The Ludwig von Mises Institute
(The LVMI is a research and educational center devoted to classical liberalism -- often known as libertarianism -- and the Austrian School of economics. Grounded in the work of economists Ludwig von Mises and Murray N. Rothbard, LVMI seeks to advance the Austrian School of economics and promote the market economy, private property, sound money and peaceful international relations, while opposing government intervention as economically and socially destructive.)
AUBURN, Ala.-- Salvation by printing press
by William L. Anderson
With the midterm elections barely over, the Federal Reserve, in a move that gives even politics a bad name, has announced yet another cut in its key interest rates. The Federal Funds Rate is down to 1.25 percent, while the discount rate now stands at 0.75 percent.
No doubt, economists from all sides will applaud this "long overdue" move by Greenspan's fed, its first cut in 2002 after 11 in 2001. Writers from the "Supply Side" faction of economic thinking have been warning about the alleged dangers of "deflation," while others see the fed as being the last hope to "stimulate" the economy.
Austrian economists, however, are not clapping. While the economic mainstream may see Austrians as being obstructionist oddballs, I think that we have a few things to say about this latest fed move, which in our book is not a positive but rather a negative move that is likely to have opposite effects from its intent. To put it another way, the Fed is not hastening economic recovery; it is impeding it.
Writers on this page have expounded upon the Austrian Business Cycle Theory, or ABCT, developed by Ludwig von Mises and F.A. Hayek, in which attempts by central monetary authorities to artificially increase monetary growth through credit creation leads to an unsustainable boom and, finally, to the bust. This last business cycle was classic in how it fit the ABCT.
Unfortunately, just as the drunk is beginning to become a bit sober, the Fed pours some more pure grain alcohol into the punchbowl. To put it another way, the ABCT declares that the only way to recovery is to permit the full liquidation of mal-invested capital and resources that occurred during the boom. The Fed's actions once again are impeding that progress.
One place where Austrians differ strongly from the economic mainstream is in the view that the recession or bust is a necessary part of the business cycle. As Murray N. Rothbard put it in his classic "America's Great Depression," once the bust has occurred, the worst thing government can do is to try to stop it. Liquidation of capital and other mal-investments is going to happen whether the government wants it to happen or not. It is best to permit nature to run its course, which hastens the economic recovery.
Mainstream economists, on the other hand, insist that an economic contraction should never be permitted to happen, and if it does, government must do all it can to stop the process at once. In their minds, the liquidation phase of the business cycle somehow is unnatural and must be restrained at all costs.
To see this belief in action, one must look at Japan. In the late 1980s, there were a number of bubbles from the stock market to real estate in that country, as its aggressive export policies led to large infusions of cash both from abroad and also from its own central bank. (This was a time when Japanese speculators were purchasing huge amounts of real estate in the United States at unheard of prices, leading the pundits to declare that Japan would soon "own" this country. No one is uttering such nonsense today.)
Since about 1990, Japan's economic picture has darkened with the country seemingly mired in a permanent recession. While some "economists" like Paul Krugman have argued that the issue in Japan is simply a matter of aggregate demand (Japanese save too much, he believes), the real problem seems to be that Japan's authorities, at the urging of its troubled but politically powerful businesses, are not permitting the necessary liquidation to occur.
For example, Japan's banks still have not written off the bad real estate loans from more than a decade ago. Furthermore, many of its manufacturing firms are still trying to conduct business as though the boom were still a reality. No one, but no one wants to liquidate, since doing so obviously would mean businesses would shut down and Japan's "vaunted" corporate welfare system would be stretched to its limits. Thus, the people of Japan continue to live in a world of economic fiction, waiting for Godot or whoever will wave the magic wand of recovery, while Japan's central bank cuts its lending rate to zero.
Over the past decade, Japan's government took on a large number of construction projects aimed at giving the economy a "fiscal stimulus," taking on unprecedented levels of debt in the process. Krugman wrote that while one might make fun of the worthless bridges, roads, and "tunnels to nowhere" that were built, the massive projects in his mind kept Japan from sliding into depression. In other words, Krugman's recipe to cure the problem of massive mal-investments is for the government to get in the act itself and have its own set of wrongheaded investments.
In the meantime, the recession lingers. This is not due to any mystery of the business cycle, but rather an example of natural law at work. Present consumer markets simply will not support Japan's overburdened capital structure, and all the gyrations and manipulations by the authorities will not change that simple fact. Had the government permitted the liquidation of mal-invested capital a decade ago, Japan would be in recovery today. Instead, it has a bleak future.
While many signs here have not been good, for the most part I have been optimistic over the last year about our chances for economic recovery. The reason I say that is because the necessary liquidations here have been going apace. Granted, Congress and the White House have committed major blunders like the infamous post-Sept. 11 airline bailout and the disastrous steel tariffs, but much of the needed "cleansing" of mal-invested capital has continued apace and with little fanfare.
The stock market bubbles of the late 1990s are ancient history, and the government's Microsoft settlement, while an abomination, at least gives some finality to a case that has stymied growth and investment in the high technology sector for several years. In other words, the basis for recovery is being laid -- despite the wrongheaded efforts of the Fed.
However, by cutting interest rates and pushing up the money supply, the Fed has done whatever is possible to make the necessary liquidation as long and painful as possible. The rate cuts have sent very different messages from what market forces have been literally screaming for the past two years: deal with mal-invested capital, please!
Instead, the artificially low interest rates created by the Federal Reserve System have sent the false signals to investors that long-term capital projects are feasible -- at the same time the financial markets have been saying the opposite. This is extremely confusing, to say the least.
If investors are doing what the Fed wishes -- making large-scale capital investments -- then they are prolonging the recession by trying to continue to string out bad investments. On the other hand, it also is possible that investors recognize what the politicians refuse to see, that being many long-term projects that seemed promising a few years ago now are not viable.
One thing is for sure. Greenspan's repeated attempts to manipulate interest rates do nothing for the economy. At best, they are useless, except that they mean when the recovery occurs, investors will be enticed by artificially low interest rates and are sure to make large-scale errors in capital spending, creating conditions for a future recession. At worst, they encourage continued investments into projects that should be in the process of liquidation, not expansion.
The best thing Greenspan can do, other than to close down the fraudulent entity known as the Federal Reserve System, is to sit back and do absolutely nothing. A sedentary Alan Greenspan harms no one. When he is active, however, watch out. The man is dangerous.
(William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University.)
The Cato Institute
WASHINGTON -- Is attacking Iraq worth risking smallpox?
by Charles V. Peña
According a recent administration intelligence review, four countries, including Iraq, possess covert stocks of the deadly smallpox virus. The CIA's Weapons Intelligence, Nonproliferation, and Arms Center, known as WINPAC, has "high confidence" that Iraq has the virus.
At least one person who has access to the intelligence information offered to "bet my next year's salary" that Iraq has smallpox.
So as the Bush administration continues to push the country ever closer to war against Iraq, what is it doing to protect the public against the possibility of Iraq using smallpox or giving it to al Qaida terrorists? Nothing. Nada. Zip. Zero.
CIA Director George Tenet has warned that if the United States attacks Iraq, Saddam Hussein would no longer be deterred from assisting Islamist terrorists in conducting attacks against the United States. Yet according to one person involved in the smallpox debate, "the decision is still sitting on his (the president's) desk."
And the reason a decision hasn't been made is because the bureaucracy is apparently still engaged in a debating society on the issue.
Vice President Cheney is said to be pressing for mass vaccination. Health and Human Services Secretary Tommy Thompson prefers voluntary vaccination, but wants to wait at least two years for an improved vaccine before making it available to the public. Meanwhile, the Advisory Committee on Immunization Practices at the Centers for Disease Control and Prevention continues to push for limiting vaccinations to first responders and waiting for an actual outbreak to begin more widespread vaccination of the public.
The first responsibility of the federal government is to protect its citizenry and none of these plans is acceptable. There is enough smallpox vaccine in the stockpile (over 150 million doses with three times that by the end of the year) to begin voluntary vaccination now.
The most effective defense (and deterrent) against a smallpox attack is a well-vaccinated population. A study by experts from Yale University and the Massachusetts Institute of Technology shows that vaccination of the U.S. population (even if only a fraction was vaccinated) before an attack worked best to reduce fatalities and the number of days to contain the outbreak when compared to all post-attack responses (including mass vaccination).
There's no known cure for smallpox. The vaccine is most effective if administered beforehand. Immediate vaccination is the only way to combat the virus after infection. The problem is that the first symptoms of smallpox usually appear 12 to 14 days after infection and the vaccine needs to be administered within three to five days of contracting the virus.
The bottom line is that an unvaccinated population is completely vulnerable and an attractive target. In a densely populated and highly mobile society, the intentional introduction of the smallpox virus into the population will outpace the ability of public health officials to inoculate against its spread. And in the inevitable post-attack panic and confusion, the medical infrastructure would buckle under the weight of millions of people demanding immediate vaccination.
A better approach than leaving the population exposed and responding after an attack would be to take preventative measures now. Because there are known risks with the smallpox vaccination (in particular for those with weakened immune systems, pregnant women, and very young children), individuals should be allowed to make a voluntary, informed decision (in consultation with a doctor) to understand, manage, and mitigate those risks.
Those who are most at risk to the vaccine could elect to opt out and not be vaccinated, thereby greatly reducing the number of potential deaths and side effects due to the vaccine.
Even if only a fraction of the population were vaccinated beforehand (various polls show that 50 percent or more of the public would like to be vaccinated), a "community immunity" effect would occur that lowers the rate of transmission of the disease and significantly increases the chances of success of a post-attack vaccination strategy. As a result, the chances of a successful attack would be lowered, which could also have a deterrent effect and thus might prevent such an attack from occurring.
In its rush to engage in regime change in Iraq, the Bush administration is knowingly putting the public at grave risk -- which is in and of itself a questionable policy -- but doing nothing to protect it. Continuing to leave the U.S. population vulnerable, when an adequate stockpile of smallpox vaccine exists, seems foolish at best and irresponsible at worst. After Sept. 11, Americans deserve better from their government.
(Charles V. Peña is senior defense policy analyst at the Cato Institute.)