Unforeseen Contingencies

I’m delighted that Giuliani has been eliminated. Next to Huckabee, he’s the worst of the Republicans. I lived in NYC when he ran against David Dinkins for mayor. He was far better that Dinkins, but, frankly, dreadful. It was only by New York City's terrible standards that he could be acceptable.

He's very statist, and very corrupt. My South American friends described him as a fascist, which frankly seems a fairly accurate characterization. Yes, the term is bandied about so much that it’s almost lost most meaning, but he’s an authoritarian: great respect for power, none at all for law.

If Huckabee falls next, as I suspect, the two worst Republican threats to liberty are gone. (I take comfort where I can.) Edwards ran a poor third in Florida, incidentally. After his "also ran" showing in his home state, isn’t it time that this 'worst Democrat' surrendered too?

No more dreadful "state of the states" from Bush.

It was his usual incoherent shtick -- discussion of fiscal responsibilty, followed by spending proposal upon spending proposal. I listened to a little, but found it too wearisome and pointless to warrant my attention. He's a lame duck, with an uncooperative Congress, and any proposals he makes to Congress are all show.

George, your time is done, just go out peacefully. Don't bomb Iran, don't "save" the economy, don't do anything but go. Going gracefully is the best thing you could do for your "legacy," at this point.

Last year (Fall 2006), at a conference at Hillsdale College, economist Larry White argued in favor of replacing the Fed with a free banking system. Harvard’s Robert Barro responded that this might have made sense in the early days of the Fed, but by now we’ve finally learned how to do central banking right.

"Right." Yes, indeed!

Today’s extraordinary "intermeeting" rate decrease by the Fed gives lie to the constructive rationalism of the supporters of central banking. Greenspan, the paragon of central bankers, enabled the subprime fiasco. His heir, Bernanke, is making even a worse shambles. Here’s the story:

For quite some time, Americans have been living on credit. American consumer spending has been phenomenal, but much of it has been driven by cheap credit: the housing boom, the explosive growth of mortgage instruments, and the expansion of credit cards and growing consumer debt are examples. American private borrowing has roughly been matched by private saving (occasionally not quite) so it’s been a wash. But with Bush 43, federal government has additionally been borrowing, and since there aren’t excess savings in America, the balance - roughly the deficit - has been financed from abroad.

During the orgy of borrowing, Greenspan’s Fed intervened, fostering and facilitating it by expanding the money supply and keeping rates low. Low rates were crucial to the real estate boom, cheap credit was especially important for the crazy house flipping in Florida and similar boom markets.

Now it turns out that many of the private investments were bad ones - and people who took on debts can’t pay them off. (Why do you suppose the credit card banks were so adamant about tightening bankruptcy laws a few years back, in the midst of good times for them?) This isn’t a problem of insufficient liquidity, it’s a problem of bad investments, and dumping more money into the mess won’t fix it. A bad investment remains bad, regardless of how much money one tosses at it. But Ben Bernanke has now called for an emergency injection of liquidity with this sharp and extraordinary interest rate cut. The idea is that lower rates and more funds will stimulate activity and fend off a recession. But credit-driven activity is the problem - haven’t we had enough of activity for activity’s sake? What the economy needs is an end to artificial credit manipulation, an end to government deficits (for which borrowing costs are largely hidden) and liquidation of the mistaken investments and a fresh start, a fresh start undistorted by government interventions that push investment and consumer spending in unsustainable directions.

But instead we get: more money from the Fed, which might postpone crashes (or might not), but will certainly generate inflation; more tax "cuts" from the Republicans (read tax "deferments and transfers:" a tax cut without a corresponding spending cut in the current situation means someone will have to pay more), and eventually more spending ("fiscal stimulus"), probably from our future Democratic President and Congress.

All these chickens, home to roost. This won’t be a recession as we Americans have become accustomed to thinking of them, this will be a long, drawn-out blood-letting, involving low or negative growth, plus inflation. It’s hard to see how it could be different. Bothe private and public sectors are addicted to cheap credit and high interest rates strangle us, foreigners are increasingly skeptical about loaning us further funds (but happy to buy our fire sale assets), and the only alternative finance source - money creation - is already leading us into inflation.

No wonder Bernanke is in a panic.

"We" here at Unforeseen Contingencies have never felt we get quite the recognition we deserve. Hence we’d particularly like to thank Thomas DiLorenzo of the Mises Institute for his recent post mentioning us on the LewRockwell.Com blog. I only regret he didn’t include a link to UC; he’s surely welcome to do so.

Anyway, thanks Tom D!

(Thanks also to Tom P. as well.)

With my usual impeccable timing, I’ll take this opportunity to say I support Ron Paul for President. (Now you know why I’m not a day trader.) The National Review exposé of Paul’s newsletters increases my trepidation in doing so (mostly I’m thinking "what next?"), but I think it’s clear Paul is the best choice, and unlike what many a number of libertarians say, this is a time when the choice matters. (Classically Liberal has argued for sitting out, as have people such as Steven Horwitz and Wendy McElroy.) Why Paul, and not "None of the Above?" In a way, it’s because he’s a "fanatic" and a "kook."

The next President will have a choice - s/he will either jettison the Bush 43 courses, or lock them in. There are three areas in particular for which I think lock-in practically guarantees sharp, long run declines in American liberty, prosperity, and security. And I think it’s clear that Ron Paul would consistently jettison these, and the other candidates would not.

1. Federal Budget: a new CBO study highlights the unsustainability of our current fiscal situation. CBO puts current federal spending at 20% of GDP. Under a conservative projection, which essentially means no new spending initiatives, they find that rising costs (especially for Medicare, interest payments, and Social Security) will more than double this share of GDP over the next 75 years (43.6%, with some false precision). Of course, this is the conservative estimate; an estimate that includes likely new spending projects federal spending to an insane 75%.

This stuff is simply unsustainable, and means a looming crisis that is as close to a certainty as one can get. Ron Paul is a fanatic on these issues, adamant about the need for fiscal responsibility and sound money. A fiscal fanatic is exactly what we need right now. It’s received wisdom among economists that if there’s to be a central bank, the central banker ought to be an inflation "hawk," with much greater aversion to inflation than the average policy maker in government, who would have an incentive to create money for short term political gain. (Uh, Mr. Bernanke?)

Similarly the President should be a fiscal hawk, a fanatic, on spending. Fiscal responsibility, for a Congressman, is a public good. Every Congressman has an incentive to free ride on others’ fiscal responsibility, and grab pork for his own district. Since they all have this incentive, it’s a tragedy of the commons. A fanatic, in terms of the President, is one way of at least partially derailing this, and given we currently have no serious institutional constraints on spending, it’s the best we can do now. It will take intransigence to stand against the clamor for more spending, or for tax cuts without spending cuts. No other candidate has a shred of credibility in this area; they may differ in how fast federal spending should increase, and over what areas, but that’s it. And we can’t afford the status quo, never mind increases in spending.


2. PATRIOT Act and related police statisms: For me, the most terrifying aspect of Bush 43ism is the broad set of police state initiatives, such as PATRIOT Act, various warrantless spying programs, extraordinary rendition, suspension of habeus corpus, torture and the campaign to make it acceptable as public policy, Real ID, the FDA approval of technology for microchipping humans, declaration of "enemy" status that allows people to be imprisoned without judicial oversight for the duration of an undeclared "war" projected to go on for decades... Augh!

Conservatives take comfort in the apparent fact that the Bush administration has only used these powers and technologies to a limited extent. Small comfort. If the next administration doesn’t strongly reject all this, it will become the status quo in America, rather than a Bush aberration. And their already frightening use will expand.

Does anyone think Hillary will be hesitant to use these powers? Huck? Rudy? Etc.? Ron Paul catches hell for tending towards conspiracy theories, fears of the Trilateralists and the like. Umm, may I suggest that maybe that’s what we should want in a President, an unusually sharp fear of unconstrained power? We have a set of dreadful (and unnecessary) institutions in place, and the question isn’t "what happens if they are used exaclty as we'd want, by omniscient, benevolent leaders?" but "what happens if they are abused, and what prevents this abuse?" A little "paranoia" would be a virtue here. You cannot establish a system of unchecked power and not have it be abused; this is Hayek’s message in "Road to Serfdom." We don’t have four more years to put this off.


3. Perpetual war: The least of these problems, but a very nasty one. The U.S. is heading towards an expanding war with the Islamic world. The Republican candidates other than Paul are, frankly, warmongers to one degree or another (I fear Huckabee wants to lead us to Armageddon). Clinton and Obama have no credibility on withdrawal fom Iraq; both have already specified circumstances under which U.S. troops will stay, very low bars in each case, and the logic of occupation requires any presence be substantial. Continued occupation and intervention in Iraq and the Mideast simply increases Arab, Muslim, and world hostility to us. We are heading, I think, towards a wider set on unnecessary conflicts we can never win, and that will further bleed and bankrupt us. Perhaps Edwards is serious about withdrawal for now, in this one case, but he’s not a non-interventionist. Ron Paul is the only non-interventionist (memo to Wall Street Journal: isolationist is something quite different; the Huckabee/Edwards opposition to free trade is isolationist) running, and it will take a sharp break to reverse the destructive course we’re on.

One of my fonder wishes is that I have no idea what I’m talking about in any of this, and America is well on track for freedom, prosperity, and peace. But I can’t see it. The Bush Presidency was a disaster for America, and the world. The Bush course needs to be reversed, but for all the jibberish about "change," it’s hard to see that the candidates represent anything fundamentally different from the status quo. They differ on details, rather than fundamental issues. Paul is the sole exception, which earns him the label kook, but it’s only in a country that’s gone far, far astray that fiscal responsibility, strict limits on the police power of the state, and peace would be seen as "kooky." We need to move to a different track, and soon. Hence Paul. He's really not a fanatic or kook, but so dramatically different on central issues, so out-of-step with our unsustainable status quo, that he gets labelled as such.

But...

I’ve never thought that Paul had chance of winning the nomination; the GOP hierarchy would never allow it. My hope is that he can galvanize opposition to our current course, and make the libertarian alternative commonly known. It’s a very difficult job, but he’s boggling it, and starts looking like a genuine fanatic and kook. There were endorsements by the likes of "Stormfront;" Paul said he can’t be responsible for whomever chooses to endorse him. But then there’s the newsletter scandal. It starts looking like a pattern, and Paul does indeed start looking suspicious. Why doesn’t he simply come out and damn the neo-nazis, racists, and their fellow-travelers to hell. Why did he ever flirt with them in the first place?

A friend of mine observed that the Ron Paul phenomenon really is something different in American politics, but, as he put it, whether it’s the start of a real libertarian alternative or the last gasp of liberty is unclear. I hope it’s the former, of course; and it could be even if Paul botches things, it really isn’t a "Ron Paul revolution." But botching things doesn’t help at all. I support Ron Paul, not because he’s perfect, but because wrt the three crucial areas above, he’s very good, and I don’t believe he’s a closet racist. He needs to do a better job of sinking this matter; but I think we also ought to support him, not for his sake, but ours.

Thank heavens there’s law and order somewhere. The Chechen Prosecutor’s Office is closing the Chechnya office of a British NGO that works with war-traumatized refugees. It seems the non-profit not only owes half a million rubles in back taxes, but also its dokyumenti weren’t in order.

This crucial investigation understandably has consumed substantial time and resources, so it’s now clear why the Chechen Prosecutor’s seven-year investigation into the kidnapping and murder of Ruslan Alikhadzhiev by Russian spetsnaz has failed to reach a conclusion.

Russia surely would be a land of individual liberty and rule of law, if only those darned Brits would pay their taxes. I suppose next those crazy Britishers will claim they actually operate legally and this is just retribution for British insistence that Russia extradite Andrei Luguvoi as a suspect in the Litvinenko murder, and the ensuing diplomatic dispute.


(Footnote:Yes, I know the British Council isn’t the Center for Peacemaking and Community Development. The CPCD is British, though, and much weaker and more vulnerable than the Council...or Russian spetsnaz.)

Why does Tom Palmer get to have all the fun?

Since the NR article documenting the idiocies in the Ron Paul newsletter, the "Fever Swamp" is overflowing onto his blog again. It appears that the comments for which Paul is being attacked may have been written by founder of the Ludwig von Mises Institute, Lew Rockwell. For some time Palmer has documented that Rockwell and co. are associated with all kinds of irrational, anti-libertarian agendas, including racism, holocaust denial, homophobia, Christian Reconstructionism, apologetics for Putin- Lukashenka- and Kuchma, restoring the Confederacy, and other strange things. And each time he documents something, the hits and comments on Palmer’s blog skyrocket.

I’ve occasionally weighed in in the verbal fisticuffs, and in the latest fracas have posted on some incidents of Rockwellian racism . I got sick of the inaptly-named Ludwig von Mises Institute in the early 1990s, after attending three of their conferences. In 1989 and 1990 I attended their "Summer Universities," both held at Stanford University, and in, umm, about 1991?, I attended a joint conference of the LvMI & Rockford Institute held in Princeton NJ on "Egalitarianism." Palmer documents the predilection of many of the LvMI people for "fever swampish" ideas; racism, etc. I encountered this sort of thing myself; but I think these nasty predilections are really sidelines for them. First of all, they are economists. Unfortunately, they are really bad ones.

Why do I think this? A few examples...

Consider their late "dean," Murray Rothbard. I met him at each of the LvMI conferences I attended, and could see he was very intelligent and well read. I enjoyed his sense of humor. But it was also clear he often had no idea what he was talking about, and was, well, crazy. For example, at the 1989 conference he discussed graphical representations of demand curves, and pointed out that the textbook standard had once been the constant elasticity demand curve, until someone (Stigler, I believe) drew a linear demand curve, which became the new standard. As Rothbard correctly observed, it doesn’t really matter how they are drawn, since all are simply heuristic tools, rather than exact representations of reality. Good point.

However, at the 1990 conference, he was drawing "realistic" demand curves, and insisting that the only proper way to draw them was as an irregular step function, taking special care to be sure there was no perfectly elastic portion, which would be "impossible." I thought this was a bit mad. Never mind that the continuous demand curve he drew necessarily assumes an infinitely divisible good, in violation of his own strictures concerning utility theory. Who cares that it’s "more realistic?" This curve tells us nothing different than a constant-elasticity or linear curve does, and none of them are "realistic," nor can they be. And they are useful nevertheless. During one of our evening discussion groups, Roger Garrison incredulously asked if any of us students really thought anything was gained by drawing the demand curve Rothbard-style. None of us did, nor did Garrison. Rothbard’s insistence on it made no sense, but is typical of the strange and unthinking economic "realism" sometimes seen with the Mises Institute.

On this note, consider the lengthy exchange between Block and Hulsmann of LvMI, and Bryan Caplan of George Mason. Caplan argued that Austrians are guilty of a false realism that is really quite unrealistic. Block and Hulsmann responded, and in the course of the debate began attacking neoclassical utility maximization for dividing and multiplying "incommensurate quantities." A condition for utility maximization is that MUX/PX = MUY/PY, but MU is measured in some sort of utility units (utils) and P is price, measured in monetary units. Since the units of measure are different, the units cannot be divided, argued our intrepid Mises Institute scholars. Hulsmann went on to give the example of a rabbit divided by a piano concerto, a supposed reductio ad absurdum.

Very funny, particularly since it illustrates that Block and Hulsmann failed to understand 3rd grade math. Caplan was incredulous. Miles per hour, anyone? (That’s 1.61Km/hr for my European readers, NV.) I kind of like the rabbits per concerto idea myself, although it’s unclear whether we’re taking the rabbits to the concertos as guests or as food. But how to account for the blindness of B & H?

Another example: at the 1989 conference, Hans Herman Hoppe had just published his paper on the "argumentation ethic," an argument that allegedly proves the existence of natural rights, and he gave us a lecture on it. It’s interesting but I raised an objection. Hoppe argues that if one argues against natural rights, one implicitly accepts them because one accepts that the person to whom one speaks has the right to make up his own mind. I objected that this is not the case - after all, arguing might simply be a lower cost way of controlling a being that should be subject to one’s will. "Do what I say, don’t make me force you" doesn’t involve a contradiction.

Hoppe, who was new to the LvMI at this point, agreed that this might be a problem for his thesis, and quite reasonably said he would have to mull it over. I was favorably impressed by his intellectually honest response.

Next year, at the 1990 conference, he again lectured on the argumentation ethic, and I again raised the same objection. Only this time, he dismissed it as entirely irrelevant. Why? No answer, just a dismissal. I kept after him, and we went back and forth until I was hoarse. He had no answer other than argument from his own authority. I can only think that by then he’d been fully indoctrinated into the Rockwell-Rothbard cult, and was beyond reason. But what kind of "economic analysis" is beyond reason? Mises, when talking about a priori knowledge and apodictic certainty, said it was always appropriate go back and re-check the arguments, that one should never rule out that a mistake had been made.

To return to Rothbard again, at the Princeton "Egalitarianism" conference, Rothbard gave an address in which he said that if egalitarianism were true, if humans really were identically equal, trade, cooperation, and specialization would be impossible. It’s only our differences, in preferences, skills, and endowments that make trade possible.

What? Such nonsense ignores one of the first lessons of Econ 101: economies of scale. Even if people were utterly identical, they could still cooperate to reap gains from trade. Imagine 10 identical farmers, each with an identical field, each field containing an immense identical boulder than restricts farming. Suppose also that each boulder is too big for one man to move, but ten men, working together could move it. Mutual gains from trade don’t require heterogeneity, and it’s hard to see how anyone with a Ph.D. in economics could miss this, unless they’d blinded themselves with ideology, and simply had to achieve a certain result. Of course, Adam Smith argued that basically identical people could also reap gains from trade by differentiating themselves through on-the-job learning, in his pin factory example. But Rothbard was so possessed with the idea that Smith was, well, evil (for failing to solve the problem of value) that he couldn’t see anything of value in Smith.

I could go on and on with the patent nonsense I encountered from LvMI "scholars." A final example: in 1992 I attended the Mont Pelerin meetings in Vancouver B.C. During some free time there was a private dinner at which a number of libertarians gathered. At the dinner, Walter Block announced that Charles Murray's "Bell Curve" was coming out (it hadn't been made public to that point). Block then expressed delight that it would prove blacks were inferior and that this would mean the government would stop wasting money trying to educate "those people." His hatred for blacks was quite obvious. I recounted this in my post on LvMI racism on Palmer’s blog, but omitted subsequent events.

After the dinner, a number of us, including Block, took a van to private residence where a meeting of the local Libertarian Party chapter was being held. There were perhaps twenty locals in attendance, a nice enough bunch, and they welcomed us as guests. Since Block was known for his "Defending the Undefendable," they had him give a little talk. During the talk he argued that a numerical utility function necessarily implies that utility is cardinal, rather than ordinal, and therefore the use of utility functions is illegitimate. Unfortunately for Block, it is a standard point of neoclassical theory that the utility function is insensitive to any monotonic transformation, which is mathematese for "it’s ordinal." I raised my hand and said so, in the midst of Block’s talk.

Afterwards, while I was in the kitchen getting another cold drink from the refrigerator (good hosts, those Canadians) Block came in and told me, in words we simply don’t use at Unforeseen Contingencies that I was never to contradict him when he was speaking. He was smiling when he said this, but he didn’t seem very friendly. I just grinned back.

What would Mises have thought of all this? He was a brilliant economist. He was uncompromising in his opposition to all irrationality and violations of individual rights. He was particularly hard on racism. Yet here we have an "Institute," and an associated "Lew Rockwell.Com," promoting idiotic economic analysis and reprehensible anti-libertarian agendas in his name. Thy do great damage to Austrian economics, and to libertarianism, with their crankiness. Well, with the Paul newsletter scandal, they are finally getting some long deserved critical scrutiny. Here’s hoping these intellectual miscreants also get the comeuppance they so richly deserve.

Suppose, for a moment, you are an avid fan of American college football. Your favorite team (either LSU or OSU) has made it to the Sugar Bowl in New Orleans. You manage to get tickets, book a flight, and fly out early to enjoy the city and party a bit. You arrive in the Big Easy, ready to mix with all the other football fans, and find yourself surrounded by...

Economists. Hundreds of economists.

The football fans have finally outnumbered us, but up until this evening it wasn’t the case. In the hotels and on the streets you’d see these very puzzled looking football fans, with looks that said "did I come to the wrong town? In the wrong month? Something’s not right here." Economists are a very distinctive, nerdy looking bunch. Even now on Bourbon Street it looks like there must be fans for three teams: the Buckeyes, the Tigers, and the Fightin’ Optimizers.

There’ve been some very good sessions. I’ve tended to attend those on technology transfer and health care, but also attended one on the economics of markets for paid sex; it was particularly good. The most interesting paper in this session developed an economic explanation for the development of sexual reproduction, hermaphrodism, differentiated sexes, and gender. Fascinating stuff, and some has already made the biology journals.

Yes, football has nothing on this. Go, Econ, go!

We don’t call them "Idiots Out Wandering Around" for nothing.

Iowans have spoken! Sort of. Well, a few of them anyway. Why should this small and unappealing state, a state utterly addicted to farm subsidies, play such a role in presidential elections? And with such an anti-democratic process as the caucuses? It's not even all of Iowa voting, but just a handful of people meeting and voting in an utterly untransparent process. No one knows, for example, how many people voted for Obama, or Edwards, or Clinton, or, for that matter, exactly how the delegates were awarded. All we know is that these boobs go behind closed doors, squabble for a while, and suddenly the rest of us are told who our choices for president are likely to be. Iowans call it democracy; the rest of us call it bullshit.

(Forgive me, dear readers. I promise to curb my longstanding feelings of hatred for Iowa; they date back to my childhood and the miserable summer trips our family took there, and I just had to let them out for a moment.)

Mike Huckabee: it's becoming increasingly clear that he is clueless on foreign policy, economics, the nature of the American political system, and anything else beyond Baptist theology. So far as I can tell, he's the least competent of all the candidates in the race, for either party. So of course, he wins handily. And Rudy Giuliani takes only 4% while Ron Paul takes 10%, so during the returns CNN studiously interviews Rudy and their pundits discuss his chances while completely ignoring Paul... Rudy is a serious candidate, after all. (I am sure I'm not the only one to notice that on the big pie charts CNN keeps showing with the vote breakdowns, on the Republican chart Paul's name is omitted, while on the Democrat chart, Bill Richardson's name is boldly listed above his 2%. Of course, Richardson is a serious candidate.)

Barack Obama: I never said so here at UC, but I have always said in conversation that Hillary would not be the Democrats' candidate. I still think this, but not for the reasons the CNN "experts" are citing. The heart and emotion shown by the candidates, how "presidential" they sound, and the rest of this nonsense are irrelevant. Hillary galvanizes the Republican opposition like no other Democrat. She's too hated to be a reasonable choice for the Democrats.

They are right, though, that Obama does have emotional appeal beyond his true believers; I admit even I like listening to him, so long as he doesn't mention any of his policies. He'd be a bad president, possibly worse than Hillary, but he'd be a fine choice for a candidate (and he's far better than Edwards, at least). (OK, a little better?) (How can you know with these clones?)

The most galling thing about this "democratic" process is how utterly rigged it is, and not simply in the Iowa charades. The news media works to make or break candidates. It fails to give the ignorant Mr. Huckabee any sort of serious scrutiny, and consistently treats Ron Paul as a non-serious candidate (after all, he actually intends to shrink government - only proposals to increase it are serious). The media treats the race among the Democrats as a sporting match - who will best marshal their team in the coming battle of strategy and tactics. Ideas? Forget it. No wonder Paul gets such short shrift - and it's not conspiracy - Paul really has no strategy or tactics to analyze, just ideas. No clever plans to grab this or that segment of the vote, no trick to strip off some particular interest group or other from another candidate - just a repetition of the same set of unchanging ideas. And ideas, if taken beyond the level of the barest, shallowest, most cartoon-like bromides, are anathema to modern media. Even NPR, arguably the finest broadcast new media in today's world, can’t get its campaign analysis beyond tactics, sports analogies, and the touchy-feely.

And so we march on, to perpetual war, endless deficits, and a growing police state.

OK, I'll stop. Back to economics.

// posted by Charles N. Steele @ 23:22 0 comments

С Новым Годом!

For the next three days, Team Unforeseen Contingencies will be blogging live from the American Economic Association-Allied Social Sciences Associations 2008 Annual Convention. Oh, the action, the thrills, the edge-of-the-seat excitement as "we" bring you the breaking developments as economists from around the world gather and, and, and... umm, talk a lot about heterogeneity and aggregate fluctuations in directed search equilibria, stock dynamics and realized volatility of daily returns and option prices, and agglomerative wage premia in employment clusters.

I jest a bit - there's actually a lot of interesting stuff going on here, perhaps even including the papers whose titles I’ve paraphrased above, so it's a perfect time to blog...particularly since I finally have a fast internet connection for the first time in my Christmas break travels. More to come!