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Think tanks wrap-up

WASHINGTON, July 29 (UPI) -- The UPI think tank wrap-up is a daily digest covering brief opinion pieces, reactions to recent news events and position statements released by various think tanks.


National Center for Policy Analysis

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(NCPA is a nonprofit, nonpartisan public policy research organization whose goal is to develop and promote private alternatives to government regulation and control, solving problems by relying on the strength of the competitive, entrepreneurial private sector.)

DALLAS. Texas -- The "wealth effect" and the stock market decline

by Bruce Bartlett

The sharp fall in the stock market is wreaking havoc with economic forecasts these days. Economists cannot decide whether it means something or nothing. And if it means something, they are not sure if it is a cause or an effect.

On the one hand, the stock market is presumed to be a forward-looking indicator. In theory, market participants make a bet on whether the economy -- and therefore corporate earnings -- will be rising in the near future or falling. Consequently, a falling stock market might indicate a belief on their part that prospects for the economy and earnings are poor. Since they are betting their own money on their judgment, one has to give serious consideration to the possibility that they are right.

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The problem is that they are often wrong. There have been many occasions when the stock market fell sharply without a recession following. According to economist Brian Nottage, there have been 15 "bear markets" since 1929, where stock prices fell for an extended period of time. But almost half were not associated with a subsequent recession. The stock market fell sharply in 1987 and 1998, for example, without any meaningful impact on the real economy.

An alternative view is that the stock market may be a poor predictor, but nevertheless may affect subsequent economic activity on its own. That is, a fall in the stock market may so erode personal wealth that individuals will stop spending. Since consumption represents about two-thirds of gross domestic product, even small changes in consumer spending can affect economic growth.

Economists call this the "wealth effect" and spend a lot of time studying it. The Federal Reserve was strongly influenced by research in this area to tighten monetary policy in 1999. It thought that people were becoming too rich and that this would translate into higher spending, which would put upward pressure on productive capacity and cause inflation. This led the Federal Reserve to raise interest rates in a conscious effort to "prick" the stock market bubble and head off a rise in spending and inflation.

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My view has been that if the stock market was in some kind of unsustainable "bubble," resulting from "irrational exuberance" -- to use Alan Greenspan's phrase -- then sooner or later it would have corrected itself. Policymakers have no business second-guessing the market and making their own judgments about whether the market is too high. Only people risking their own money have that right.

The Fed's concern is only legitimate if there is a meaningful correlation between stock prices and consumer prices. But the evidence supporting such a relationship is extremely tenuous. To the extent that it operates at all, it must be through higher stock prices causing an increase in consumption. That is, people spending their higher wealth on cars, clothes and other consumer goods.

Some studies find relatively large effects on spending from changes in wealth, others find very little. But even those that find large effects report increases in spending of just five cents to six cents for every $1 increase in wealth.

One reason for the contrary findings may be that prior to 1978, when the 401(k) account was created, most stocks were held in ordinary brokerage accounts. People had easy access to funds in them. But 401(k)'s are designed for retirement saving. The size of such accounts may affect retirement behavior, but probably don't affect current consumption, because people can withdraw funds from them only by paying a substantial penalty.

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In any case, for those in the middle class, wealth is primarily in housing, which has done very well even as the stock market has fallen. For many people, their houses have increased in value by more than their stocks have fallen. Since the wealthy own most stocks, they are the ones who have suffered most. But since they are wealthy, it is doubtful that they changed their spending much on the way up or on the way down. Therefore, the economy as a whole is largely unaffected.

The impact of the falling stock market is mainly psychological. When people lose money -- even money they never expected to spend -- they feel bad. This may cause them to retaliate against those whom they believe are responsible -- generally, the political party in power. Even if it didn't cause the losses, it should have done something to prevent them, people think.

Thus the impact of the fall in the stock market is more likely to be on elections than on the economy. I believe that the economy is fundamentally strong and is unconnected to the stock market's problems. But if stocks do not rebound before November, Republicans in Congress could still pay the price.

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(Bruce Bartlett is a senior fellow at the National Center for Policy Analysis.)


The Institute for Public Accuracy

Institute for Public Accuracy

(The IPA is a nationwide consortium of policy researchers that seeks to broaden public discourse by gaining media access for experts whose perspectives are often overshadowed by major think tanks and other influential institutions.)

WASHINGTON -- A 'sham hearing' on Iraq; weapons sites 'defunct and destroyed'

The Senate Foreign Relations Committee is scheduled to hold hearings on United States policy toward Iraq beginning Wednesday July 31.

-- Scott Ritter, former, former a chief United Nations weapons inspector in Iraq and is the author of "Endgame: Solving the Iraqi Problem Once and For All."

"Sen. Joe Biden, D-Del., is running a sham hearing. It is clear that Biden and most of the congressional leadership have pre-ordained a conclusion that seeks to remove Saddam Hussein from power regardless of the facts, and are using these hearings to provide political cover for a massive military attack on Iraq. These hearings have nothing to do with an objective search for the truth, but rather seek to line up like-minded witnesses who will buttress this pre-determined result ... This isn't American democracy in action, it's the failure of American democracy. Before we go to war with Iraq, we must be able to determine that Iraq poses a threat to the national security of the United States. Such a determination must be backed up with substantive fact. I believe that Iraq does not pose a threat to the United States worthy of war. This conclusion is shared by many senior military officers. According to President Bush and his advisers, Iraq is known to possess weapons of mass destruction and is actively seeking to reconstitute the weapons production capabilities. I bear personal witness, through seven years as a chief weapons inspector in Iraq for the United Nations, to both the scope of Iraq's weapons of mass destruction programs and the effectiveness of the U.N. weapons inspectors in ultimately eliminating them. While we were never able to provide 100 percent certainty regarding the disposition of Iraq's proscribed weaponry, we did ascertain a 90 percent to 95 percent level of verified disarmament. These are the sort of facts that must be included in any hearing that seeks to determine the threat posed by Iraq today. It is clear that Sen. Biden and his colleagues have no interest in such facts."

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-- Hans Von Sponeck, former United Nations Assistant Secretary General, Von Sponeck headed the United Nations "oil-for-food" program until he resigned two years ago in protest over the continued sanctions on Iraq. He was in Iraq two weeks ago, visited sites purported to be weapons sites and found them to be "defunct and destroyed."

"Evidence of al Qaida/lraq collaboration does not exist ... Six years of revisions to sanctions policy on Baghdad have repeatedly promised 'mitigation' of civilian suffering. Yet, in 1999, UNICEF confirmed an estimated 5,000 excess child deaths every month above the 1989 pre-sanctions rate. Four months ago, UNICEF reported that more than 22 percent of the country's young children remain chronically malnourished. Credible opposition groups outside Iraq have called for de-linking economic and military sanctions. At the March Arab summit in Beirut, all 22 Arab governments (including Kuwait) called for the same. If the economic embargo on Iraqis not in their interest, then in whose interest is it?"


The Reason Foundation

LOS ANGELES -- Happy 90th to a "Hero of Freedom:" Because of Milton Friedman, we're more free to choose.

By Joel Miller

Not too long ago, I wrote a column about Milton Friedman's position on the drug war (he wants to end it). A conservative reader, in a huff about the Nobel-winning economist's libertarian side being so prominently aired, wrote to tell me that political scientist Harry Jaffa was far more important than Friedman.

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No offense to Jaffa or his fans, but if Friedman hadn't come around the mountain when he did, Jaffa would be unemployed.

Friedman, who turns 90 on July 31, was recently toasted by President George W. Bush in honor of his life's achievements. This "hero of freedom," said the president, "has used a brilliant mind to advance a moral vision: the vision of a society where men and women are free, free to choose, but where government is not as free to override their decisions ... All of us owe a tremendous debt to this man's towering intellect and his devotion to liberty."

Unfortunately, fellows like my rankled conservative reader are quick to display something else: ignorance and ingratitude.

If you're looking for the father of the 20th century libertarian renaissance, start your paternity tests with Uncle Milty. Certainly fingers should point in the direction of Mises, Hayek, and other such luminaries. Murray Rothbard and Ayn Rand were both making sizeable waves as Friedman was wading into the pool. But Friedman really deserves the brass ring for creating both academic and popular support for the idea of reducing government controls and increasing individual freedom.

Mises and Hayek got the ball rolling after World War II, but Keynes and his cronies had all the loot and influence. The libertarian economic position was muffled and marginalized. Something had to shake it loose. That something was Friedman, who helped create a massively influential free-market academic network based at the University of Chicago.

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In 1962 Friedman published "Capitalism and Freedom," a book that laid the foundation for his popular works to follow. In books such as "Capitalism and Freedom" and "Free to Choose," his Newsweek columns, and various TV documentaries, Friedman effectively argued against Social Security, government monopoly control of education and the post office, military conscription, drug prohibition, subsidies for farming and housing, rent controls, high taxation, tariffs, occupational licensing, reckless government spending, Keynesian inflationary meddling, and the reams of regulatory red tape so adored by bureaucrats and statist desk jockeys.

"It is testimony to Milton Friedman's tireless, good-natured efforts and the vigor of his arguments that economic ideas once regarded as hopelessly out of date are now being seriously discussed again," said Playboy magazine when it interviewed him in 1973 (one of the reasons why the old "I read Playboy for the articles" protest carried any weight).

Nearly 30 years on, these ideas are more than seriously discussed -- they now carry the day.

Friedman was instrumental in sacking military conscription and getting a rein on marginal tax rates. His basic monetary position was proven right in the 1970s when stagflation put the lie to Keynes' theory and had folks looking to wooden nickels as a safe haven for their money. Friedman's case for drug legalization is increasingly popular as the culture shifts to understand that political, economic, and civil liberties are indivisible. And his school voucher evangelizing, started almost 50 years ago, has even won converts on the Supreme Court.

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Give what he has achieved, it's hard to overstate the importance of Milton Friedman's role. This makes scarier still the thought that he once wanted to become an accountant.

The reason for his influence? Certainly the political seas were increasingly churning with libertaria in the 1970s and 1980s, but Friedman stood out. In a 1995 Reason magazine interview, Friedman was asked why he had the respectability and presence he has.

Answer: "That's because of only one thing: I won the Nobel Prize. What, are you kidding yourself?"

I can appreciate some humorous self-deprecation. But the real reason is that Friedman saw what was attainable and lunged for it.

"The difference between me and people like Murray Rothbard is that, though I want to know what my ideal is, I think I also have to be willing to discuss changes that are less than ideal so long as they point me in that direction," he told Reason. "So while I'd like to abolish the Fed, I've written many pages on how the Fed, if it does exist should be run."

Another example? Friedman is opposed to public money in schools, but led the voucher charge. "I see the voucher as a step in moving away from a government system to a private system." Vouchers are a good answer, however partial, to government involvement because they are attainable. The best answers are the ones you never achieve because they put Uncle Sam out to pasture.

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Others in the libertarian world did not have the same impact on policy because they demanded 200-proof anti-statist measures to which only a handful of people would assent. Hence the early definition of libertarians: 12 guys selling newsletters to each other.

Friedman, by being pragmatic -- and principled -- with his message, expanded that pool of people far beyond a dozen. In the 1980s his ideas were smuggled into the Reagan White House, followed in the 1990s by the statehouses of the globe. Said Bush in his toast: "The rest of the world is finally catching up with Milton Friedman."

Let's hope we do more than that. Let's push his work forward so we have plenty of good news to report when he turns 100.

(Joel Miller is the books editor for WorldNetDaily.com.)

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