So that's why my answers are so conversational...

The issue is the New Deal. We go two rounds. I haven't even read Jeff Madrick's final response yet; for all I know he wins by KO.

I'll let you guess the sides of the debate. (Here's a hint: Madrick has a book titled, The Case for Big Government.)

If you want to grab a folding chair and join the fun, here is a forum for further comments on the debate.

Chris Brunner sends along this sobering report (via Karl Denninger via ZeroHedge). Chris Martenson did some sleuthing with CUSIPs and (apparently) discovered that the Fed just bought 47% of the fresh Treasury debt that was issued the week before!

Good grief! Just last week, when the auction results were announced it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand" and all the rest.

And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

They didn't even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.

The speed of the shell game is accelerating.

This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.

And guess what? This week the Treasury plans on selling almost $100 billion in new debt. I bet they'll find some takers...

People had been complaining about this interview at LRC, but I didn't realize how bad it was. If you watch, say, the first three minutes, that's a good sample of the whole thing.



I think that interview will actually help Schiff a lot. It will first of all toughen him up for if/when he debates Dodd. Beyond that, I can't imagine someone who was convinced to vote against Schiff because of this host's shenanigans, was actually going to vote for Schiff.

My former star pupil Gennady Stolyarov II repays my kindness by criticizing Rothbardian anarcho-capitalism (what I call "market anarchy" [.pdf]). In the below article, guest blogger Edward Gonzalez also takes me to task. I would be nervous, if I weren't right.--RPM

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

Questioning Market Anarchy
by Edward Gonzalez

After a seven month tour in Iraq fighting an insurgency, it became obvious to me that much of what I had been taught in school about government, law, and economics was utter nonsense. I returned home with a simple model in my mind and began picking up books, trying to find academics whose theories matched what I had witnessed. It took a while but I eventually found the Austrian School and have been a self taught student this past year. I will admit that I am a novice and do not fully understand all the intricacies of the theories, but so far, everything I have read by Ludwig von Mises holds true to the reality that I witnessed. Much of what Murray Rothbard wrote also holds true, but not all of it. I have recently read Rothbard's "Anatomy of the State" and For a New Liberty, and Robert Murphy's Chaos Theory [.pdf]. Here I will point out where I agree with the theory of market anarchy but also where I believe the theory departs from the reality of human nature. I hope to give specific examples of why I believe the theory is flawed and give Dr. Murphy a chance to correct me if I simply do not understand the theory in full.

First, I concede to all the economic theories and arguments. The free market is certainly the most efficient way to provide goods and services to people. However, the utilization of force against human beings is different and to treat it like any other service in the market economy is contrary to human nature.

In "Anatomy of the State," Murray Rothbard said,

One method of the birth of a State may be illustrated as follows: in the hills of southern “Ruritania,” a bandit group manages to obtain physical control over the territory, and finally the bandit chieftain proclaims himself “King of the sovereign and independent government of South Ruritania”; and, if he and his men have the force to maintain this rule for a while, lo and behold! a new State has joined the “family of nations,” and the former bandit leaders have been transformed into the lawful nobility of the realm.

I can personally attest to the reality of this scenario. In one town I operated in, all doings were under the control of an Iraqi Police Colonel. In the first year of the American invasion, that small city was thrown into chaos. There was a great deal of crime, vendetta killings, etc. A former sergeant from the Saddam era Iraqi Army was the toughest criminal around and, one by one, defeated the other gangs until he controlled the area. He declared himself in charge and saw fit to promote himself several times, and when I met him he was a self declared Colonel and ran the town.

The people of the town did not like this man. However, he was a strong man and a dominant leader that most people seemed to accept as a lesser evil than the chaos they had experienced immediately following the war. To use praxeology, the majority of people saw their acceptance of this self appointed Colonel as an improved condition over the constant criminal attacks, murder, and street fighting that accompanied the post war chaos. Obviously, there were many problems with his method of leadership. He dominated local business and extorted money from numerous people. There were several attempts on his life in the few months I was around. I have no doubt that a tougher tyrant will one day replace him.

This brings me to my first question regarding market anarchy: Why didn’t voluntary exchange services of defense arise during this post war chaos? Both Robert Murphy and Murray Rothbard claim that voluntary organizations of defense will emerge in a free market. This state of anarchy certainly provided the opportunity for these services to arise, but they didn’t.

My answer to this question is that like every other form of specialization in a free market, people will naturally seek out what they enjoy and what they are good at. In a total anarchy, the individuals who become the strong men are not only good at using force on other people, but they enjoy doing it and will seek to employ their specialized skill often. A farmer or fishermen has no desire to test his fighting prowess against a professional initiator of force, so they submit to his rule. Hence, if we are to achieve true liberty, services that involve using force on other human beings must be treated differently than all other services provided in a market economy.

I would love Dr. Murphy or any other theorist comments on this topic.

I also spent time in a much smaller farming and fishing village. This village had no local strong man. Al Qaeda insurgent cells did operate in the area, and anyone who had spoken out against them had met with death, and usually the death of whatever family members happened to be in the house with them at the time of the murder. People were scared, kept to themselves, and were not producing much of anything for trade. Again, my question is why didn’t voluntary exchange defense services arise in this environment? The Al Qaeda cells had no permanent presence in the village so an individual looking to start a protection service would have been able to do so.

My answer is that when most libertarians discuss liberty vs. security it is always discussed with only the individual in mind. In practice, people’s children and loved ones are at the forefront of their minds when making decisions regarding liberty, security, and force. Would you start a business whose failure would result in the immediate execution of your children? Would you employ an individual or company whose competitor would murder your family if you gave him your business? Maybe for some the answer is yes, but for most the answer is no. People will give up many things, including individual liberty, if the result is that their children are free from harm. It is human nature to do so.

How does market anarchy address this?

Most importantly, the greatest chink I see in market anarchy would be its inability to deal with revenge killings and blood feuds. My last mission in Iraq, I was required to oversee the security of the Hajj, the religious trek Muslims make to Mecca. The year before religious extremists had removed twenty people on the trek from their bus and executed them. This spurred revenge killings that resulted in mass sectarian violence that claimed over a thousand lives in a matter of weeks. The reason blood feuds are so dangerous is that without a strong judicial authority dealing out punishments, people feel honor bound to exact revenge themselves. Hence, if two young men argue and one kills another, the family members feel honor bound to avenge the young man’s death. In practice, there is a multiplier effect where if a person is killed in your family, usually you go and kill two or three from the other family and back and forth it goes. This may seem surprising to those living in the United States, but revenge killings are something we had to deal with often.

The market anarchy idea of monetary damage as the only method of punishment does not abide by the laws of human nature as I see it. If someone raped and murdered your child, would you be content to a cash settlement and the knowledge that person is off living their life somewhere? For a select few the answer may be yes, but for most the answer is that if someone does not harshly punish the murderer, they will do it themselves.

A strong court and police force can deal with rape, murder and prevent blood feuds. Has this been considered in the theory of market anarchy?

Please do not mistake my arguments for support of our current system. Our system is full of problems that need serious correction. What I am saying is that to treat the use of force like any other service in a market economy would be a mistake. I believe that Ludwig von Mises has the model for government, economy, and law that is most in line with human nature.

There was a village in Iraq that emerged from the chaos of war as a free society, but I will save that and the system they arranged for another essay.

Edward M. Gonzalez is a graduate of New York University and served on active duty in the United States Marines Corps from January 2004 to August of 2008. He is currently a Captain in the reserves and works for a private school in San Jose, CA. The views expressed in this article are not necessarily endorsed by the United States Marine Corps.

I think I got this link from Chris Brunner... In any event PJO has some pretty good lines in here. E.g. in referring to the politicians taking over the financial sector, he says (paraphrasing) "That's like when the father burns dinner, and then putting the dog in charge of the cooking. In other words, the one creature in the house you know is going to do a worse job."



Also, yesterday my Townhall column dealt with the cash-for-clunkers craziness.

Perhaps seeing that I do not restrict my self-important ramblings to merely economic matters, lately Scott Sumner (the Little Professor Who Could, who is now receiving NYT coverage) has branched off into philosophy. In a recent post he wrote:

What we are doing in physics is constructing models that can predict, and that therefore are very useful. But we shouldn’t kid ourselves that we are doing any more than that. This doesn’t mean that prediction is the only way to test a new model. In earlier posts I argued that the more elegant model often proved superior in the long run, and thus by induction we can infer that this might be true of future models as well.

The problem with debates over objective and subjective beliefs is that we have no God-like entity to referee the debates. So all we can do is muddle through on our own. Science can make a lot of neat predictions, and hence is very useful, but only for our purposes....

The scientific community is full of people who think religion is bunk and the humanities are not providing “real knowledge,” but rather just some light diversions to keep us entertained. OK, so then where does ethics come from? I suppose scientists might say it develops through evolution (evolutionary psych) or they might attribute it to the forces of culture (a mere social convention.) But even evolutionary psychologists like Stephen Pinker say that just because we (men) have evolved to think a certain way about violence and rape, doesn’t make it right. And most people would also say that merely because a culture is bigoted against a minority group, doesn’t make it right. So where do our moral intuitions come from? Science is unable to answer that question in a way that doesn’t sound like we are describing morals as “mere social conventions.”

So when the Alan Sokal’s of the world sneer at those who think Newton’s laws of physics are mere social conventions, I could sneer back at those in the scientific community by asking whether they regard our abhorrence at genocide as a “mere social convention.” So how do we resolve this? One way is through religion. Perhaps religion provides objective truth about ethics. But my solution is to meet the problem head on, and admit that everything we believe in both science and ethics is a social convention. Instead, let’s contest Sokal’s use of the term “mere.”
...
A lot of scientists suggest that it is immature to rely on religion as a crutch. I won’t take sides in this dispute. But if being grown-up is realizing that we have no one to fall back on but ourselves, then in what sense can we say there is a distinction between what we believe to be true (i.e. what predicts pretty well) and what is objectively true? Who will tell us when we are wrong?

As with his views on inflation, here I commend Scott for taking his position to its ultimate conclusion. Without a God (not necessarily the Christian God of course), your own worldview should make you wonder if the very notion of "truth" is simply a useful trick that humans invented at some point during our evolution.

I remember when I was an atheist (in college) and my Christian friend gave me a C.S. Lewis book; I think it was The Abolition of Man. Lewis had an argument trying to show that if you subscribe to the Darwinian account (at least the philosophically-charged account, that says it was random mutations on which natural selection acted), then you had no basis for trusting the conclusions of your brain.

At the time I thought that was a goofy argument, because whether you're a Christian or an atheist, it is a separate question whether you think "Truth with a capital-T" exists, or whether there is a meaningful distinction between objective and subjective statements.

Yet now I understand Lewis' point, especially when I read thoughtful essays like Scott's. In the Christian view, if the story is true, then you have a reason to trust your intuitive feelings on things. For example, the reason "A is A" seems like it must be true, is that it is true--objectively--and God equipped us with the ability to discern truth.

But on the strictly evolutionary account, there is no way to know. The story is consistent with truth really being true, versus merely appearing to be true. (It's like saying, "Is a leaf really green, or is that just an evolved perception?")

I'm sure some of the hardcore Austrians who read this blog, think that Sumner's epistemological musings just show what a nihilist monetary crank he is. But I think that's unfair. Given his premises, I think Scott has reached the logical conclusion.

And just as his opinion that Bernanke was too tight in the fall of 2008 is--for me--damning evidence that something is horribly wrong with his framework, so too does his opinion that morality and scientific propositions are social conventions, constitute damning evidence that there is something wrong with atheism.

Over at the Mises blog--and note that the Mises blog is different from the Mises Daily article--I have a short post about Robert Lucas' defense of mainstream economics. Lucas basically argued that nobody could have predicted the housing crash, because if they had predicted it by the day before, then it would have happened the day before. And so on. I wrote:

This is far too clever and slippery. Someone can evaluate a situation as unsustainable (or poised in an "unstable equilibrium") without being able to predict exactly when the break will occur....

Also...I'm starting to think the efficient markets hypothesis is a state of mind, a consciously chosen way of looking at the world. I'm not sure what it would mean to really falsify it. It seems that any attempt to test it would rely on assumptions about seemingly random events, which in the final analysis would mean you weren't really testing the efficient markets hypothesis alone.

In the comments Troy Camplin argued that, contrary to Lucas, the existence of price bubbles obviously shows the Efficient Markets Hypothesis (EMH) is false. I responded:

Troy,

Your understanding of what the EMH is, is obviously different from Lucas'. Lucas obviously is aware of what happened to housing prices, and he doesn't think it violated EMH.

This is partly what I was getting at in my post. I'm pretty sure that Lucas thinks the housing market was hit with a really big shock in 2006, and that made prices fall.

Lucas knows it must have been an unexpected shock, because...(you fill in the blanks).

So my point is that Lucas thinks he just empirically tested whether EMH held up during the housing boom and bust, and he thinks it passed through with flying colors. Yet what wouldn't pass with flying colors?

Don't misunderstand, I'm agreeing with you: The housing bubble is a great reason that I personally don't endorse the EMH. But technically speaking, the EMH is consistent with what just happened. So Lucas isn't wrong, he just doesn't realize how a priori his worldview is.

Treasury Secretary Timothy Geithner has urged Congress to raise the federal debt limit, currently chafing the administration at a measly $12.1 trillion. But as Robert Wenzel noted, Geithner's reasoning is odd:

"It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations," Mr. Geithner said in a letter to lawmakers.

When somebody owes you money, do you feel reassured when they say, "It's fine, I'll pay you back. I just got a new credit card." ?

From his latest NYT column:

But while the organizers are as crass as they come, I haven’t seen any evidence that the people disrupting those town halls are Florida-style rent-a-mobs. For the most part, the protesters appear to be genuinely angry. The question is, what are they angry about?

There was a telling incident at a town hall held by Representative Gene Green, D-Tex. An activist turned to his fellow attendees and asked if they “oppose any form of socialized or government-run health care.” Nearly all did. Then Representative Green asked how many of those present were on Medicare. Almost half raised their hands.

Now, people who don’t know that Medicare is a government program probably aren’t reacting to what President Obama is actually proposing. They may believe some of the disinformation opponents of health care reform are spreading, like the claim that the Obama plan will lead to euthanasia for the elderly. (That particular claim is coming straight from House Republican leaders.) But they’re probably reacting less to what Mr. Obama is doing, or even to what they’ve heard about what he’s doing, than to who he is.

That is, the driving force behind the town hall mobs is probably the same cultural and racial anxiety that’s behind the “birther” movement, which denies Mr. Obama’s citizenship. Senator Dick Durbin has suggested that the birthers and the health care protesters are one and the same; we don’t know how many of the protesters are birthers, but it wouldn’t be surprising if it’s a substantial fraction.

If you're curious as to Krugman's evidence for this, he actually resorted to an a priori deduction (he must have been reading Mises). I think Krugman's argument goes like this:

(1) The people say they are afraid of government taking over health care.
(2) The government already has taken over health care, and that's nothing to be scared about. Therefore the rioting seniors don't really mean it when they say (1).
(3) The only other explanation is that they're racists.

Go ahead and read Krugman's column if you think I'm being unfair.

Here it is [.mp3]. I went in to the studio to do the "Jeffrey Show." This aired live on June 19, 2009, during rush hour traffic in the Bahamas (Nassau).

This was definitely something different, but the TV show I did was really a new experience. (I don't have the DVD yet, but it's coming.)

I got my confidence with the Bahamians when I realized that my accent alone made me interesting. The unorthodox, yet strangely compelling, economic analysis was just gravy.

This is so ridiculous. Paul Krugman has a post called "Rioting Against Health Care Reform." I only watched the first 2:30 of this, but it hardly looks like a riot. If Krugman actually listened to Glenn Beck, he'd know that Beck's fans like to quote the Federalist papers. I'm not saying Glenn Beck's growing popularity is A-OK, I'm just saying the people in this video--I'm assuming this is the same town meeting that I heard people calling Beck about--are mad because union people were allowed into a back entrance to fill up the hall before the angry mob could storm the gates. Those people had a right to be furious.

(Again, I only watched to 2:30. If something awful happens afterward, then point it out and I'll retract my criticism of Krugman.)



UPDATE: Just look at this sentence from Krugman: "By all accounts, many if not most of the rioters were elderly."

He has to be kidding, right? I mean, go read the whole post, and you'll see that no, it's a serious Krugman statement.

But what I mean is, no one can possibly write the sentence quoted above, and actually take himself seriously.

Krugman has been kidding all along. He might not say it in those words, but he knows.

The more I think about it, the more certain I become that there will be significant liberalization of the marijuana market within the next three years. I expect that at least half of the states will allow small purchases of marijuana, perhaps under an open ended "medicinal use" clause.

The power elites in D.C. are clever, but they're not as clever as they think they are. And that's not a good group of people to get handed the keys to the nukes, the IRS, and the Fed. They are going to hit a brick wall within the next two years and the elites will be genuinely surprised by just how hard the wall is. They think they have several backup plans, but they don't really understand how society works and so their mental simulations are wrong.

In particular, I think they are underestimating the importance of reputation in financial markets. These people understand thuggery and intimidation. That's not how you have your way in the bond market. Maybe it is for a while; but you can't take on the whole world if they start attacking the dollar.

And oh my gosh can you imagine how much Putin is hoping the dollar crashes? This is like the time in high school when the meat-head gang slipped up and went to the wrong barbecue. They didn't realize it was a get-together of 15 guys who were huge and who hated them with a passion. And they were just waiting, biding their time, until the meat-heads showed a vulnerability... (Yes I'm referring to actual events from my high school years, and yes Uncle Sam would be the big meat-head in the analogy.)

So what does all this mean? It means they will face the dilemma that Jeff Hummel describes: Within three years (my timing, not Hummel's), they will have to either default on Treasury obligations or simply let the Fed print all our troubles away.

But they will have a third option, as someone will surely point out: They could legalize pot and tax the heck out of it! Not only would it bring in tax revenue, but it would also let the states turn out millions of nonviolent inmates. So they'd bring in more money and have to spend less on prisons.

How much money are we talking? Well, in 2007 the U.S. states in total collected $5.8 billion in revenues from liquor stores. Now note, I'm pretty sure that figure just refers to the actual earnings from state-run stores; that number doesn't count sales and special sin taxes levied on alcohol sales in general. (The alcohol and beverage tax receipts in 2006 were $5.4 billion.)

Now who knows how much revenue pot legalization would bring in. But I'm guessing that it will be at least $15 billion annually, especially if you include the jump in sales tax and income tax revenues.

Because the elites who run the show will be caught with their pants down, I think they will almost certainly turn to marijuana legalization. They might save it to deploy near the 2012 election, just to make sure Obama gets enough votes that they can plausibly declare him the winner. There are going to be some seriously angry people then, so getting a bunch of them stoned might be an added bonus.

This is pretty funny (HT2LRC):

SAN FRANCISCO (CN) - Small businesses that received $682 million in IOUs from the state say California expects them to pay taxes on the worthless scraps of paper, but refuses to accept its own IOUs to pay debts or taxes. The vendors' federal class action claims the state is trying to balance its budget on their backs.

Lead plaintiff Nancy Baird filled her contract with California to provide embroidered polo shirts to a youth camp run by the National Guard, but never was paid the $27,000 she was owed. She says California "paid" her with an IOU that two banks refused to accept - yet she had to pay California sales tax on the so-called "sale" of the uniforms.

Incidentally, I've been writing a few op eds lately about the California budget crisis. Their deficit is bigger than most countries' GDPs. Here is my best impression of Bill Kristol.

Last point: For those of you who like to consider data before forming a political conclusion, I refer you to Table 7 [.pdf] in the latest ALEC/Laffer state rankings. Before I began reading this research, I figured tax cuts were great but mostly on principle. But after reading this stuff for a few months, I began to be puzzled as to why any states have bad tax policies. My only conclusion was the (Hans Hoppian) observation that a governor at most gets to play with the state's finances for eight years. But if a governor served a life term, then--whatever horrifying things might ensue--at least the 50 states wouldn't have such ludicrous tax codes.

Greg Ransom sent me this very interesting NYT piece on BB&T's John Allison and Ayn Rand. Check out this absurd remark from Mark Thoma:

Mark A. Thoma, an economist at the University of Oregon, says the financial crisis would have been worse if the government hadn’t rapidly intervened.

“I completely disagree with the idea that letting the markets heal themselves is the best idea,” he says. “We tried that in the ’30s, and it didn’t work out so well.”

At the very very very most, you could argue that "we" tried letting markets heal themselves until March 4, 1933. But at that point, FDR was in charge, and right away he seized everyone's gold at gunpoint. And then there was that whole New Deal thing.

So for a good 65% of the 1930s, we clearly had massive intervention; the most in U.S. history, before or since. And for the first portion, we still had much much much more government (and Fed) tinkering than we had ever had up to that point in U.S. history.

I actually think it would be far more accurate to say we didn't let markets heal themselves in the 1930s, and that's why we had the worst depression in world history.

As with most of my writing, my previous blog post on this topic did not receive the attention it deserved.

I don't think I specified clearly enough why we are all fantastically rich, were it not for dumb government policies.

Just take organ markets. If the government made trade in body organs as regulated as, say, trade in perishable food, that would overnight add about $90 trillion in wealth to the U.s. population, at current market prices. OK, so prices for hearts and kidneys would come way down with the liberalization, so let's call it $5 trillion to be super conservative.

I have no idea if they're accurate, but I've seen estimates that the market price for a good kidney right now is $160,000. Now imagine you sold the rights to all of your body organs to some third party group. (You adjust your will so that after your death, you bequeath any salvageable body parts to the group.) How much would they pay you upfront for that right? It would depend on the characteristics of each person, of course, but I bet it's worth at least $300,000 for a healthy 30-year-old.

So if I did the math right (and it's tough with so many zeroes), then $300,000 per person times 300 million people in the U.S. is an increase in marketable wealth of...$90 trillion. Like I acknowledged above, presumably the price of a kidney comes way down once ten million people opt to sell their spare ones off, so the $90 trillion is way too high. But my point is to get you to see how rich we are, were it not for dumb laws.

Even if you chose to retain your kidney, you would still be wealthier. You would now have that $160,000 (or whatever) as an emergency backstop. And if the idea of signing away your body parts freaks you out--you don't want the third party group cutting deals with ambulance paramedics!--then you can just leave your body to your own heirs. (You'd be like that tree in the Shel Silverstein book.) Knowing that Billy would get the farm and your heart, kidneys, eyeballs, and so on, you could safely contribute less to your 401k etc. Freeing up more present income would make you richer right away, even if you retained full rights over your body parts while alive.

Last point, more ominous: It's possible that the State could transform this into a monstrous new development, just like other types of "deregulation" often blow up. For example, if I owe a lot to the IRS or my mortgage lender, I don't want the executives telling me they were seizing a kidney. So with a predatory State looking on, the leftists are quite rightly concerned about commercializing the human body (even more so than our culture has already done).

...you call a business and the answering machine tells you to call back during normal business hours, which include the time at which you're hearing the message?

I also get mad when the self-checkout stations at the grocery store boss me around. ("Please put the item in the bag.") Like I'm trying to steal a Valu Pak of paper towels. Yeah I'll just put that under my shirt, heh heh. Doh! Foiled again by the clever machine!

This is all I'm looking for, no big requirements on my end. Brad DeLong quotes Robert Lucas who argued that nobody saw this train wreck coming, and then comments:

some economists did indeed forecast the financial crisis of 2008--or, rather, forecast that Alan Greenspan's low interest rate policies of 2002-2004 (policies I approved of and endorsed, by the way) ran an unacceptable risk of getting the economy wedged into a position like the one it now is. All praise and honor to Dean Baker, Richard Thaler, Robert Shiller, Michael Mussa, and their posse. Here's Michael Mussa, writing in 2004...

Then after quoting from Mussa who nailed it, DeLong continues:

The disappointment with economists is not because there were none of us who forecast the possibility of the crisis we are in, but rather that economists like Robert Lucas and myself did not listen with sufficient care and attention to [the] Michael Mussa posse. (Indeed, I have a half-finished paper that will now never, ever be finished on how Mussa was wrong.)

OK so DeLong admitted he got it wrong, and that the people warning about Greenspan's low interest rates were correct. That's all I hope for from critics of Austrian economics. Obviously we're not going to make everyone a Misesian overnight, but as long as we admit when "our side" loses on a particular point, then it's worthwhile to continue debating.

(This is incidentally why I'm putting so much effort in cultivating good relations with the monetary crank Scott Sumner. When he sees the CPI over the next 12 months, I think he will have some serious 'splainin to do on his blog, and I think he will do it honestly.)

Uh oh GG is stirring up more trouble. For months, Olbermann and Bill O'Reilly had been sniping at each other (on their respective shows). But then on June 1, Olbermann announced that he would no longer crack jokes about the creator of the No Spin Zone, because (he claimed) O'Reilly had endorsed the murder of Dr. Tiller and so it was no longer a joking matter.

Wow, isn't that refreshing, to see someone drop the childish stunts when people start getting hurt?

Hmm, GG reported that Olbermann's newfound civility was the result of an explicit deal cut between GE (which owns MSNBC) and News Corp (which owns Fox). The parent companies decided that a ceasefire would be better for business, all things considered. So they told their top "journalists" to stop poking into each other's business.

Since it's mostly liberals who read GG, Olbermann was in hot water. He explicitly denied on air that he had been a party to any deal. But oddly, he also confirmed that GG had reported accurately on the matter.

If you want objective measures, some prof emailed GG facts about the frequency of attacks by O'Reilly and Olbermann before and after the alleged deal. It's posted as an update at the second link above.

Tell me this wouldn't go viral on YouTube: You show a brief clip from CNN or some other official news network, announcing the release of the two journalists from North Korea, and how they flew back to the United States with Bill Clinton.

Then the screen changes showing a Bill Clinton impersonator with two Korean women on a plane. Clinton's in the middle seat. They're all holding cocktail glasses and Clinton says, "So did they tell you girls who got you released from prison? Do you want another drink? It's OK--I used to be president."

Aristos posted a video of his six-year-old's teeball game. If you are a father, watch the first 1:45 of the video. It is hilarious.

(BTW Aristos and I were very competitive in college. [He was better in pickup football, I was better in chess.] So that's partly why I was laughing out loud. But even strangers will appreciate it.)

Argh... I am working on a payment plan with the IRS. (For a while my business wasn't incorporated, and so I just got checks made out to me personally. You're supposed to file quarterly tax payments as that income rolls in. Well, I was always going to do it, next month. And then it was April 15.) As soon as I navigated through the automated menu to where I needed to be, the computer voice said, "Your estimated wait time is greater than 15 minutes."

Having said that, I must admit the IRS was--believe it or not--pretty "fair" in dealing with my delinquency. They told me how much I owed them, assessed penalties that actually weren't all that bad, and then started the thing rolling over at interest. But the rate wasn't outrageous by any stretch; I don't remember off the top of my head but it was nothing compared to credit cards if you let your balance start rolling.

Don't get me wrong, there is still a huge difference in that I signed up for the credit card. But dealing with back taxes isn't nearly as awful as I would have thought, from watching movies and listening to talk radio.

P.S. If you want to call me a sellout for paying taxes even when there's an unjust war going on, etc. etc., that's fine. But please don't discuss anything illegal in the comments, because then I'll have to take it out, you'll be even more convinced I'm a stooge for the feds, etc. No fun for anyone.

Just when you thought the "green recovery" plans couldn't get more inefficient:

Green investment is a major pillar of the president's economic recovery plan. Yet, America's dependence on foreign countries to produce green technologies may undermine this recovery strategy. Using a list of green goods derived from the Organization of Economic Cooperation and Development (OECD) and the Asia-Pacific Economic Cooperation (APEC), we have determined that the United States ran an overall green trade deficit of -$8.9 billion in 2008, including a deficit of -$6.4 billion in the critical category of renewable energy, one of the main targets of the Obama administration's green agenda. The U.S. economy also suffered a significant deficit in the pollution management category. On the positive side, the United States ran modest surpluses in two categories--energy efficiency and a grouping of other environmental goods related to water purification and sustainable agriculture.

If current trends continue, the green trade deficit can be expected to widen further as the administration's agenda increases domestic demand but without sufficient measures to increase domestic production. If the deficit continues to grow, the United States will forego the creation of millions of high-wage, high-skill green manufacturing jobs and lose its potential to be a global producer as well as a consumer of green technologies.

And liberals love to guffaw at General Turgidson when he says, "Mr. President, we cannot afford to let the Soviets create a mineshaft gap!"

Recently I discovered this great public radio station. (It's 98.9 FM in the Nashville area; I don't know the call letters.) The first time I stopped on it, there was a guy who didn't sound insane, talking about how all the Osama bin Laden videos after a certain date were obvious fabrications.

Then a few days later I heard some woman reading a lengthy treatise on why the charging of interest was a harmful social practice. This isn't "Go Obama!" programming like NPR; this is seriously hardcore stuff.

Anyway, today I was on the way to my office and I was listening to some activist fighting rhino hunting in Africa. She explained to the radio show host that the hunters sell the ivory horns to be used for dagger handles and to be ground into aphrodesiacs in China. The host was horrified.

Then the activist said, "Yes, we actually started a rumor that it would give you AIDS."

The host immediately approved: "Oh that's a good idea."

Isn't that rather shocking? I thought two, fairly important, official progressive goals were to (1) tell the truth and (2) dispel rumors about how you can catch AIDS. But I guess they were trumped by (3) save the rhinos.

For a while, I think Mario Rizzo and I were the two contributors to the geeconosphere who most succinctly pointed out the micro-coordination problems that macro stimulus would distort. But in a short post, I think Jerry O'Driscoll crystallizes it even more tightly:

Consider the current economic situation. A financial crisis has been brought on by, first positive, and then negative monetary shocks. In the short run, individuals are increasing their demand for money (velocity is declining), and are simultaneously increasing their long-run, desired savings to a more normal rate. These effects combine to place downward pressure on nominal demand in many markets.

But the decline in nominal demand is not evenly spread across all markets. If demand is to be stimulated consistent with the new consumption/savings equilibrium, it would need to be supplied in the precise proportions that correspond to the new pattern of demand across markets (including inter-temporal markets). The information requirements to accomplish that task are nothing short of what would be required for comprehensive economic planning of the economy. Moreover, Public Choice tells us that stimulus will always be applied according to political, not economic, criteria.

If nominal demand is falling at uneven rates, then relative prices are changing. The same self-regulating forces are at work as described in microeconomics. Resources are being re-allocated across markets even as this is being written. A macroeconomic model with one good (output), one price, one interest rate, one wage rate, etc. is incapable of capturing those forces. The rationale for stimulus makes sense only in terms of such models and not in terms of how market economies actually work.

When businesspeople try to benefit from technological advances, they end up designing robots that feed humans Ramen (HT2MR).

When government officials realize the new opportunities, they fund the development of robots that feed on human corpses (HT2LRC).*

Any questions?


* Aww shucks, the wusses at Fox News have officially repudiated the original story. Now apparently the Pentagon robots are just supposed to eat plants. Hmm...

* Another favorable review (of my first Politically Incorrect Guide) at FrontPageMag.

* My radio interview with Michael McKay, from the Mises Institute.

* Betsy Hansen was a summer fellow at the Mises Institute this year. Last week (during the conference) we started talking about mark-to-market and it soon became apparent that she had done a lot more research on it than I had. (She was citing specific regulations and such; go figure.) I like her take in this article; she basically says that yes the government screws up financial regulation, but changing accounting rules mid-game isn't going to solve the crisis.

Lately I've realized how much it bums people out when I calmly explain to them that Bush, Ben, and 'Bama are doing a great job...if their goal is to re-create the Great Depression. So in the present post, let me explain why I'm not devastated.

First, I have my religious faith. I won't delve into such matters here, but longtime readers know that on Sundays we bring up the J-word. Needless to say, if you "actually believe that stuff?!", then it brings a certain degree of peace of mind.

Second, and on purely rational grounds, what we need to remind ourselves is that we are all standing on an unbelievable hunk of natural resources, just waiting to be tapped. In terms of the riches that can be showered upon us from this oblong spheroid on which we circle a star, we have--quite literally--just scratched the surface. With the stroke of a pen, President Obama could change policies regarding offshore and Alaskan oil drilling. That would magically place billions of barrels of new oil in the hands of the free world.

(And by the way, my new term for "the private sector" will be "the free world." If the enviros are going to start calling it "clean energy," then I'm calling my special interest group "the free world.")

It's not even just a matter of natural resources. The government could legalize all forms of currently heavily regulated commerce. There would be an explosion in productivity and wealth creation from such a movement, which would include drug, prostitution, and gambling legalizations. (And part of the newfound prosperity would be due to the drop in gang violence, mafia revenues, and STDs.)

This is what the government did during the Great Depression. In his first month in office, FDR ended alcohol Prohibition. (As he signed the bill, he reportedly said, "I think this would be a good time for a beer.")

I get so amused by all these Fox News commentators explaining how Obama's gonna be another Jimmy Carter. No he won't; he will legalize marijuana coast to coast if things get really awful. You're telling me liberals are going to vote for the Republican, and repudiate the administration of the First Black President, after he drives the price of the best pot these people have ever smoked, down to $10 per eighth of an ounce? I think not!

Things are a little creepier with health care. They will install some asinine program this year, and it will indeed make things much worse. Yet when the plan is quite evidently bankrupt, the government can at that point allow people to trade away their bodily organs for "health care credits." For example, a poor guy who needs a heart transplant can trade in his spare kidney in order to bid on the available (compatible) hearts.

So it's true, once we are in the throes of Obama Care, at that point it will probably help people to allow them to sell off body parts. In the example above, the poor guy is choosing between life and death; taking away his option would spell his death. And it's not even a matter of him getting the heart, versus somebody else. Because everybody is selling their organs into circulation, there is a greater supply and more people can get life-saving operations. (Keep in mind people could sign away the right to their organs after they die.)

And yet, this logic breaks down when the government virtually monopolizes health care. Then it might literally adopt policies to allow them to harvest some people's organs. I am NOT saying that the present administration is planning to do that. What I AM saying is that if you allow the government to take over health care, then you have to hope that you never get some really evil people in office, because they could look at everyone as cattle.

In conclusion, we will get through this depression. The people in power need the society to function at a basic level. There's no point in running the world if you can't trust the airplanes to work! During the 1930s, the people in charge realized they had miscalculated; things were worse than they had anticipated. (Remember, these people presumably aren't experts in classical liberal thought. If you spend your whole life plotting to become senator, you probably haven't read de Tocqueville in the original French.)

So in the 1930s, they pulled back and repealed Prohibition. They actually had to amend the Constitution, to undo the previous Amendment. Now I suppose a true conspiracy theorist will say that too was all part of the diabolical plan; perhaps the point was to show that the formal amendment process was too annoying, and that the Supreme Court should just interpret the document as a living thing.

In any event, they allowed people to buy and sell liquor again. Can you imagine how great a boost that would have been, had the country not been in the depths of the Great Depression?

Many economists wonder what magic spell FDR spun, since he got the economy to turn around on a dime virtually the moment he was sworn in. A lot of the economists think it was FDR's decision to take the dollar off gold, giving the green light to the Fed to print money. But maybe, just maybe, it was the legalization of alcohol.

If things get really bad, they can do the same with pot or organ selling. We are incredibly, fantastically wealthy. The government will have no choice but to lift some of the shackles in the coming depression.

* I take on my buddy Brad DeLong at Mises.org. DeLong had tried to use Wicksell to defend Greenspan, and I cracked that Knut. (OK that was awful, sorry.)

* Jeffrey Rogers Hummel says that the U.S. government will default on its debt.

* David Friedman has a very interesting post on responding to climate change. Unfortunately, his numbers were off and it became clear in the comments that he was shooting from the hip (he didn't even realize there had been a 4th report of the IPCC). Nonetheless, his central point remains: Right now there are successful human societies spanning a large range of average temperature. If the entire globe were to move upward over the course of a century within this range, then adaptation seems rather doable. And his point about our houses etc. already being calibrated to the current temperature distribution is great: Friedman points out that most buildings will be replaced or seriously modified anyway, within the next 100 years, so it's not that much of a marginal cost to have to install more AC or whatever.

* A young and dynamic pastor here in Nashville has just released a new book on Jesus. I haven't read it yet but the pastor, Jared Wilson, is a great combination of punk young guy and serious Christian.

* Scott Sumner can't stop thinking about me.

* Tom Woods gave a really funny talk [.mp3] about his experience in marketing the bestselling Meltdown. This was an especially impressive talk, since the poor guy gave it on Tuesday night at Mises U, following my performance the night before. (I'm still waiting for them to post my talk on LRC's podcast, because their interface is so much easier than having to download an mp3. As the internet becomes ever cooler, my laziness increases pari passu.)

Check out this interesting succession of clips (HT2EPJ):



I'm not sure if he uses it in the above video, but anyway now whenever Obama says, "Let me be clear," I interpret that as meaning, "The following is false."

Here is an article (HT2 Tyler Cowen) about six economists who oppose Ron Paul's bill to audit the Fed. (Interesting tidbit: The last economist, Mike Feroli, was in my class at NYU. In fact we were the only two Americans, and used to joke that there would be ethnic cleansing after the preliminary exams. Ah when we were young and carefree...)

I actually think most of what these economists are saying, is correct as far as it goes. If anybody could figure out a way to take a punitive measure against Fed recklessness (i.e. the audit bill) and turn it into a way to empower the Fed and give us more inflation, it would be the U.S. Congress. (Come on guys, impress me.)

The thing that really irks me about these critics, though, is that they don't even give a nod to why so many people are upset. E.g. Kashyap from U of Chicago says, "The spirit of the Paul bill seems to be that having FOMC meetings live on C-SPAN would be best way to make monetary policy. That would be a disaster."

No, actually the spirit of the bill seems to be that when you give a guy a printing press, and he uses it to literally hand out over $1 trillion to bankers, thereby diluting everybody else's wealth, th