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Austrians and Keynes Revisited

August 12, 2013 in Economics

By John P. Cochran

Peter Boettke highlights more nonsense from Paul Krugman. Krugman again demonstrates a complete lack of appreciation for and understanding of Hayek’s (and Mises’s) significant contributions to what is now called macroeconomics. Krugman writes re Hayek and Keynes, “back in the 30s nobody except Hayek would have considered his views a serious rival to those of Keynes.” This would be news to leftist journalist, Nicholas Wapshott, author of Keynes Hayek: The Clash that Defined Modern Economics (reviewed here). While Wapshott’s presentation of Hayek and his views is mostly a hatchet job, he does provide relatively strong evidence of an important competition between the ideas of Keynes and Hayek during the 1930s. This assessment is supported, at least for English economics, by the stature of the participants (Keynes, Hayek, Kaldor, Sraffa, Knight, and Robbins) and the reputation of the journals (Economica, Economic Journal, Econometrica, The Review of Economic Statistics) carrying the exchanges. Further evidence is provided in the correspondence between Hayek and Keynes. What is a shame now is how columnists like Krugman work so hard to discredit Hayek in order to keep these ideas from challenging the current revival of knee jerk Keynesian policy.

More relevant is the not question of the whether there was a significant debate between Hayek and Keynes in the 1930s, but the question does the economics of Keynes or Hayek-Mises contribute to our understanding of how market based capital using economy can coordinate economic activity and how it might break down. Which is a better guide to cause, policy, and prevention of economic crisis; Keynesian macro, modern macro, or a capital-structure based macro a la Hayek-Mises-Garrison? Roger Garrison provides insight as he highlights  the marvel of the macro economy.

Much of my early work, especially work with Fred Glahe, was devoted to attempting to answer this question. Shorter papers were “The Use and Abuse of Equilibrium in Business Cycle Theory” and

The Keynes-Hayek Debate: Lessons for Contemporary Business Cycle Theorists with a book length attempt in 1999, The Hayek-Keynes Debate – Lessons for Current Business Cycle Research.

            I recently revisited the issue in a working paper, Capital-Based Macroeconomics: Austrians, Keynes, and Keynesians, which should be forthcoming in an Oxford U press handbook.

The abstract:

The recent revival of boom-bust business cycles and the world–wide slow recovery from 2009-2012 has renewed interest in the analysis of a money-production economy developed by Keynes and capital-structure based Austrian macroeconomics developed …read more

Source: MISES INSTITUTE

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Ken Rogoff Decides This Time Is Different

August 12, 2013 in Economics

By Hunter Lewis

Rogoff was previously chief economist at the International Monetary Fund and now teaches at Harvard. He is a Republican.
Democrats criticized his 1985 paper recommending that the Fed keep inflation low and not try to influence employment.
They also didn’t like it when he told Harvard Magazine, after the Crash of 2008: ” We borrowed too much, we screwed up, so we’re going to fix it by borrowing more.”
They really didn’t like it when he published This Time Is Different, a book which seemed to argue that too much government deficit spending can be dangerous for an economy.
But Keynesian cheerleaders for our present ( Bush and Obama)  economic policies of print ( money), borrow, and spend didn’t really have to worry about Rogoff. Not too long ago,  he announced that what the Fed really needed to do was print so much money that consumer price inflation would rise sharply, while continuing to cap interest rates. That would create  negative real interest rates, which would be equivalent to paying people to borrow. At the time, Rogoff seemed to be talking about creating as much as 6% consumer price inflation while keeping short term interest rates near zero. In the article below, he tempers this to 4%.
Think about this for a moment. If you pay people to borrow, not just give money away for free, but actually pay them to borrow, what quality of loans would you expect? Would people be expected to use this money to make productive investments and otherwise use it wisely? Or would they just speculate with it or waste it and figure that the government will bail them out if anything goes wrong?
Would the bond market even let the Fed get away with trying this crazy advice? Could the Fed be able to keep an absolute lid on interest rates after it acknowledged the plan  to create so much inflation? If it did “succeed,” how much new money would have to be created to continue to hold down rates?
Let’s also keep in mind who benefits from consumer price inflation and who suffers from it. It is obvious that the middle class suffers. Studies confirm  that the poor suffer the most. They are the least able to get their incomes up as prices head up. None of them will get the Fed’s newly created money.  Meanwhile rich people, especially people on Wall St., understand what is happening and how …read more

Source: MISES INSTITUTE

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Sen. Paul Statement Mandatory Minimum Sentencing Reform

August 12, 2013 in Politics & Elections

Sen. Rand Paul today released the following statement in anticipation of Attorney General Eric Holder’s speech regarding reforms to federal drug sentencing policies.
‘I am encouraged that the President and Attorney General agree with me that mandatory minimum sentences for non-violent offenders promote injustice and do not serve public safety. I look forward to working with them to advance my bipartisan legislation, the Justice Safety Valve Act, to permanently restore justice and preserve judicial discretion in federal cases. I introduced this legislation in March with Senate Judiciary Chairman Patrick Leahy as a legislative fix to the very problem Attorney General Holder discussed today.
‘The Administration’s involvement in this bipartisan issue is a welcome development. Now the hard work begins to change the law to permanently address this injustice

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…read more

Source: RAND PAUL

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Milton Friedman and Restraint

August 12, 2013 in Politics & Elections

Lovers of Big Government and apologists for debt like Paul Krugman have tried to paint Milton Friedman as a contradiction. They say that Friedman’s insight that more Fed intervention might have mitigated the Great Depression is inconsistent with his view that the Depression would have been less severe without the Fed.
Krugman can typically be discounted because his partisanship diminishes his perceptiveness. It is, however, disappointing when National Review joins the fray and publishes opinion claiming that Friedman ‘would likely have supported a much more aggressive monetary response to our economic downturn.’
Professor Ivan Pongracic of Hillsdale College explains that Friedman’s insight was that the Fed’s inaction in the Great Depression was in the context of a banking system in which the central bank had monopolized the position of lender of last resort.
Pongracic writes:

Friedman and Schwartz claimed that the depression would not have been a Great Depression if there had been no Federal Reserve in the first place: ‘[I]f the pre-1914 banking system rather than the Federal Reserve System had been in existence in 1929, the money stock almost certainly would not have undergone a decline comparable to the one that occurred.’

That point was effectively elaborated by Milton and Rose Friedman in Free to Choose:

Had the Federal Reserve System never been established, and had a similar series of runs started, there is little doubt that the same measures would have been taken as in 1907 – a restriction of payments. That would have been more drastic than what actually occurred in the final months of 1930.

The existence of the Reserve System prevented the drastic therapeutic measure: directly, by reducing the concern of the stronger banks, who, mistakenly as it turned out, were confident that borrowing from the System offered them a reliable escape mechanism in case of difficulty; indirectly, by lulling the community as a whole, and the banking system in particular, into the belief that such drastic measures were no longer necessary now that the System was there to take care of such matters.<

Pongracic goes on to explain that Friedman's insight that the Fed should have acted to avert deflation in the face of bank runs is a conclusion based on the scenario of a Federal Reserve System that has monopolized the function …read more

Source: RAND PAUL

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Giving School Choice the Milton Friedman Test

August 12, 2013 in Economics

By Andrew J. Coulson

Andrew J. Coulson

Last month marked the 101st anniversary of Milton Friedman’s birth. The date was celebrated across the nation, particularly — and rightly — by school-choice advocates. Although Friedman launched the modern school-choice movement and lived to see it rise to national prominence, there is still more that those of us who support educational freedom can learn from his example.

Friedman was famous for his advocacy of individual liberty and limited government, particularly in education, but often said that this was an avocation, not his vocation. Professionally, he studied the role of government spending and the money supply on consumers and unemployment. His work in this field was so compelling that it caused many economists to abandon their erstwhile Keynesian views, and it earned him the 1976 Nobel Prize in economics.

What distinguished that work was its rigorous empiricism and focus on long-term outcomes. For example, a reigning belief among mid-20th century economists was that if government handed out money during hard times, people would spend it, stimulating economic growth. Friedman theorized that this was wrong and proposed that consumers mostly base their spending decisions on their “permanent,” long-term income prospects — so they tend to save rather than spend temporary additional income. Then he put both theories to the test.

“The ultimate test of the validity of a theory,” Friedman wrote, is “the ability to deduce facts that have not yet been observed, that are capable of being contradicted by observation, and that subsequent observation does not contradict.” He collected data that could potentially demolish either Keynesian stimulus spending or his own “permanent income” theory — or both. When the numbers had been crunched, only Friedman’s theory was still standing.

To this day, Friedman’s conclusion remains the accepted view among economists. If education reformers wish posterity to be kind to their labors, we would do well do emulate Friedman’s rigorous empirical methods. That means testing our policy recommendations against reality and not allowing short-term benefits to cloud our assessment of long-term outcomes.

At present, there is little research comparing alternative school-choice policies such as vouchers, education tax credits and charter schools. Separately, each has been compared with the conventional public school system, but their relative merits have hardly been explored. As a result, decisions as to which of these policies should be advocated seldom have an empirical basis. Yet, what little evidence is available suggests that there may be real …read more

Source: OP-EDS

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Fed, Farm and Trade Policies Inflating Our Grocery Bills

August 12, 2013 in Economics

By Scott Lincicome

Scott Lincicome

Monthly U.S. headlines trumpeting the death of inflation hide a painful truth for American families: rapidly rising food prices.

News reports rarely mention this pain because economists’ preferred inflation metric, so-called “core CPI,” omits both food and energy due to concerns about their volatility.

Although this omission might make sense from a purely economic perspective, it does a disservice to voters because several federal government policies that enrich a few special interests have conspired to keep American grocery bills high and rising.

There can be little doubt that food prices have spiked in recent years, especially in relation to other goods and services.

According to the St. Louis Fed, food inflation was 22% between January 2006 and June 2013, while core CPI clocked in at only 15% over the same period. This divergence grew following the recession, with food prices (9%) far outpacing core CPI (5.9%) since late 2009.

Certain family staples fared even worse: over the past five years, for example, the average price of meat, poultry, fish and eggs is 16.2% higher.

Food inflation’s impact on American families is real and significant. One industry consulting firm recently estimated that between 2006 and 2012 the typical family of four paid $2,055 more per year in food bills than it would have if these costs hadn’t suddenly started trending up.

This added expense disproportionately hurts poor American families, particularly in this time of high unemployment and stagnating wages, as they’re forced to use an ever-increasing share of their never-increasing budgets on essential foodstuffs.

Food inflation’s impact on American families is real and significant.”

Although market forces like increasing global demand and recent droughts have undoubtedly helped to push food prices higher, there is also little doubt that U.S. laws and regulations add insult to injury.

For starters, archaic trade restrictions that shield certain food producers from international competition inflate U.S. prices for many foods. According to the U.S. International Trade Commission, these artificial barriers to free trade make dairy, sugar, tuna and other foods much more expensive here than they are overseas.

Thus, for example, protectionism forces a working mom to pay substantially more for a stick of butter than her foreign counterpart, and the proceeds from this “butter tax” go directly into the pockets of U.S. dairy farmers.

As bad as these laws are, however, they can’t explain the recent spike in domestic food prices because the trade restrictions are decades-old. That blame instead …read more

Source: OP-EDS

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Giving School Choice the Milton Friedman Test

August 12, 2013 in Economics

Last month marked the 101st anniversary of Milton Friedman’s birth. The date was celebrated across the nation, particularly — and rightly — by school-choice advocates. Although Friedman launched the modern school-choice movement and lived to see it rise to national prominence, there is still more that those of us who support educational freedom can learn from his example.

…read more

Source: CATO HEADLINES