The Free Market Reader

 

7 BUDGETS, TAXES, BUREAUCRACY, AND INTERVENTIONISM

Love in the Bureaucracy

Bradley Miller

As long as bureaucrat-bashing remains sport royal, there is hope. But how much? Even now, confronting bureaucracy’s relentless encroachments and entanglements, who ya gonna call?

The Reagan administration phoned Ollie North, a “man of action,” a “take-charge guy” who can “cut through red tape” and “get things done.” But most of us must call a faceless functionary at the Reports and Publications Division of the Environmental Protection Agency’s Water and Waste Management Administration’s Emergency Service’s Department’s Request and Complaint Office’s Bureau of Trash, Metal Bulk, and Dead Animal Removal, and get put on hold. In other words, we must call Bureaucratic Man.

As of this writing it seems unlikely that North will go to jail, but powerful evidence indicates that what he tried to do was neither popular nor legal, and could even doom the very group his efforts were designed to help: the Nicaraguan contras. Yet to many, including the president who fired him from the National Security Council, North is a national hero. Even his detractors grant he’s a forceful and attractive personality.

Surveys have found that most Americans don’t know which side is which in Nicaragua, but tell pollsters they’re against sending their tax money down there. So it’s clear that North’s popularity either has nothing to do with the goals he was pursuing, or emerged despite them.

In fact, the root of Americans’ love of him is their hatred of the bureaucracy he defied, just as the 1980 and 1984 elections reflected more hatred of Carter and Mondale than love of Reagan.

North comes across as a forthright, patriotic, God-fearing, family-loving, ruggedly handsome, bemedaled man of action. But America is not lacking in such chaps, and North is far from unflawed. What stirred America was the sight of him thrown before those perceived as niggling, blood-sucking representatives of the world’s biggest and most overpaid bureaucracy. The bureaucracy manufactures the red tape North tried to cut through (never mind toward what ends or in violation of what laws). It stands between the rest of us and the freedom to do what we want, and its spider web of regulations is woven and enforced by gray little men who can’t be fired short of behavior so outrageous it would make most of us candidates for the funny farm.

In Harper’s, Leonard Reed has reported that only one-tenth of one percent of federal bureaucrats are fired for incompetence. At the higher bureaucratic levels such unbearable bungling lands you not in the funny farm but—no joke—in a “turkey farm,” where unbearable bunglers are put through training sessions to turn them into bearable bunglers, i.e., bureaucrats competent enough not to inspire excessive public outrage, and sensible enough to realize that if they do their jobs too well they’ll lose them.

In his great book Bureaucracy, written in 1944, Professor Ludwig von Mises says the distinguishing mark of the bureaucrat is that he is driven not by the profit motive but by the necessity to follow and enforce rules. Mises points out that a bureaucracy, so understood, isn’t intended to be profitable, so its worth can’t be assessed by profit-and-loss statements. Businesses also have bureaucratic aspects, but the free market imposes limits on them. An overload of bureaucrats diminishes profits by diminishing efficiency, innovation, and morale. That’s why schemes to bring business methods to government come to grief. As Mises says, business and government are fundamentally different, and the methods appropriate to one are alien to the other.

The picture is even far bleaker than this. Not only is Bureaucratic Man uninterested in doing good work by business standards; doing such work would cost him his job. An anti-poverty warrior so good he eradicated poverty would have nothing to do, so such wars aren’t intended to be won, but endlessly expanded. This thins the ranks of those who work for a living, and swells the ranks of those who vote for a living. In sum, it makes a joke of representative government.

How bad is it? Guess who said the following:

If we do not halt this steady process of building commissions and regulatory bodies and special legislation like huge inverted pyramids over every one of the simple constitutional provisions, we shall soon be spending many billions of dollars more.

So said Franklin Roosevelt, father of today’s welfare state. By today’s standards FDR was doubtless an efficiency expert.

But by now the deathly effects of bureaucracy on the commonwealth are too well known to need elaboration. Bureaucracy is at once a monstrous evil and banality, and, as its consummation in totalitarianism has shown, it makes the most monstrous evils banal. Banality, indeed, is its highest virtue. Bureaucratic Man wants merely to rust out in ease, security, and respectability, not to wear himself out pursuing greatness. He doesn’t love, in any deep sense, his work or spouse, for love entails risk and demands energy. BM asks only for comfort.

It’s as hard to picture Nietzsche’s superman or Aristotle’s large-souled man in this kingdom of clerks as it is to imagine Pascal at a PTL picnic. The ultimate triumph of the bureaucratic state, which has long been realized in such Periclean lands as Bulgaria, Albania, and North Korea, is to obliterate all traces of even Mick Jagger’s street-fighting man.

Bureaucratic Man is far lower than Winston Smith in Orwell’s 1984, who in the end loved Big Brother. Deep love and deep hate are both inconceivable to BM, so no goon squads are needed to keep him in line. Intellectually and emotionally, after all, his whole life amounts to an endless standing in line to get the necessities for more standing in line.

As technology progresses, it becomes clear that BM is far lower than a machine. Anything BM can do, machines can do better at a fraction of the cost and irritation.

Unfortunately, BM, freed from drudgery by automation, doesn’t devote himself to the art of love or even the love of art, two reasons to live. Instead, automation has exposed—not created—a world in which, as Mises says, “the man who is aware of his inability to stand competition scorns ‘this mad competitive system.’ He who is unfit to serve his fellow citizens wants to rule them.”

BM created this world. If he knows nothing else, BM is at least aware of his limitless inability, which fills him with envy of his superiors, whom he tries, with depressing success, to suffocate through government. Government work is tedious, so it’s hard to get superior men to do it, but in today’s hi-tech age, government by actual robots would be much more efficient and humane than government by BM.

Rotation in Office

Llewellyn H. Rockwell, Jr.

The Articles of Confederation of 1777, our first “Constitution,” was superior in a number of ways to the document adopted 200 years ago. (It’s easy to forget, amidst all the celebrations, that the Constitution as originally drafted had few limits on government power; it was saved only by the Bill of Rights that the Jeffersonians demanded.)

One of the great clauses of the Articles mandated annual election of Congressmen (by the various state legislatures), and said that no Congressman “may serve for more than three years in any term of six years.”

But politicians hate to be out of office, and this great idea—originated by Thomas Jefferson—was stricken from the Constitution. It was resurrected, however, by that great modern Jeffersonian (and Mises Institute Distinguished Counsellor) Ron Paul who introduced legislation while serving in Congress to limit Congressmen to four two-year terms; Senators to two four-year terms; and Supreme Court and other federal judges to one eight-year term.

It was Dr. Paul’s view, and Jefferson’s, that continuation in office helped create big government. Both these men also applied what Jefferson called “rotation in office” to all government employees.

For more than the first half of our country’s history, when a new administration came into office, it installed its own people in all civilian government jobs. This healthy and purgative process prevented the build-up of bureaucracy. Not surprisingly, it was despised and denigrated by statists as the “spoils system.”

About a century ago, big government advocates, in the first flush of the statist “progressive” era, instituted the idea of civil service—the monstrous idea that civilian bureaucrats should have lifetime tenure in office.

When we have our first 20th century Jeffersonian administration, its agenda will include not only the gold standard, the free market, and a constitutional foreign policy, but the restitution of rotation in office for all government employees, elected and appointed.

The Balanced-Budget Amendment Hoax

Murray N. Rothbard

It is a hallmark of the triumph of image over substance in modern society that an administration which has submitted to Congress budgets with the biggest deficits in American history should propose as a cure-all a constitutional amendment mandating a balanced budget. Apart from the high irony of such a proposal from such a source, the amendment-mongers don’t seem to realize that the same pressures of the democratic process that have led to permanent and growing deficits will also be at work on the courts that have acquired the exclusive power to interpret the Constitution. The federal courts are appointed by the executive and confirmed by the legislature, and are therefore part and parcel of the government structure.

Apart from these general strictures on rewriting the Constitution as a panacea for our ills, the various proposed balanced-budget amendments suffer from many deep flaws in themselves. The major defect is that they only require a balance of the future estimated budget, and not of the actual budget at the end of a given fiscal year. As we all should know by this time, economists and politicians are expert at submitting glittering projected future budgets that have only the foggiest relation to the actual reality of the future year. It will be duck soup for Congress to estimate a future balance; not so easy, however, to actually balance it. At the very least, any amendment should require the actual balancing of the budget at the end of each particular year.

Secondly, balancing the budget by increasing taxes is like curing influenza by shooting the patient; the cure is worse than the disease. Dimly recognizing this fact, most of the amendment proposals include a clause to limit federal taxation. But unfortunately, they do so by imposing a limit on revenues as a percentage of the national income or gross national product. It is absurd to include such a concept as “national income” in the fundamental law of the land; there is no such real entity, but only a statistical artifact, and an artifact that can and does wobble according to the political breeze. It is all too easy to include or exclude an enormous amount from this concept.

A third flaw highlights again the problem of treating “the budget” as a constitutional entity. As a means of making the deficit look less bleak, there has been an increasing tendency for the government to spend money on “off-budget” items that simply don’t get included in official expenses, and therefore don’t get added to the deficit. Any balanced-budget amendment would provide a field day for this kind of mass trickery on the American public.

We must here note a disturbing current tendency for “born again” pro-deficit economists in conservative ranks to propose that “capital” items be excluded from the federal budget altogether. This theory is based on an analogy with private firms and their “capital” versus “operating” budgets. One would think that allegedly free-market economists would not have the affrontery to apply this to government. Get this adopted, and the government could happily throw away money on any boondoggle, no matter how absurd, so long as they could call it an “investment in the future.” Here is a loophole in the balanced-budget amendment that would make any politician’s day!

A fourth problem is that the various proposals make it all too easy for Congress to override the amendment. Suppose Congress and/or the president violate the amendment. What then? Would the Supreme Court have the power to call the federal marshals and lock up the whole crew? To ask that question is to answer it. (Of course, by making the budget balance prospective instead of real, this problem would not even arise, since it would be almost impossible to violate the amendment at all.)

But isn’t half a loaf better than none? Isn’t it better to have an imperfect amendment than none at all? Half a loaf is indeed better than none, but even worse than no loaf is an elaborate camouflage system that fools the public into thinking that a loaf exists where there is really none at all. Or, to mix our metaphors, that the naked Emperor is really wearing clothes.

We now see the role of the balanced budget amendment in the minds of many if not most of its supporters. The purpose is not actually to balance the budget, for that would involve massive spending cuts that the Establishment, “conservative” or liberal, is not willing to contemplate.

The purpose is to continue deficits while deluding the public into thinking that the budget is, or will soon be, balanced. In that way, the public’s slipping confidence in the dollar will be shored up. Thus, the balanced-budget amendment turns out to be the fiscal counterpart of the supply-siders’ notorious proposal for a phony gold standard. In that scheme, the public would not be able to redeem its dollars in gold coin, the Fed would continue to manipulate and inflate, but all the while this inflationist policy would now be cloaked in the confidence-building mantle of gold.

In both plans, we would be dazzled by the shadow, the rhetoric of sound policy, while the same old program of cheap money and huge deficits would proceed unchecked. In both cases, the dominant ideology seems to be that of P. T. Barnum: “There’s a sucker born every minute.”

How Government Intervention Plagued Our 19th-Century Economy

Lawrence W. Reed

The recessions and depressions of the 19th century are often cited as proof of the “inherent instability” of the free market. (Indeed, the promoters of the Federal Reserve System in 1913 argued for a central bank as a way of preventing future downturns!) This is, of course, a bum rap.

The 1800s were freer than today, but there was more than enough government intervention to cause serious setbacks in the economy. And Austrian trade cycle theory explains exactly how.

The source of the business cycle, Mises discovered, is government-engineered expansion of money and credit. Such a policy artificially depresses interest rates at first, deranges the structure of production by generating unsustainable malinvestments, and inevitably leads to contraction and painful readjustments.

The first economic calamity of the century occurred in 1808 when a federal embargo on overseas shipping produced widespread bankruptcies and unemployment. After that, five major cyclical depressions struck the American economy: in 1819, 1837, 1857, and 1893. The typical economic history text lists among the “causes” things like railroad speculation, stock crashes, trade imbalances, commodity price booms and busts, etc.

These are not, of course, causes at all, but merely symptoms. Only Austrian trade cycle theory as propounded by Ludwig von Mises, Murray N. Rothbard, and others, makes sense of the mess and provides a coherent explanation of these five depressions.

The 1819 collapse followed a flagrant credit expansion by the Second Bank of the United States, created by the feds in 1816. The definitive work on the experience is still Rothbard’s PhD thesis, The Panic of 1819.

Rothbard documented the extensive culpability of the Second Bank. In its very first year, it issued $23 million on a specie reserve of about $2.5 million. The expansion of credit, which eventually involved state banks as well, was actively encouraged by the U.S. Treasury. The government even made it legal for inflating banks to fraudulently suspend payment of specie, ripping off hapless depositors in the process.

Then, in a series of deliberate deflationary moves, the Second Bank pulled the rug out from under the very house of cards it had built. It forced a drastic reduction in the money supply starting as early as the middle of 1818. The depression, which came a few months later, was the unavoidable outcome of gross manipulation of money and credit.

Those who blame the gold standard for this debacle are wrong. In fact, the country was not even on a gold standard at the time. In 1792, the official policy was “bimetallism,” according to which silver and gold were to circulate side by side at a governmentally fixed ratio. (The ratio between the prices of any two commodities, including gold and silver, is always changing on the market, and an attempt to fix the ratio by government fiat always leads to trouble. In this instance, it forced the country onto a de facto silver standard from the start. The same sort of intervention proved to be a major factor in the later crisis of 1893.)

The Second Bank’s shenanigans created the depression of 1837. Anticipating a political battle to renew the Bank when its charter ran out in 1836, Bank authorities early in the decade embarked upon a rapid expansion of the money supply. Reserve ratios were pushed to their lowest levels of the entire antebellum period. Orchestrating “good times” through easy money was the Bank’s way of fighting hard-money, anti-central bank President Andrew Jackson.

Jackson, however, flattened the inflation by requiring specie in payment for federal lands and by vetoing the Bank’s charter. In the quick contraction that followed, the inflationary malinvestments promoted by the bank were liquidated. But Washington persisted with its policy of bimetallism. In addition, state and local governments responded to the 1837 collapse with a wave of anti-banking laws, outlawing banks altogether in some places and exacerbating the depression. This is hardly laissez-faire or gold standard behavior.

By the early 1850s, state governments got into the inflation act. Exerting control over their extensive network of state-chartered banks, they pressured the banks to monetize state debt. The result was another round of credit expansion, dangerous reduction of specie reserves, and a temporary, artificial boom in the economy, followed by panic and depression in 1857. Because the pressure on banks to monetize debt occurred principally in the Northern states, the subsequent collapse was considerably less pronounced in the South.

The general depression of 1873 also provides a clear example of government as the guilty party. In the prior decade, both Northern and Southern regimes abandoned a specie standard altogether and printed massive quantities of irredeemable, legal tender paper.

In the Confederacy, high taxes, a paper hyperinflation, and Northern scorched-earth military policies plunged the region into depression in 1865.

In the North, despite crippling tax hikes, revenues fell far short of the funds necessary to prosecute the war. No less than $5.2 billion in “greenbacks” were printed. At the war’s conclusion, a greenback dollar was worth only 35 cents in gold. The Northern economy struggled for a few more years, but with the complete cessation of paper inflation in the 1870s, collapse and readjustment began by 1873.

Recovery had barely commenced when the central government began a new form of monetary intervention, this one tied to silver. In 1878, Congress passed (over President Hayes’s veto) the Bland-Allison Act, which mandated the Treasury’s purchase of $2-$4 million in silver bullion per month. The metal was to be minted into silver dollars, each containing 371.25 grains of silver. Since the gold dollar was defined as 23.22 grains of gold, this established a ratio between the two metals of 16 to 1.

But the free-market value of silver in terms of gold was at least 18 to 1 in 1878. By overvaluing silver and undervaluing gold, Bland-Allison set Gresham’s Law into motion. “Bad” money (officially overvalued silver) began to drive “good” money (officially undervalued gold) out of circulation, deranging the nation’s finances and engendering a steady loss of confidence in the currency. On top of it all, Bland-Allison authorized the Treasury to issue paper silver certificates along with the depreciating silver dollars.

The inflationists of the period—who pushed for this intervention in the belief that “more money” would aid the economy in general and debtors in particular—were not satisfied. Throughout the 1880s, they pushed for even more inflation under the guise of “doing something for silver.”

Their crowning folly was enacted into law in 1890—the Sherman Silver Purchase Act. It required the Treasury to buy virtually the entire output of American silver mines—4.5 million ounces per month; mint it at 16 to 1 at a time when the gold/silver ratio in the free market was actually greater than 30 to 1; and issue new paper “Treasury Notes” simultaneously.

Drugged by easy money, the economy took on the classic symptoms of a boom. Unemployment and interest rates in 1891 and 1892 fell dramatically. Capital goods industries worked feverishly. Foreigners, however, were the first to sense danger and began withdrawing their capital from America as early as 1891.

The economic reversal started in 1893, and led to the worst depression in 50 years. It also produced one of the more scholarly addresses ever delivered before the House of Representatives. Congressman Bourke Cochran of New York, a first-rate historian, traced the history of coinage in England and explained how debasing the currency led to recurrent depressions. Applying that principle to his day, he declared:

I think it safe to assert that every commercial crisis can be traced to an unnecessary inflation of the currency, or to an improvident expansion of credit. The operation of the Sherman Law has been to flood this country with paper money without providing any method whatever for its redemption. The circulating medium has become so redundant that the channels of commerce have overflowed and gold has been expelled.

Viewing the crisis of 1893, contemporary historian Ernest Ludlow Bogart said:

It must be said that the net results of this experiment of “managed currency,” that is, one in which the government undertakes to provide the necessary money for the people, were disastrous. For the maintenance of a suitable supply, the operation of normal economic forces is more reliable than the judgment of a legislative body.

The economy of 19th-century America was punctuated by serious economic setbacks. They were caused not by the free market, but by the destructive manipulations and interventions of government authorities. This was not a century of government as innocent bystander, but of government as the incessant bungler, running roughshod over the principle of sound and honest money. (Although, without a Fed and other government interventions, the recoveries from these panics were quick.)

We can learn much from the experiences sketched here. Monetary reform, if it is to be genuine and successful, must sever money and banking from politics. That’s why a modern gold standard must have: no central bank; no fixed rations between gold and silver; no bail-outs; no suspension of gold payments or other bank frauds; no monetization of debt; and no inflation of the money supply, all of which have proved so disastrous in the past.

Anything short of the discipline and honesty of a true gold coin standard will inevitably self-destruct, consuming our wealth and liberties, and nurturing the omnipotent state.

Send Out the Clowns

Llewellyn H. Rockwell, Jr.

Only in the cloud cuckoo-land that is Washington, D.C., could the budget summit held by the Congress and the Reagan administration be taken seriously.

After the Crash, the politicians panicked. Not because of any harm to the American people, but because such events can hurt all incumbents. The result was a sideshow that—not unsurprisingly—has not calmed the markets.

Federal deficits and spending do not cause the business cycle, but if we are to prevent the coming inflationary recession from becoming something worse, we have to curb not only the Fed but the spendthrifts in elected office.

True to form, both party establishments are adopting exactly the wrong sort of policies. Instead of—at the very least—cutting federal spending across the board to immediately balance the budget, they are minutely shaving projected spending by one third of one percent.

Instead of—at the very least—cutting incentive-destroying, business-obliterating taxation, they are increasing it, and spending $1.5 billion more on “tax compliance and enforcement.”

Instead of repealing the trade barriers raised by the most protectionist administration and Congress since Herbert Hoover, they are increasing them, overtly through quotas and tariffs and covertly by devaluing the dollar.

Given the specter of the Federal Reserve pumping in more “liquidity” to solve the problems its previous inflation caused, we face either an immediate recession or a postponed (and worse) one. That is inevitable. What is not inevitable is the duration and intensity of the bust and the political results that will flow from it.

We can work to influence the politicians. But their reaction to the coming economic debacle shows once again that we cannot count on them to act correctly until we have changed the climate of ideas.

Twenty years ago, politicians talked and acted like statists. Today, they still act the same, but they use our rhetoric. And that’s because the people want a change. Thanks to our movement, we have made tremendous intellectual progress.

It is our job to continue that progress, and not to allow the government again to use a crisis to increase its power over us. The example of Ludwig von Mises, in combining scholarship and activism, shows us how to proceed. And the mood of the American people gives us the opportunity.

How our Economic Constitution Has Deteriorated

Robert Higgs

Many people think of the Constitution as essentially unchanged, yet today’s document bears little resemblance to the original of 1787 in its relation to the economy. The original words remain, but they have been formally amended in critical ways; and reinterpreted by the Supreme Court so that their practical effect has become almost the opposite of the intent.

The original Constitution promoted economic development in many ways. For example, it resolved the disputes over the West by providing for the admission of new states on equal terms with the old, thereby fostering settlement of the vast interior. Provision for duty-free interstate trade increased productivity. The Constitution made state governments less intrusive by prohibiting their issuance of paper money and their passage of laws impairing the obligation of contracts.

By the mid-19th century, rapid economic growth had become the normal condition of the economy. But under the surface, an irresolvable contradiction was growing. The lump that would not digest was slavery.

In view of its importance in the southern economy and the deep disagreements between northerners and southerners about it, slavery received scant mention in the original Constitution. (The words “slave” and “slavery” do not appear at all.) Congress could not interfere with the international slave trade for 20 years; slaves escaping into free states had to be returned; and three-fifths of the slaves were counted in determining representation in Congress. Otherwise the Constitution left slavery to the states.

For seven decades, a succession of political compromises kept the conflict between North and South from boiling over, but finally either the will or the ability to fashion acceptable compromises ran out, and the Civil War ensued.

In the war’s aftermath the old Constitution was fundamentally altered. The Thirteenth Amendment abolished slavery. The Fourteenth guaranteed to all citizens, including the freed slaves, protection from state actions that would abridge the privileges and immunities of citizenship, deprive them of life, liberty, or property without due process, or deny them equal protection of the laws. The Fifteenth Amendment guaranteed the right of the freedmen to vote. The amendments of the 1860s transferred power from the states to the national government. Though disputes over states’ rights persisted, claims of dual sovereignty lost most of their force.

During the post-civil War era, Americans enjoyed unprecedented economic growth, an achievement favored by the Supreme Court’s insistence that due process of law included protection of economic liberties—rights of private property and freedom of contract. Then, government actions caused the economy to plunge into deep depression in the early 1930s. Governments at all levels responded by expanding their powers over economic affairs. At first the Supreme Court resisted many of these measures. Starting in 1937, though, the Court reversed so many important decisions on economic matters that its turnabout must be considered a constitutional revolution. The heart of the Court’s new position was a broad reading of the Commerce Clause. Practically everything, no matter how manifestly local, was seen as part of interstate commerce and therefore subject to regulation by Congress and its agencies.

During the past 50 years, the United States has developed a welfare state not much different from those of Western Europe. Economic affairs, once overwhelmingly private, have become pervasively politicized. Taxes now equal 40% of the national income—up from 13% as recently as 1929. The free-market economy has come to be regulated in minute and expensive detail, with the costs born largely by consumers. Citizens have lost much of the economic liberty their ancestors esteemed.

American traditions and political pressures have kept the government from totally destroying all private property rights. But the Constitution, which formerly served to guarantee economic liberties, no longer provides much if any substantial protection. One may well doubt whether the economic dynamism that made the average American rich by world standards will prove permanently compatible with a constitutional regime so permissive of governmental intrusion into economic affairs.

But the Constitution can be changed, as it has been changed before. In 1865 the Constitution gave the slaves freedom from their masters. We can hope that someday the Constitution will be changed again to give all Americans economic freedom from our masters in Washington.

Nine Myths About the Crash

Murray N. Rothbard

Ever since Black, or Meltdown, Monday October 19th, the public has been deluged with irrelevant and contradictory explanations and advice from politicians, economists, financiers, and assorted pundits. Let’s try to sort out and rebut some of the nonsense about the nature, causes, and remedies for the crash.

Myth One: It was not a crash, but a “correction.”

Rubbish. The market was in a virtual crash state since it started turning down sharply from its all-time peak at the end of August. Meltdown Monday simply put the seal on a contraction process that had gone on since early September.

Myth Two: The crash occurred because stock prices had been “overvalued,” and now the overvaluation has been cured.

This adds a philosophical fallacy to Myth #1. To say that stock prices fell because they had been overvalued is equivalent to the age-old fallacy of “explaining” why opium puts people to sleep by saying that it “has dormitive power.” A definition has been magically transmuted into a “cause.” By definition, if stock prices fall, this means that they had been previously overvalued. So what? This “explanation” tells you nothing about why they were overvalued or whether or not they are “over” or “under” valued now, or what in the world is going to happen next.

Myth Three: The crash came about because of computer trading, which in association with stock index futures, has made the stock market more volatile. Therefore computer trading and/or stock index futures, should be restricted/outlawed.

This is a variant of the scapegoat term “computer error” employed to get “people errors” off the hook. It is also a variant of the old Luddite fallacy of blaming modern technology for human error and taking a crowbar to wreck the new machines. People trade, and people program computers. Empirically, moreover, the “tape” was hours behind the action on Black Monday, and so computers played a minimal role. Stock index futures are an excellent new way for investors to hedge against stock price changes, and should be welcomed instead of fastened on—by its competitors in the old-line exchanges—to be tagged as the fall guy for the crash. Blaming futures or computer trading is like shooting the messenger—the markets—that brings bad financial news. The acme of this reaction was the threat—and sometimes the reality—of forcibly shutting down the exchanges in a pitiful and futile attempt to hold back the news by destroying it. The Hong Kong exchange closed down for a week to try to stem the crash and, when it reopened, found that the ensuing crash was far worse as a result.

Myth Four: A major cause of the crash was the big trade deficit in the U.S.

Nonsense. There is nothing wrong with a trade deficit. In fact, there is no payment deficit at all. If U.S. imports are greater than exports, they must be paid for somehow, and the way they are paid is that foreigners invest in dollars, so that there is a capital inflow into the U.S. In that way, a big trade deficit results in a zero payment deficit.

Foreigners have been investing heavily in dollars—in Treasury deficits, in real estate, factories, etc.—for several years, and that’s a good thing, since it enables Americans to enjoy a higher-valued dollar (and consequently cheaper imports) than would otherwise be the case.

But, say the advocates of Myth #4, the terrible thing is that the U.S. has, in recent years, become a debtor instead of a creditor nation. So what’s wrong with that? The United States was in the same way a debtor nation from the beginning of the republic until World War I, and this was accompanied by the largest rate of economic and industrial growth and of rising living standards, in the history of mankind.

Myth Five: The budget deficit is a major cause of the crash, and we must work hard to reduce that deficit, either by cutting government spending, and/or by raising taxes.

The budget deficit is most unfortunate, and causes economic problems, but the stock market crash was not one of them. Just because something is bad policy doesn’t mean that all economic ills are caused by it. Basically, the budget deficit is as irrelevant to the crash, as the even larger deficit was irrelevant to the pre-September 1987 stock market boom. Raising taxes is now the favorite crash remedy of both liberal and conservative Keynesians. Here, one of the few good points in the original, or “classical,” Keynesian view has been curiously forgotten. How in the world can one cure a crash (or the coming recession), by raising taxes?

Raising taxes will clearly level a damaging blow to an economy already reeling from the crash. Increasing taxes to cure a crash was one of the major policies of the unlamented program of Herbert Hoover. Are we longing for a replay? The idea that a tax increase would “reassure” the market is straight out of Cloud Cuckoo-land.

Myth Six: The budget should be cut, but not by much, because much lower government spending would precipitate a recession.

Unfortunately, the way things are, we don’t have to worry about a big cut in government spending. Such a cut would be marvelous, not only for its own sake, but because a slash in the budget would reduce the unproductive boondoggles of government spending, and therefore tip the social proportion of saving/consumption toward more saving and investment.

More saving/investment in relation to consumption is an Austrian remedy for easing a recession, and reducing the amount of corrective liquidation that the recession has to perform, in order to correct the malinvestments of the boom caused by the inflationary expansion of bank credit.

Myth Seven: What we need to offset the crash and stave off a recession is lots of monetary inflation (called by the euphemistic term “liquidity”) and lower interest rates. Fed chairman Alan Greenspan did exactly the right thing by pumping in reserves right after the crash, and announcing that the Fed would assure plenty of liquidity for banks and for the entire market and the whole economy. (A position taken by every single variant of the conventional economic wisdom, from Keynesians to “free marketeers.”)

In this way, Greenspan and the federal government have proposed to cure the disease—the crash and future recession—by pouring into the economy more of the very virus (inflationary credit expansion) that caused the disease in the first place. Only in Cloud Cuckoo-land, to repeat, is the cure for inflation, more inflation. To put it simply: the reason for the crash was the credit boom generated by the double-digit monetary expansion engineered by the Fed in the last several years. For a few years, as always happens in Phase I of an inflation, prices went up less than the monetary inflation. This, the typical euphoric phase of inflation, was the “Reagan miracle” of cheap and abundant money, accompanied by moderate price increases.

By 1986, the main factors that had offset the monetary inflation and kept prices relatively low (the unusually high dollar and the OPEC collapse) had worked their way through the price system and disappeared. The next inevitable step was the return and acceleration of price inflation; inflation rose from about 1% in 1986 to about 5% in 1987. As a result, with the market sensitive to and expecting eventual reacceleration of inflation, interest rates began to rise sharply in 1987. Once interest rates rose (which had little or nothing to do with the budget deficit), a stock market crash was inevitable. The previous stock market boom had been built on the shaky foundation of the low interest rates from 1982 on.

Myth Eight: The crash was precipitated by the Fed’s unwise tight money policy from April 1987 onward, after which the money supply was flat until the crash.

There is a point here, but a totally distorted one. A flat money supply for six months probably made a coming recession inevitable, and added to the stock market crash. But that tight money was a good thing nevertheless. No other school of economic thought but the Austrian understands that once an inflationary bank credit boom has been launched, a corrective recession is inevitable, and that the sooner it comes, the better.

The sooner a recession comes, the fewer the unsound investments that the recession has to liquidate, and the sooner the recession will be over. The important point about a recession is for the government not to interfere, not to inflate, not to regulate, and to allow the recession to work its curative way as quickly as possible. Interfering with the recession, either by inflating or regulating, can only prolong the recession and make it worse, as in the 1930s. And yet the pundits, the economists of all schools, the politicians of both parties, rush heedless into the agreed-upon policies of: Inflate, and Regulate.

Myth Nine: Before the crash, the main danger was inflation, and the Fed was right to tighten credit. But since the crash, we have to shift gears, because recession is the major enemy, and therefore the Fed has to inflate, at least until price inflation accelerates rapidly.

This entire analysis, permeating the media and the Establishment, assumes that the great fact and the great lesson of the 1970s, and of the last two big recessions, never happened: i.e., inflationary recession. The 1970s have gone down the Orwellian memory hole, and the Establishment is back, once again, spouting the Keynesian Phillips Curve, perhaps the greatest single and most absurd error in modern economics.

The Phillips Curve assumes that the choice is always either more recession and unemployment, or more inflation. In reality, the Phillips Curve, if one wishes to speak in those terms, is in reverse: the choice is either more inflation and bigger recession, or none of either. The looming danger is another inflationary recession, and the Greenspan reaction indicates that it will be a whopper.

The Crash Commission Report

Ron Paul

The crash of 1929, and the depression of the 1930s, entrenched the welfare-warfare state. Intellectuals, taking their cue from government propagandists, wrongly blamed the free market and the gold standard for the disaster. In a variation on the same theme, they are blaming the October 19 crash on insufficient government regulations.

Most prominent among the various stock market study commissions is the president’s. But its recommendations are disappointing for anyone who values free markets. The stock market wasn’t too impressed either. When the commission released its 340-page report, the Dow promptly fell 140 points.

The president’s commission missed the true lessons of the crash—that Federal Reserve inflation causes the business cycle of booms and busts—and its recommendation for more regulation will only make matters worse.

The president had appointed Nicholas Brady, chairman of Dillon Read and an especially well-connected member of the Eastern Establishment, to head the commission. Also on it was John Opel, chairman of the New York Federal Reserve Bank, where the report was actually written.

“To help prevent a repetition of the events of mid-October and to provide an effective and coordinated response in the face of market disorder,” said the report, “we recommend: one agency should coordinate the few, but critical, regulatory issues which have an impact across the related market segments and throughout the financial system; clearing systems should be unified across marketplaces to reduce financial risk; margins should be made consistent across marketplaces to control speculation and financial leverage; circuit breaker mechanisms (such as price limits and coordinated trading halts) should be formulated and implemented to protect the market system.” Finally, “the Federal Reserve is well qualified to fill that role.”

All markets are linked as never before, but the rules they want to impose will only “coordinate” the various sectors of American finance. This is a world market, as October 19th showed. Their own logic should compel the commission to call for unified world regulation of markets—an idea that delights world government advocates and that has already been suggested by people in the Securities and Exchange Commission.

Every one of the proposed regulations is, of course bad, but one of the worst is the vague call for a “circuit breaker mechanisms,” namely “price limits and coordinated trading halts.” This means the government would stop trading when things get “out of hand.”

Raising barriers between willing buyers and sellers just makes markets less efficient, not to speak of violating the individual rights of would-be market participants. Plus price swings will inevitably be exaggerated once the market is opened again, as the case of the Hong Kong stock market showed, when it closed down for an entire week after the crash, and dropped even more precipitously later.

When government manipulates trading, it helps only the insiders (like Dillon Read investment bankers).

What was the fundamental cause of the October crash according to the Brady Commission? They don’t know. And it’s obvious that nobody on the Commission understands the business cycle. They illustrate their ignorance in appendix VIII of the report where they admit—20 years after Murray Rothbard’s America’s Great Depression—they don’t know what caused the 1929 Crash and the Great Depression. Of course, it was Federal Reserve intervention that caused it and the Brady Commission wants more of the same.

Like Br’er Rabbit begging not be thrown into the briar patch, the Fed responded to the Brady report by saying it wasn’t sure it wanted more power. That’s nonsense. They’re salivating at the prospect.

If the new regulations are imposed, they won’t, as the report claims, “ensure that our securities market will maintain its global preeminence.” They will only ensure that the old financial Establishment will keep its influence in Washington.

Commissions like Brady’s serve to reinforce the myth that the crash was caused by a mere technical maladjustment. Thus they conclude that we need a mere technical change. But the problem is more fundamental than that. The Federal Reserve—the dollars they create and the government they fuel—is the source of our problems.

The Regulatory-Industrial Complex

Sam Wells

The free market is great for consumers and producers, but some businessmen find government regulation an easier road to profits. That’s why they try to use government to protect them from the rivalry of the market.

There is nothing wrong with wanting to be on top, of course, so long as it is done peacefully. But when businessmen use the government to gain a monopoly, they cease being market competitors and become a political pressure group.

Some businesses advocate “fair trade” laws against “unfair competition,” government price floors, licenses, taxes on competitors, and other political measures.

Taxi monopolies are powerful on the city level. They lobby government to make new drivers go through lengthy procedures or acquire expensive licenses to own a taxi. These laws don’t exist to protect the public; they protect a privileged industry from competition and work against the public interest.

Dairy monopolies and utility companies are powerful on the state level. In New York, the dairy industry lobbies for protection from its New Jersey competitors who sell milk at a cheaper price. Utility companies get special privileges to be the sole provider of water, electricity, and natural gas. In all these cases, the consumer loses his freedom to choose.

At the national level, to take just two examples, the Post Office has a monopoly on mail and the Federal Reserve has a monopoly on money and banking.

Socialism is the final monopoly. Here the government allows no competition and only limited trade. Nationalizing an industry puts monopolists in power by merging their competitors under their control. Nationalizing an entire economy gives those on top the biggest boon of all. It’s no coincidence that statist U.S. industrialists like Dwayne Andreas of Archer-Daniels-Midland and Armand Hammer of Occidental Petroleum get along so well with the elites that run the Soviet economy.

In each case—local, state, and federal monopolies and under socialism—monopolists find that they gain more through special privileges from the government than they do from the free market. And they do so at our expense.

This isn’t something new. At the turn of the century, as historian Gabriel Kolko explains in the Triumph of Conservatism (1963):

Competition was unacceptable to many key business and financial interests. . . . As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could “rationalize” the economy. Although specific conditions varied from industry to industry, internal problems that could be solved only by political means were the common denominator in those industries whose leaders advocated greater federal regulation. Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.

One classic example is the Interstate Commerce Commission, a federal agency set up at the behest of the railroad industry in 1887, which has been a menace to consumers ever since. The ICC was this nation’s first “independent” regulatory agency, charged with preventing “cut-throat” competition in the transportation industry. The railroad industry sold it as a boon to consumers.

During the hearings on the Interstate Commerce Act of 1887, the leaders of the railroad industry lobbied hard for the ICC. Why? They wanted the government to outlaw price competition, which threatened established, old-line railroads. The ICC’s first action was to do exactly that. Over the years, the ICC brought less competition, higher prices, and lousy train service. Like a pact with Satan, the ICC eventually helped ossify and then destroy the railroad industry, but by that time, the original owners and managers had long since gone to their reward far richer than they would have been in a world of free competition.

The ICC—and other similar Progressive Era agencies like the FTC—set the stage for more cartelization under FDR’s National Industrial Recovery Act, which was drafted by Gerard Swope of General Electric, the Chamber of Commerce, the American Bar Association, and dozens of other business groups and leaders. As E. W. Hawley shows in his classic study, The New Deal and the Problem of Monopoly (1966), big business lobbied for the NIRA because they had a “vision of a business commonwealth, of a rational, cartelized business order in which the industrialists would plan and direct the economy, profits would be insured, and the government would take care of recalcitrant ‘chiselers.’”

In America, special interests are the minority. They are greatly outnumbered by taxpayers, voters, and competitors. But the interests get what they want in politics because they are well-organized, have well-defined goals, and can reward those in government who do their bidding. Consumers and taxpayers are spread out, disorganized, and pay a small marginal cost per intervention. Unfortunately, an interventionist economy tends to grant favors to well-organized minorities at the expense of the majority, even in a democracy where the will of the majority supposedly triumphs.

The special interests created the Interstate Commerce Commission, the Federal Reserve System, the Food and Drug Administration, the Federal Trade Commission, the Export-Import Bank, the Commodity Credit Corporation, the Securities and Exchange Commission, the Environmental Protection Agency, the Consumer Product Safety Commission, and a host of other agencies. In case after case, the agency served the special interests by promoting oligopoly and monopoly and retarding competition to the detriment of consumers.

The way to avoid such abuses is not by giving even more power to the political regulators who, after all, are already comfortably in bed with the vested interests.

The way to quash the regulatory-industrial complex is through a separation of Market and state, a strict adherence to the policy of laissez-faire. Only a purely free market will stop privilege-seeking businessmen from clustering around Washington like flies around a garbage can. Under a free market, the only road to profits will be to please the consumer.

Who Really Benefits From Foreign Aid?

Sam Wells

Acoalition of Third World regimes, businessmen, and bureaucrats is scheming for your wallet.

What they want is more: more tax dollars extracted from Americans to redistribute under the name of “foreign aid,” allegedly to lend a helping hand to “developing” countries so they can climb out of poverty.

Opponents of such policies are said to be selfish and uncaring, or perhaps they have some other more fundamental character flaw. American taxpayers are told to sacrifice their paychecks for the greater good of the poor around the world. How it is that the United States, Britain, Switzerland, Canada, Australia, Sweden, etc. were able to develop without foreign aid is never explained.

Assertions, emotion, and power drive these aid programs; not facts or reason. Peter T. Bauer and others have demonstrated that the hundreds of billions flowing from developed nations to the Less Developed Countries (LDCs) actually retard progress in those countries while bleeding the donor nations of precious capital.

U.S. government foreign aid, in all its various forms, is not assistance to poor people. It is aid to foreign governments, political regimes almost always of an authoritarian or totalitarian nature. Very little of this money ever gets to the poor people in those foreign lands.

Foreign aid is not charity from rich people to poor people. It is money extracted by government coercion (taxes) from working-class Americans and sent to the ruling cliques in foreign regimes. Politicians and civil servants in those countries dish it out to favored special interests, regardless of any “need.”

That’s why U.S. foreign aid dollars have helped buy, among many other things, modern TV stations in places where there is no electricity; dress suits for Greek undertakers; extra wives for Kenyan government officials; stretch limousines for African dictators; wasteful “national pride” boondoggles such as the construction of expensive capitals (Brasilia, Islamabad, and Dodoma in Tanzania); and filled the Swiss bank accounts of corrupt politicians. And since foreign aid goes to ruling elites, it helps entrench them in power.

Much of the largesse is pumped into state-run industries and collectivist programs run by socialist bureaucrats. By shoring up socialist systems, our foreign aid money virtually assures economic stagnation, political oppression, and therefore even fewer opportunities for poor people to climb out of their misery.

Julius Nyerere, Tanzania’s Marxist dictator, has received hundreds of millions in U.S. foreign aid, even while he brutalizes peasants, pulverizes whole villages, and murders political prisoners who dares to question his forced collectivization.

In Ethiopia, the socialist government uses food to control the population and as a weapon against dissenters. Its collectivist agricultural policies have—not surprisingly—caused famine. But foreign aid has only strengthened the grip of the dictatorial regime over its abject subjects.

Moreover, U.S. foreign aid has often been granted to both sides in the endless parade of wars between feuding nation-states: India and Pakistan, Ethiopia and Somalia, Israel and Egypt, Algeria and Morocco, etc. Of course, the munitions manufacturers don’t mind; they receive more orders for their wares from sovereign belligerents whose bank accounts are replenished by American citizens.

The foreign-aid scam also benefits politically privileged U.S. corporations. The recipient national regime must spend some of the aid money to purchase goods from US. exporters, with taxpayer-subsidized loans through the Export-Import Bank, the Commodity Credit Corporation, or the Overseas Private Investment Corporation. The corporation, the recipient government, U.S. bureaucrats—everybody wins in such a transaction. Except the U.S. taxpayer and the poor citizens of the foreign land.

From 1946 to the present, the U.S. government has given over $400 billion in foreign aid to other governments. Figuring the lost interest on that amount, the real total comes to a staggering $2.6 trillion. And foreign aid has zoomed during the Reagan years. In 1979, the U.S. government doled out $9.5 billion; this year it will waste over $21 billion on foreign aid. Few other budget items have increased as fast. The Reagan administration has spent more than $114 billion dollars on foreign aid—more than the total of foreign aid spending of the Nixon, Ford, and Carter administrations put together. The president once even threatened a veto because Congress had appropriated too little for foreign aid.

The U.S. Constitution nowhere permits the taxing of American citizens for the benefit of foreign governments, U.S. corporations, or U.S. bureaucrats. For the sake of morality, efficiency, and fairness, let’s leave foreign aid to those private organizations that actually help, and get the government out.

A Plague From Both Their Houses: the Economic Advisors to Bush and Dukakis

Lew Rockwell

In primitive societies, witchdoctors legitimized government tyranny by naming it the mandate of heaven. In return, they got a cut of the earthly loot.

In the United States, some economists serve the same function. For promoting government intervention as scientific, and advising on the most efficient forms, they receive power, prestige, and money from Washington.

Although these “political economists” differ over candidates and parties, and quibble over small theoretical questions, they are inevitably followers of John Maynard Keynes, the 20th century’s most influential justifier of state economic planning.

In the Keynesian tradition, the economic advisors to George Bush and Michael Dukakis share the same intellectual premises, and advocate government power over individuals and businesses, and extensive government intervention in the economy.

Bush’s Economists

Michael Boskin

The top economic advisor to the Bush campaign is Professor Michael Boskin of Stanford University. The Wall Street Journal (5/23/88) calls him a “mainstream conservative,” but that’s only within the Keynesian spectrum. As the New York Times (6/5/88) notes, Boskin “makes a bow to the late John Maynard Keynes.” But it is more than a bow. It is a genuflection.

Keynes believed that at the first sign of a recession, the government should dramatically increase spending . . . on anything: public works, social welfare, corporate subsidies, the military, etc. It is only important that the spending create a budget deficit, which can then be inflated away through fiat paper money.

But it is government intervention and credit creation that create unemployment and the business cycle in the first place. As the chaos of the 1970s showed—thanks to the policies of Richard “We-are-all-Keynesians-now” Nixon—Keynesian “countercyclical” policies produce unemployment and inflation at the same time.

Nevertheless, in Reagan and the Economy (Institute for Contemporary Studies, 1987), Boskin still advocates these failed policies:

Most economists, including myself, oppose an annually balanced budget. . . . A preferable scheme would be a budget balanced over the business cycle, running deficits in recessions and surpluses in expansionary periods (p. 136).

This is what Franklin D. Roosevelt did in the 1930s when he increased taxes and spending in the midst of a depression. But once the economy recovered, despite the New Deal, his successors somehow forgot about running surpluses. And now, with the U.S. economy allegedly in recovery since 1983, Keynesians say deficits don’t matter.

The people still worry about it, however, so Boskin proposes to define most of the deficit out of existence with a “capital budget.” All the spending that politicians could call “investment” would be counted as increased assets and not as regular spending. Today, for example, when the government spends $100 million on a new office building for welfare bureaucrats, it’s considered spending. Boskin would call the building an investment and subtract the $100 million from the deficit.

There is probably no government spending—aside from transfer payments—that some politician couldn’t label an investment. So with Boskin’s capital budget in place, the government could always run a surplus, no matter how much spending exceeded revenue.

Government spending can never be an investment in the private-sector sense. In fact, government spending is anti-investment. Every penny must be seized from individuals in the private sector who otherwise would have put it to productive use. We can know there is a loss, but not how much, because, as Henry Hazlitt has noted, we can’t know what profitable investments were not made by entrepreneurs, and what social benefits therefore never resulted.

As Ludwig von Mises showed, bureaucrats—because they operate outside of the price system—have neither the information nor the incentive to invest. Their activities must always lead to a net social loss.

On spending, Boskin calls for a “flexible freeze.” Why not an actual freeze? Because, says Boskin, the government should spend more in such areas as “education, drug enforcement, and AIDS research.” So, while a “flexible freeze” sounds real, it actually means nothing. And if any spending were frozen, Boskin says it should promptly be unfrozen during a downturn “as in 1974-75 or 1981-82” (New York Times, 6/5/88). As Keynes said, in downturns “the government must and can replace private demand by public spending” (The General Theory, p. 322).

Actually, a recession or a depression is—despite Keynes and Boskin—the very time to cut government spending and get Washington out of the way of the market’s natural recovery from the Federal Reserve-caused bust.

Boskin’s first love, however, is taxes, which he studied at the University of California at Berkeley during its most left-wing period. His PhD dissertation won first prize from the National Tax Association, an organization of federal, state, and local tax collectors dedicated to promoting “revenue enhancement.”

All told, Boskin has published two books and 25 articles on taxation and right now, he advocates “a broad new federal consumption tax” (Wall Street Journal, 5/23/88), which would have a “neutral” effect on the economy (Reagan, p. 162).

But taxes can never be neutral. Taxation transfers resources from producers to non-producers through coercion, which must necessarily disturb market exchange and the structure of production.

Boskin has also written extensively on social security. After two more books and five articles, he concludes that privatization is not the answer. Instead he favors raising benefits and supports the higher taxes engineered by Fed chairman Alan Greenspan when he headed the Reagan social security commission.

Privatization would mean voluntarism, but Boskin advocates “compulsory coverage” because “some individuals . . . may not save at all or may fail to anticipate or allow for unfavorable contingencies” (Too Many Promises, 1986, p. 102). So responsible government must take care of irresponsible individuals.

It’s no wonder that liberal Keynesian Lawrence Summers praises Boskin as a “smart, solid guy. He’s from the Rockefeller-Feldstein wing of the Republican party” (Wall Street Journal, 5/23/88). Nor that on Boskin’s resume, his first character reference is Secretary of State George Schultz, one of America’s top corporate statists (and another successful political economist).

“Boskin has hurtled along the fast track of academia that brought other economists to the upper reaches of government, including Arthur Burns,” says the New York Times (6/5/88). The comparison is apt. Burns, another Republican Keynesian, chaired both Nixon’s council of economic advisors and the Federal Reserve, where he helped design and implement Nixon’s high inflation and price and wage controls, while claiming to be for sound money and free markets. Burns also delighted in slamming shut the “gold window”—which severed the final tie between the dollar and gold.

Says Boskin: “Public service is important and noble. . . . I hope to go to Washington for a few years” (NYT).

Martin Feldstein

The other senior Bush economist is Professor Martin Feldstein of Harvard, also a Republican Keynesian. Feldstein is also president of the National Bureau of Economic Research, set up more than 70 years ago to encourage statist economic research, and a member of the Trilateral Commission. Founded by David Rockefeller, the commission—to which Bush also belongs—seeks, in its own words, to end the “separation between the political and economic realm” (Toward a Renovated International System, 1977). That is, it advocates cartelization of the world economy.

As chairman of the council of economic advisors in the first Reagan administration, Feldstein was the major advocate of higher taxes, and he helped design and push the four Reagan tax increases of those years. Since leaving the administration, he has consistently called for more inflation, higher taxes, and international devaluation of the dollar.

Feldstein, who like Boskin is on the conservative end of Keynesianism, says that sometimes government can make mistakes, but only as “the unintended and unexpected by-products of well-meaning policies” (The American Economy in Transition, p. 3).

But government policies—despite their rhetoric of compassion and humanitarianism—are rarely well-intended. In the name of helping the poor, labor unions and their kept politicians impose minimum wage laws, which then throw people out of work. But this is not an unexpected or unintended consequence; it is precisely what the unions want: to create a labor cartel by reducing job opportunities for marginal workers and therefore competition for their over-paid members.

Federal regulation of business imposes very high costs, often causing small enterprises to shut their doors, or not to open at all. But that is precisely why it is championed by many large firms. Regulation imposes a higher relative burden on the small company than on the corporate giant, and thus also reduces competition.

As another example, the Federal Reserve inflates the money supply precisely because this benefits big banks and the government, no matter what the cost to the rest of us. It claims to be a stabilizing force, when it is just the opposite.

Government intervention is almost never undertaken with good intentions. It is imposed because tax eaters—pressure groups or politicians and bureaucrats—have succeeded in using the government to live off the taxpayers.

But Feldstein insists that government intervention is well-meaning because this lets the government and its interests off the hook for all the disasters. It also excuses Feldstein, since he has built his career on providing an intellectual justification for these policies.

On May 31, Feldstein and Boskin met with Bush at his summer mansion on the Maine coast. At their urging, Bush called for more Federal Reserve inflation. Not speeding up the printing presses, said the vice president, could “shut down economic growth in this country” (Washington Post, 6/1/88). But in the long-run, it is inflation that will do exactly that.

Politicians and their economists never seem to care about the long run. Like Keynes—who was a nihilist at heart—they have very short time horizons. As Keynes quipped, the long run was unimportant; “in the long run we are all dead.”

Dukakis’s Economists

Robert Reich

George Bush’s advisors are conservative Keynesians; Michael Dukakis’s are liberal Keynesians. Professor Robert Reich of Harvard’s Kennedy School of Government, for example, advocates an “industrial policy” of “active government” in “partnership” with large corporations (Minding America’s Business, 1982, p. 331-2).

In this book, Reich calls for centralized direction of business, massive subsidies to favored corporations, more regulation, legal barriers to new entrepreneurs, “a whole range of special tariffs, quotas, loans, and guarantees,” and a “knowledgeable” team of government bureaucrats running everything.

All this is in keeping with Keynes, who wrote in 1936 that he wanted “to see the State . . . taking an ever greater responsibility for directly organizing investment” (The General Theory, p. 164).

Reich claims that his plan will “curb market power” and check the size of business. But his policies would deliberately create one huge government-approved cartel, and make it impossible for small businesses to compete, all at high cost to consumers and taxpayers.

Reich wants “government’s role in industry . . . much more open, more explicit, and more strategic” (The Next American Frontier, 1983, p. 14), as during World War I, the New Deal, and World War II, when:

[S]ocial planning . . . dominated national discourse. . . . Indeed, large government agencies and large corporations were almost indistinguishable, both to the people who worked within them and to outsiders who dealt with them . . . (p. 58).

The free market responds to consumers, whereas Reich cares only about big government and big business. It doesn’t matter that consumers want home computers, gasoline, or diet sodas. He would take resources away from these areas and devote them to “semi-conductors and fiber optics” (p. 338).

Statists always seem enamored of the latest market-supplied technology (that their policies would have prevented from coming into being). Lenin, for example, loved electrification. So, in the Soviet Union today, there is electricity even in the meanest, farthest outposts of the empire. People may not have decent clothes, food, housing, medical care, or education—let alone appliances that run on electricity—but they have electric current. (Of course, the reliability and quality of the current in the Third World’s largest economy is another question.)

Reich wants to subsidize research and development, but the government’s sole choice is to stifle them or get out of their way. It is individuals in the market who create new technology. The government, cut off from prices, consumers, and entrepreneurs, cannot know what is best—fiber optics, semiconductors, diet soda, or anything else.

Only entrepreneurs can forecast the desires of tomorrow’s consumers and make sure they are fulfilled efficiently. Reich wants government in charge, siphoning funds to favored big business as in the “Massachusetts miracle,” with the entrepreneur’s and consumer’s only role to obey. Dukakis calls these ideas “thoughtful and well worth thinking about” (Wall Street Journal, 5/23/88).

Lawrence H. Summers

Dukakis claims he will balance the budget by increasing the size and power of the Internal Revenue Service. The idea comes from a student of Michael Boskin’s, Keynesian Professor Lawrence H. Summers of Harvard, the other top advisor to Dukakis.

Summers comes by his views almost genetically. Both of his parents are Keynesian economists at the University of Pennsylvania, and his uncles include two of the top Keynesians in America, Paul A. Samuelson of MIT and Kenneth J. Arrow of Stanford. Like Boskin, Summers received an award from the National Tax Association for his work. And in addition to studying under Boskin, Summers was also a student and protégé of Martin Feldstein, and worked for Feldstein in the Reagan administration.

An enthusiastic taxer, Summers recently edited a two-volume series co-published by the NBER (which Feldstein heads and where Boskin is a senior academic) on Tax Policy and the Economy (1987 and 1988), chock-full of essays on how and why to raise taxes.

Along with favoring higher taxes and more “vigorous” collection methods, Summers—like Boskin—wants to impose broad consumption taxes. And he says that economists and policy makers are too concerned about inflation. They should focus on the other side of the Phillips Curve: unemployment.

The Phillips Curve sums up the Keynesian notion that we must have either unemployment or inflation, but cannot have both. The doctrine died after high levels of inflation and unemployment in the 1970s, but Summers still believes in it.

In fact, the Phillips Curve is the reverse of the truth. More inflation brings more unemployment, and sounder money means more jobs. There is no trade-off between the two government-created plagues of monetary debauchment and joblessness. They are visited upon us hand-in-hand.

Summers also calls—with Boskin—for a major government effort to collect more economic statistics, an ominous idea.

Consumers get their information from personal experience, friends, and advertising. Business people need only know about their own markets. But government gathers data about the entire economy to control us.

Unlike consumers and business people, politicians and bureaucrats stand outside the market. But to try to run it, they need information about what is going on inside it. Collecting economic statistics imposes huge costs on business, but the government is willing to spare no cost to us, for, as Professor Murray N. Rothbard has noted, “statistics are the eyes and ears of the bureaucrat, the politician, the socialistic reformer.”

Brothers Under the Skin

Republican or Democrat, all four of these Keynesians differ only in degree. For example, liberal Keynesians think saving is ridiculous, and want government to discourage it, whereas Boskin thinks that some saving is OK.

There are as many varieties of Keynesian economics as there are economists in Washington, D.C. Its doctrines are muddy and open to different interpretations, which is one reason it’s so popular: it can be used to justify any interventionist policy, Republican or Democrat.

The Keynesian answer to every economic ill is government stimulation of total demand to increase consumption, investment, and prices. How is this “aggregate demand” to be stimulated? Through government spending and deficits, funded by taxation during booms and inflation during busts.

Before Keynes, most non-socialist economists held to some sort of sound economics. There were no models pretending that the whole of the economy, with millions of individuals and billions of decisions, could be crammed into a group of equations. Economic laws and the logic of human action governed economists’ thinking, so most economists advocated a free market.

That ended with the “Keynesian revolution,” which gave the first intellectual justification to what politicians wanted to do anyway. All of a sudden, economists—who used to criticize inflation, deficits, and high spending—were applauding these policies.

Not surprisingly, Keynesians of one stripe or another have filled prominent posts in every administration since Herbert Hoover (and his advisors were proto-Keynesians). FDR took all of Keynes’s propositions seriously, and sought to centralize investment decisions in Washington and drive prices up through the destruction of wealth (burning crops, killing animals, inflating the money supply, and raising taxes). He also hired the unemployed for unwanted and unnecessary tasks, and cartelized business and banking in the name of promoting a higher level of coordination.

FDR-style Keynesianism is rare today. But the basic themes of Keynesian economics still constitute the mainstream: that countercyclical fiscal policy is necessary to compensate for the free market; that investment and consumption are in lock-step, and when one is primed, the other booms; that there is a necessary trade-off between inflation and unemployment; that interest rates are properly manipulated by the central bank, as is the supply of money; that this monetary manipulation can successfully redirect investment; that inflation promotes growth; that consumption is economically superior to savings; and that the free market cannot properly allocate resources. All are exactly wrong, but no one—aside from the Austrian school—has ever challenged the fundamental Keynesian assumptions.

Today, most prominent economists reflect the theory’s bad policy implications to one degree or another. And that is true of these four economists, who although they may be competitors, are Keynesian brothers under the skin. They also share an ambition to use their undoubted intellectual powers to serve big government and thus advance their careers. As Joseph A. Pechman of the liberal Brookings Institution says: All are “made from the same cloth” (NYT, 6/5/88).

Ludwig von Mises discussed such men in Human Action (1966 [1949], p. 869):

The early economists devoted themselves to the study of the problems of economics. . . . They never conceived of economics as a profession. The development of a profession of economists is an offshoot of interventionism [with] the specialist who is instrumental in designing various measures of government interference. . . . He is an expert . . . at hindering the operation of the market economy.

There are thousands and thousands of such professional experts busy in the bureaus of the governments and of the various political parties and pressure groups . . . and pressure-group periodicals. . . . The eminent role they play is one of the most characteristic features of our age of interventionism.

There can be no doubt that [this] class of men . . . includes extremely talented individuals. . . . But the philosophy that guides their activities narrows their horizon. By virtue of their connection with definite parties and pressure groups, eager to acquire special privileges, they become one-sided. They shut their eyes to the remoter consequences of the policies they are advocating. With them nothing counts but the short-run concerns of the group they are serving. The ultimate aim of their efforts is to make their clients prosper at the expense of other people.

From examining these four men, we can know that big government and its associated special interests cannot lose in 1988. Yes, the subsidies may go to one interest group rather than another, but both sides agree on political control of our economic lives, and on higher taxes and more state planning. No matter who is elected, Keynesianism will be in control.

Not that Boskin and Feldstein, or Reich and Summers, will exercise any real influence. Rather, like the witchdoctor, their function is to give a pseudo-scientific cover to the interventionist policies of their candidate and his backers. Thus these economists are worth studying for their predictive value, if not for worth of their ideas.

For that, we need economists who share the vision of Ludwig von Mises, and instead of promoting the interests of big government, oppose any interference with the peaceful prosperity of the free market.

The Coming World Central Bank

Ron Paul

International statists have long dreamed of a world currency and a world central bank. Now it looks as if their dream may come true.

European governments have targeted 1992 for abolishing individual European currencies and replacing them with the European Currency Unit, the Ecu. Next they plan to set up a European central bank. The next step is the merger of the Federal Reserve, the European central bank, and the Bank of Japan into one world central bank.

The Ecu is a basket of ten European currencies weighted according to their respective country’s economic strength. The German mark gets the highest weight while the Irish pound, the Danish krone, and the Greek drachma get lower. The Ecu doesn’t qualify as a working currency yet, but it is already being used by international banks and multinational corporations. And traveler’s checks denominated in Ecus are also popular in Europe.

The Ecu first appeared in 1979. Its creators quickly found that its usefulness was limited without a clearing system, so Credit Lyonnais of Paris and Morgan Guaranty Bank of New York formed the Ecu Banking Association, made up of top central bankers and government officials. In March 1986 they set up the European Investment Bank and SWIFT (the Society for Worldwide Interbank Financial Telecommunications) to process Ecu transactions. Within a few months, all major central banks had signed on, and today, Ecu transactions represent the fifth largest trading volume in international currency markets.

The big push for the European central bank began after the October 1987 stock market crash as politicians seized the moment of crisis to advance their agenda. “The logic of developments . . . demand that the European currency takes over from the national ones,” argued socialist French President Francois Mitterrand.

In November 1987, European politicians, businessmen, and bankers formed the Action Committee for Europe to promote the European central bank, arguing that Europe needs one currency and “a common authority to manage it.”

The European central bank (ECB) will be modeled after the Federal Reserve. Like the Fed in 1913, it will have the institutional appearance of decentralization, but also like the Fed it will be run by a cartel of big bankers in collusion with politicians at the expense of the public.

Margaret Thatcher is the only influential holdout in Europe. And she objects because she thinks the influence of Germany’s central bank will allow less inflation than she wants! But like all central banks, the ECB is designed to inflate. And it will have a particularly free hand. With twelve separate currencies, exchange rate fluctuations allow people to sell more inflationary currencies for the stronger ones, providing some constraint on inflation. That will no longer be the case with the Ecu.

The head of the European Monetary System, former French President Valery Giscard d’Estaing, says Thatcher will join when the Ecu becomes “a real currency.” However, no government or group of governments can create a currency out of thin air. They must pay attention to the economic laws that Ludwig von Mises proved with his “regression theorem,” namely, that currencies must originate in the free market. But unlike the International Monetary Funds Special Drawing Rights (SDRs), European governments did not create the Ecu out of nothing. It is composed of existing currencies which in turn had their origins in gold and silver.

The plan for the transition has central banks fixing the trading range of the Ecu relative to other currencies while allowing them to freely circulate side by side. Then governments will overvalue the Ecu relative to other European currencies, and people will sell their pounds, lira, and marks for the Ecu, putting into effect a kind of backwards Gresham’s Law.

“There is one hitch,” says Forbes magazine. “Although currencies that make up the Ecu maintain a balance relative to one another, the entire currency basket fluctuates against the dollar, so cashing in Ecus for dollars could result in a gain or a loss.”

One of the few constraints now operating on the Fed is that if it inflates too much, people will dump the dollar for a more stable currency. That’s why there is a push to achieve international monetary “stability” (that is, equal rates of inflation) by cartelizing what will then be three remaining central banks of the industrialized world into one world central bank charged with manipulating one world currency.

The Economist of London says that “Thirty years from now, Americans, Japanese, Europeans, and people in many other rich countries” will be “paying for their shopping with the same currency. Prices will be quoted not in dollars, yen, or D-marks” but in terms of a new world currency.

Central banking is a horrendous idea to begin with. Merging central banks will be even worse. The resulting institution would become, as Dr. Edwin Vieira has remarked, “the biggest agent of economic and political irresponsibility the world has ever seen.” Today, if the U.S. Congress has a sudden fit of economic sanity, it could restrict the Fed’s power. The mere threat of that serves as a limit. But the world central bank would be subject to no authority.

The world central bank might be based on the International Monetary Fund or the World Bank, says the Economist. But I think the more likely candidate is the Bank for International Settlements (BIS), the “central banker’s bank” in Basle, Switzerland. World central bankers have been holding “consultative meetings” there once a month for over a year. Recently, the meetings have concentrated on giving the BIS “lender of last resort functions and responsibilities.” That means the power to create money and credit out of thin air.

They all want, as Banker magazine noted, “a world in which national policy authority is greatly reduced, and replaced by more powerful international policy-making bodies.”

Finance Minister Edouard Balladur of France writes in the Wall Street Journal that we should “entrust a small group of distinguished people of unquestionable moral authority” with the job of designing “a world order” that is “binding on all.” But such an elitist idea would only produce a monster. That is why those of us who believe in individual liberty and free markets must actively oppose this plan, despite the proponents’ use of free-market rhetoric. (One free-market publication praised the Ecu as “an extension of Hayek’s work on competitive currency.”)

None of this is to say that I approve of the status quo. The world monetary system is shaky. The system of floating exchange rates between fiat currencies only adds to the volatility. And we do need more international cooperation. But we want economic integration without political integration.

We all know the troubles we have dealing with city hall, let alone the state house or Washington, D.C. A world system would be unimaginably worse. Internationally as well as domestically, the answers to economic problems are free markets, free trade, free labor, and a gold standard. All would build the only kind of world economic order consistent with sound economics and individual freedom.