Question Authority (Unless I Say Not To)

by Thomas E. Woods, Jr.

Finally, I’ve been attacked – sort of.

So far the response to my book Meltdown, a free-market look at the financial crisis, has been almost eerily favorable. That’s very gratifying, to be sure, but criticism is what gets debate going and pushes a given subject matter beyond its typical confines.

Until now, it’s been hard to come by. Even though it spent ten weeks on the New York Times bestseller list, the paper refuses to review it. When the Times last reviewed one of my books – a review that consisted of a breathless list of forbidden things I had said, as if they refuted themselves – all it managed to do was give the book more notoriety and more sales.

Now comes a shot from left-wing blogger Matthew Yglesias, who is honest enough not to pretend to have read the book. His attack on it comes in the context of a discussion of conservatives’ increasing interest in something called Austrian business cycle theory. (He notes that staffers for Rep. Michele Bachmann, R-MN, confirm that she has been reading the book, which contains a foreword by another congressman, Rep. Ron Paul.)

Woods, Yglesias declares, is "pushing a fringe economic doctrine that tells the right what it wants to hear so he’s gaining popularity."

Um, Matthew, what right-wing circles have you traveled in over the years that have "wanted to hear" scathing criticism of the Federal Reserve? How many "right-wing" politicians can you name that have even mentioned the Fed as a political issue over the past, oh, ninety-six years?

But that’s a small point. Much more interesting is Yglesias’ dismissal of Austrian business cycle theory (ABCT) as a "fringe economic doctrine." Well, according to James Galbraith, maybe 10 or 12 of the country’s roughly 15,000 professional economists predicted the current crisis. (Ol’ Jimmy wasn’t counting hundreds of Austrian economists, natch.) Matt, you sure you want to use the consensus of these geniuses as your bellwether of respectability? Good luck with that.

I’ve written quite a bit about ABCT, both in my book and in numerous articles, so I won’t repeat the theory in any detail here. What matters for right now is that the theory, which won F.A. Hayek the Nobel Prize in 1974, exonerates the free market of blame for the boom-bust cycle. Instead, the culprit is the government-established central bank (in the American case, the Federal Reserve System), whose activities lead the economy into an unsustainable configuration that can seem like prosperity for a time, but which inevitably collapses in a bust when the accumulated resource misallocations reveal themselves. (Yes, the theory can also account for booms and busts that occurred in the absence of a central bank; see Jesús Huerta de Soto’s treatise Money, Bank Credit, and Economic Cycles.) Fiscal and monetary stimulus, in turn, are based on a juvenile misdiagnosis of the problem, and can only misdirect the economy still further.

Note that although Yglesias himself does not know the first thing about Austrian business cycle theory, and in fact doesn’t even seem entitled to an opinion, he is certain it is incorrect. Why? Because it implies that the economy is actually damaged, rather than stabilized, by our overlords. We cannot question our overlords, citizen. You are taking this "question authority" business much too far.

The Left’s motto "question authority" has almost never been employed sincerely. What it seems to mean is that we ought to question beliefs and institutions of long standing. What it clearly does not mean is that we ought to question the beliefs and institutions that our wondrous experts have replaced them with. Thus it never even occurs to Yglesias, the alleged progressive, to question the Fed. Why, the Fed furnishes us with the scientific management of the money supply! Whatever is there to question about it?

The Fed, you see, was created when the American people spontaneously cried out for banking reform. Their wise legislators promptly drafted legislation with an eye to the common good, thereby giving birth to the Federal Reserve, our warm and cuddly little stabilizing agent.

Absolutely nothing in the above paragraph is true, but it’s how inhabitants of the progressive la-la land, to the extent they give any thought to the Fed at all, seem to assume it must have come about.

Now I don’t mean to suggest that the Left won’t question anything authority tells them. They’ll question war – sometimes. The thinking seems to run as follows. Many foreign conflicts, like the war in Iraq, have begun when mean, self-interested people got hold of the ship of state, manipulated patriotic sentiment and pushed the country into unnecessary fighting. However, no major institutional aspect of our domestic life could possibly be unnecessary, or the result of self-interested activity or propaganda.

While I’m on the subject of war, how does Yglesias suppose the Iraq War – which he deeply opposed, I’m sure – was financed? In considerable part by the Fed’s creation of new money out of thin air.

Let me put this as simply as possible. Is the federal government more or less likely to go to war, and are its wars likely to be more or less costly and destructive, if it has access to a money creation machine? Why is the Left, which prides itself on its intellectual independence and its willingness to question old taboos, so intellectually moribund that an obvious question like this is never even raised? I’m supposed to take Yglesias and the rest of the misnamed "progressives" seriously when they propose to grant the government its money-creation machine but hope it doesn’t use it in an anti-social or murderous way? That’s just a super theory, Matt.

Not mentioned, presumably because Yglesias doesn’t know anything about them, are the Cantillon effects of expansionary monetary policy. This piece of economic knowledge reveals how the process of inflation generates wealth transfers to the politically well connected at the expense of average Americans, the vast bulk of whom do not even realize the process is taking place. I explained the full mechanism in this earlier article I wrote on the Left’s touching devotion to the Fed. This is "progressive" how, exactly?

When Lew Rockwell interviewed Naomi Wolf, she was honest enough to admit that she, and the Left at large, knew next to nothing about the Fed. Not Matthew Yglesias, though, who has already learned everything he’ll ever need to know. And good golly, he’s learned that the Fed is our Great Stabilizer. No further intellectual curiosity is necessary.

Yglesias links to the usual boilerplate about the economic downturns before the Fed, a subject I’ll bet he doesn’t really know anything about apart from an inchoate sense that they were Very, Very Bad, and were (of course) caused by the free market. I discuss these cases in Meltdown and a bit in this lecture. Suffice it to say that the same precipitating factor is evident in each one of them – the creation of credit beyond the level of voluntary saving, a discombobulating process that sets in motion an inevitable process of reversal, which we experience as a recession/depression.

It’s also worth pointing out that economic historians, as even the New York Times now admits, have caught up with Murray Rothbard on the subject of the so-called "long depression" of the 1870s. Charles Morris, not a libertarian by any means, wrote in the Times not long ago that "recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870s depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history. Employment grew strongly, faster than the rate of immigration; consumption of food and other goods rose across the board. On a per capita basis, almost all output measures were up spectacularly. By the end of the decade, people were better housed, better clothed and lived on bigger farms. Department stores were popping up even in medium-sized cities. America was transforming into the world’s first mass consumer society."

An article I plan to write later this month will incidentally respond to the critics of ABCT whom Yglesias has haphazardly assembled, though there is little need to reinvent the wheel: most of them have been abundantly replied to already, though Yglesias probably just forgot to include the replies. Just for starters, here are Mish on Krugman’s criticism of ABCT and Robert Murphy on Krugman’s criticism of ABCT. In addition, here’s Bob replying to Tyler Cowen and explaining why Krugman’s capital theory, if we can call it that, is too primitive for him even to comprehend ABCT. (You can listen to Bob’s article if you’re too busy to read it.) And here are Bill Barnett and Walter Block on Tyler Cowen (.pdf).

Yglesias’ reaction to growth of the Austrian school isn’t surprising – naturally he’d like nothing more than to see the debate on the economy confined to Keynesian drones versus monetarist drones. Anyone who dares to question authority, to propose that these false alternatives are intellectually bankrupt, is on the "fringe," you see. These are the approved alternatives, citizen. Choose from among them. The experts know what is best.

Citizen: But the experts have been all wrong! Shouldn’t we question them? Shouldn’t we listen to the people who had a clue?

Commissar: Let us hear no more of this anti-social talk about your betters. Stay away from the fringe, citizen. Listen to the experts.

Pursuing Free Trade Agreements and Fast-Track Authority

Pursuing Free Trade Agreements and Fast-Track Authority by Doug Bandow
Support for free trade long has transcended party lines. But in recent years Democrats and Republicans alike have grown more hostile to open international markets. The Bush administration and Congress should overcome partisanship and reaffirm America's commitment to trade liberalization by renewing presidential "Fast Track" authority. Mutual reductions in trade barriers offer the greatest economic benefits. Large-scale negotiations, such as those through the World Trade Organization, have helped open the world economy. Unfortunately, the so-called Doha round has been stalled over farm subsidies: The latest attempt to break the deadlock collapsed in late June. Another option is unilateral dismantlement of trade barriers, a strategy followed by Hong Kong, New Zealand, and Singapore. Indeed, most U.S. tariff and quota reductions have been unilateral. As Daniel Ikenson of the Cato Institute points out, "the primary benefits of trade come from liberalization at home."1 Unfortunately, such a proposal is unlikely to win political support. The most realistic strategy is bilateral and regional agreements. Four free trade agreements (FTAs) are currently awaiting congressional approval. But newly empowered Democrats have criticized the accords and the Fast Track authority (or "trade promotion authority") under which they were negotiated. TPA, which expired on June 30, requires that Congress hold an up or down vote on FTAs without amendment. The administration and Congress have formulated a new, supposedly bipartisan trade policy incorporating enhanced environmental and labor regulation in the negotiation process. House Ways and Means Committee Chairman Charles Rangel (D-NY) argues that the agreement "will remove the excuse of the ILO [International Labor Organization]" for trade opponents. But any restrictions are likely to act as a new barrier, sharply limiting the benefit of any resulting FTAs. Free trade is good for the U.S. Free trade benefits both buyers and sellers. by basing production on "comparative advantage," that is, allowing people in different lands to produce the goods and provide the services at which they are most proficient. Moreover, note Richard Fisher and Michael Cox of the Federal Reserve Bank of Dallas, "Larger markets give companies a wider field to search for scarce capital, cheaper inputs and human talents. They provide added impetus for innovation, business formation and risk-taking."2 And with the world's largest and most productive economy, the U.S. is well positioned to take advantage of a freer global trading environment. Overall, trade, production, and employment tend to rise together. An expanding economy raises demand both for imports and domestic products. Consumers with rising incomes buy more goods, both imported and domestic. American producers also import more intermediate goods, such as auto parts, computer components, and capital goods. Prosperity has increased dramatically as globalization has intensified. Writes Fareed Zakaria of Newsweek: Over the past 20 years, as these forces have accelerated, the United States has benefitted enormously. Its companies have dominated the new global economic order; its consumers have reaped the lion's share of the resulting price reductions. America has grown faster than any larger industrial economy during these years: over the past two decades, American per capita GDP has roughly doubled. The median income of a family of four rose 23 percent between 1985 and 2005.3 Americans have done better economically even as imports have exploded. Dan Griswold of the Cato Institute observed in 2000: During the last five years, living standards have been rising for low-and high-income workers alike. More than 80 percent of the jobs created since 1993 are in occupations that pay above the median wage. Figures on the alleged decline of real wages are misleading because they overstate inflation and do not include the growth of nonwage benefits.4 Further liberalization would yield substantial addi-tional benefits. Federal Reserve Chairman Ben Bernanke estimates that dropping all trade barriers would increase household income in the U.S. by between $4,000 and $12,000.5 Manufacturing employment has been falling—but at the same time, American manufacturing output continues to grow. Indeed, average factory worker productivity increased two and a half times from 1979 to 2005. The U.S. accounts for one-fifth of manufacturing value-added, more than any other country; real output has increased seven-fold since 1950 with no increase in the number of employees. America's trade deficit remains high, but it is counterbalanced by the inward flow of economic investment. Far from costing the U.S. jobs, explains Griswold, "As a reflection of continued domestic demand and the desire of foreign investors to acquire U.S. assets, large trade deficits are typically associated with more output and more jobs." Free trade has political benefits as well. Incorporating South Korea and Taiwan into the international economy raised their incomes and moderated their politics, encouraging democratization. Although economic freedom does not guarantee political freedom, it creates a positive environment for liberal reform. Moreover, trade involves positive cooperation which may ameliorate some ethnic and religious tensions. FTAs sometimes yield geopolitical benefits as well, strengthening economic ties with nations in sensitive regions. NAFTA has aided Mexico, America's next door neighbor and source of substantial illegal immigration. The recently negotiated FTA with South Korea is particularly important since Seoul has been moving closer to China. Agreeing to a FTA with Taiwan could help ease that country's increased feeling of isolation. Despite the many and positive benefits of free trade, there obviously are losers. Some individual jobs are lost, yet U.S. employment has been rising even as globalization has increased. Over the last decade the economy has averaged a million new jobs on net every year. The fact that more jobs are created than destroyed obviously does not lessen the pain for those who end up unemployed. But attempting to preserve jobs with trade barriers on average costs more than $230,000 per job; in some industries American consumers have paid nearly $1.4 million per job "saved."6 Unfortunately, growing numbers of Republicans and Democrats are abandoning their once strong support for open international markets. Yet if there is one incontestable axiom of economics, it is that economic liberty yields growth and prosperity, rising employment and income, and accelerating technological advance. Thus, it is imperative that the president and Congress cooperate in support of an open international economy. America's prosperity is too important to sacrifice for the political advantage of either party.

How Big Government Infrastructure Projects Go Wrong

Lessons from the Tennessee Valley Authority

Jim Powell

The recently enacted $787 billion "stimulus" program appears to be the down payment on a sweeping "new New Deal" that will include many other ambitious government programs—including the possible nationalization of health care.

Given the size and scope of such interventions into the economy, it's important to remember that big government programs often have results that are very different than what was intended. We can gain particular perspective by reflecting on the experience of President Franklin D. Roosevelt's most ambitious infrastructure program, the Tennessee Valley Authority (TVA).

It was heralded as a program to build dams that would control floods, facilitate navigation, lift people out of poverty, and help America recover from the Great Depression. Yet the reality is that the TVA probably flooded more land than it protected; much of the navigation it has facilitated involves barges of coal for coal-fired power plants; people receiving TVA-subsidized electricity have increasingly lagged behind neighbors who did not; and the TVA's impact on the Great Depression was negligible. The TVA morphed into America's biggest monopoly, dominating an 80,000 square mile region with 8.8 million people—for all practical purposes, it is a bureaucratic kingdom subject to neither public nor private controls.

Back in 1933, David Lilienthal, one of the founding directors of the TVA, vowed, "The Tennessee Valley Authority power program is not a taxpayers' subsidy. It is a business undertaking." In fact, for more than 60 years, Congress appropriated funds to cover the TVA's losses.

Although the TVA no longer receives congressional appropriations, it continues to receive large subsidies. The TVA pays none of the federal, state, and local taxes that private businesses pay. A 1993 study by Putnam, Hayes & Bartlett, a consulting firm retained by investor-owned utilities, estimated that annual cost-of-capital subsidies exceeded $1.2 billion, including the taxes that the TVA avoided. As a government-backed entity similar to Fannie Mae and Freddie Mac, the TVA can borrow money cheaper than private businesses. Currently, the TVA has about $26 billion of debt.

Moreover, the TVA doesn't have to incur the costs of complying with myriad federal, state, and local laws. Energy consultant Dick Munson reported that the TVA is exempt from 137 federal laws, such as workplace safety and hydroelectric licensing. The TVA can set electricity rates without oversight by the Federal Energy Regulatory Commission, which has jurisdiction over private utilities. The Securities & Exchange Commission has only limited jurisdiction to oversee the TVA. On top of that, the TVA is exempt from federal antitrust laws and many federal environmental regulations. It's also exempt from some 165 laws and regulations in Alabama and hundreds more laws and regulations in other states in which it operates. When the TVA wants to acquire more assets, it doesn't have to haggle, because unlike private businesses, it has the power of eminent domain. More than 15,000 people were expelled from their property to make way for the TVA.

Established by President Roosevelt in May 1933 as part of his first 100 Days, the TVA's roots actually go back to 1918 when President Woodrow Wilson decided that the federal government should get into the gunpowder business after German submarines sank several ships bringing nitrates from Chile. At the same time, E.I. du Pont de Nemours, the world's most experienced gunpowder manufacturer, wanted to build a gunpowder manufacturing facility at Muscle Shoals, Alabama, on the banks of the Tennessee River, and his company proposed building a hydroelectric plant to provide the power that was needed.

"Progressive" politicians were wary that du Pont might make money on the deal, so the decision was to have two gunpowder manufacturing facilities: one built by du Pont and the other by the federal government. The du Pont facility was finished for $129.5 million and produced 35 million pounds of canon powder before the Armistice (November 1918), while the government's facility produced nothing at all. Wilson's Muscle Shoals project became the starting point for the TVA.

It's run by three directors, each appointed by the president to staggered nine-year terms. Although the directors are sure to be political supporters, the unusual length of their terms gives them considerable independence, and they're not subject to constraints by investors, customers, or voters.

As a remedy for the Great Depression, the TVA didn't work. It created no new wealth and, through taxation, transferred resources from the 98 percent of Americans who didn't live in the Tennessee Valley to the two percent who did. Any spending that happened in the Tennessee Valley therefore was offset by the spending that didn't happen elsewhere. Those taxes reduced net incomes.

Much like any other complex public works project, it took an inordinate amount of time to build the TVA. Only three TVA dams were completed during the 1930s. The dams themselves were small—with less than one-twentieth the power-generating capacity of big western dams like Grand Coulee. Although the building process provided work for engineers and skilled construction workers—who earned above-average incomes—the dams simply came too late to have much impact on most people in the Tennessee Valley during the Great Depression.

To the degree that the TVA had any impact, it appears to be negative. The most important study of the effects of the TVA, conducted by energy economist William Chandler, estimated that in the half-century after the TVA was launched, economic growth in the Tennessee Valley increasingly lagged behind non-TVA southern markets. Chandler concluded, "Among the nine states of the southeastern U.S., there has been an inverse relationship between income per capita and the extent to which the state was served by the TVA...Watershed counties in the seven TVA states, moreover, are poorer than the non-TVA counties in these states."

In the non-TVA southern markets, there was a greater exodus of people out of subsistence farming into manufacturing and services, which offered higher incomes. Ironically, electricity consumption has grown faster in the non-TVA southern markets, because it tends to correlate with income. Subsistence farmers might be able to afford light bulbs, but they could not afford the electrical appliances that people in non-TVA southern markets were buying. Furthermore, despite the vast sums spent building TVA dams, water usage grew faster in the non-TVA southern markets.

In any case, it was a delusion to believe that there was one "key" (such as TVA-subsidized electricity) to eradicating poverty. Subsistence farmers needed equipment such as tractors, trucks, and hay bailers (which are powered by diesel fuel, not electricity). They needed to develop more skills, more sophisticated farming practices, and so on.

Backed by the power of the federal government, the TVA promoted electricity for home heating--even when oil and natural gas were cheaper. To the extent the TVA's home heating campaign was successful, it still squandered resources.

As for flood control, the TVA has flooded an estimated 730,000 acres—more land than the entire state of Rhode Island. Most directly affected by TVA flooding were the thousands of people forced out of their homes. And while farm owners received cash settlements for their condemned property, black tenant farmers received nothing.

As one might expect with a government monopoly that can ignore so many laws, there have been frequent reports of waste and possible corruption. According to TVA's own inspector general, these include lucrative executive perks, cozy consulting contracts, costly building leases, and much more. The TVA spent $15 billion building nine nuclear power plants—and none of them worked. The TVA hired a former Navy admiral to fix them, but he was charged with cronyism and bad judgment. Congressional investigations followed.

Although the TVA was established to build dams, it has expanded relentlessly (as bureaucracies do) to include 11 coal-fired power plants and three nuclear power plants as well as 49 dams—apparently with ambitions to expand the TVA's power-generating monopoly beyond the Tennessee Valley. Among other things, this has raised environmental concerns. Ralph Nader charged that the TVA "has the poorest safety record with [nuclear] reactors." On December 22, 2008, at the TVA's Kingston, Tennessee coal-fired plant, the dike of a 40-acre holding pond broke, spilling as much as a billion gallons of coal sludge with elevated levels of arsenic. The sludge covered some 300 acres up to six feet deep, damaging homes and wrecking a train. This spill reportedly was much bigger than the oil spill from the Exxon Valdez tanker that went aground in Alaska.

As the TVA's long record illustrates, voters rarely receive what they signed-off on when it comes to massive government programs. Despite all of the harm it has done, the TVA has grown into a powerful and politically unstoppable special interest that has done a grave disservice to the Tennessee Valley. Too bad today's advocates of a new New Deal seem determined not to learn from their predecessors' mistakes.

Jim Powell, a Senior Fellow at the Cato Institute, is the author of FDR's Folly, Bully Boy, Wilson's War, Greatest Emancipations, The Triumph of Liberty, and other books.