Liberty & Power: Group Blog
Just like they were earlier this week in North Waziristan.
Although Morrie’s research specialty was the economic history of India, a field to which he made seminal contributions and in which he was a recognized authority, he seemed to know about everything―European history, sociology, psychology and psychoanalysis, labor relations, you name it. His mind was constantly leaping from one area of knowledge to another and making connections that broadened one’s understanding. When he lectured, he did not write equations or carefully drawn graphs on the blackboard, as other economists did, but rather terms and labels inside circles, with arrows running from one circled term to another and with wild swirls gobbling up the entire scenario, until the board ultimately depicted something like the debris left after a tornado has struck. He created all of this illustrative interconnection while lecturing in an animated, yet scholarly manner. Although his rocket-science colleagues in the economics department looked down on him―truly an inversion of a just order of intellects―the graduate students loved him, although they sometimes were at a loss to know what to make of his instruction.
Morrie was a good natured man, a pleasure to spend time with. He had a wealth of fascinating stories to tell about his various experiences while living in India on several different occasions and about his service in the Army during World War II, among other things. He was, for example, a member of a small Strategic Bombing Survey team that made the first Allied contact with, and extensively interviewed, the German minister of armaments and war production Albert Speer after the German surrender in 1945. John Kenneth Galbraith was also a member of this team, and so Morrie had a raft of stories about him, too.
My close friendship with Morrie was cemented early in my time at the UW. In 1968, I was approached by a group of students who were circulating an antiwar petition and wanted someone to take it around to the faculty to solicit their signatures. Being staunchly opposed to the war, I agreed to perform this task. Little did I know how my colleagues, some of whom I had yet to meet, would react to my approaching them in this capacity. Some appeared to think that I was a lunatic who had escaped from an asylum. Most regarded me as they would have regarded someone offering them a complimentary bottle of cholera germs. Morrie, however, was ever so glad to sign. In a department with thirty-six faculty members, he was the only one who signed, besides me.
Morris David Morris was a sophisticated, widely learned, highly cultured, emotionally upbeat person, and I, let us say, was none of these things. Yet we became good friends. I had the greatest respect for him, and he was willing to overlook my many deficiencies. I learned a great deal from him over the years, and his friendship was a blessing to me.
He lived to see his 90th birthday, and so far as I was ever aware, he lived for the most part a good and happy life. He was one of the most decent human beings I have had the good fortune to know. May he rest in peace.
A brief obituary appears here, a much longer, more detailed one here.
In fact, monies given to Ron Paul or Gary Johnson are the only political contributions to candidates worth making. If either of these two men are not the Republican nominee in 2012 it really won’t matter who the GOP candidate is because the American people will face the same choice they had in 2008. They will be stuck with picking between two people sharing the same goal, destroying the United States and its Constitution with a combination of perpetual warfare and accumulation of massive amounts of debt.
- Ludwig Von Mises (1922)
The secret is between our legs, claims Mrs. Clinton. Recently, a top news organization was kind enough to give her a perch from which to sing us her surefire plan to Get The Economy Growing Again, via"identity economics", if you will."One of the biggest growth markets in the world may surprise you", she starts off, and unsurprisingly (for those of us who have been listening to her for the last few decades) it's women.
Click here to read the rest.
If my son ever gets accepted to Harvard, I don’t know if I’ll be proud or appalled.
(h/t) Austin Petersen
The worst to be feared and the best to be expected can be simply stated.
The worst is atomic war.
The best would be this: a life of perpetual fear and tension; a burden of arms draining the wealth and the labor of all peoples; a wasting of strength that defies the American system or the Soviet system or any system to achieve true abundance and happiness for the peoples of this earth.
Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed.
This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals.
It is some 50 miles of concrete highway. We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.
This, I repeat, is the best way of life to be found on the road the world has been taking.
This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron.
As James Ledbetter writes in his recently published book Unwarranted Influence: Dwight D. Eisenhower and the Military-Industrial Complex (Yale University Press, 2011), “Never before, and rarely afterward, did a U.S. president so passionately and prominently lay out a vision for ending tensions with the Soviet Union or so frankly criticize the social costs of military spending” (p. 69).
We know, of course, that this peace initiative was stillborn. The Soviets did not bite, and the U.S. government did little or nothing to pursue the matter, opting instead to build an ever more imposing and frightful national insecurity state. We may all rejoice that the more horrible of the two possible consequences of this course of action, atomic war, did not occur (especially when we consider how narrowly such war was averted on several occasions).
Yet, if the world escaped the apocalypse of atomic war, it did not and could not avoid the costs of waging the Cold War and its successor, the War on Terrorism. Nor have these costs been merely sacrifices of food, clothing, homes, highways, schools, and hospitals, as Eisenhower illustrated in his speech. In a deeper sense, the costs have taken the form of lost confidence in humanity and its future, of lost hope for a world of secure peace and true prosperity.
Eisenhower declared that his proposals “conform to our firm faith that God created men to enjoy, not destroy, the fruits of the earth and of their own toil. They aspire to this: the lifting, from the backs and from the hearts of men, of their burden of arms and of fears, so that they may find before them a golden age of freedom and of peace.” If only that fleeting chance for peace had been seized before it disappeared into the abyss of hatred, fear, and waste.
One modern use of anti-Semitism is to raise funds for National Public Radio (NPR). Much in the news today is a meeting between conservative filmmaker James O’Keefe and two NPR executives Ron Schiller and Betsy Liley. The NPR people mistakenly thought they were sitting down with two representatives of the Muslim Education Action Center (MEAC) a group fronting for the Muslim Brotherhood about to donate five million dollars. A video of this encounter is drawing attention for remarks by Schiller and Liley disparaging Tea Party members and Republicans as well as a statement of belief that in the long run NPR would be better off without federal funding. Less talked about is the fact that these NPR leaders were willing to make a deal that could not help but influence their content in an anti-Semitic direction. They sought funding from what they believed was a front group for the Muslim Brotherhood, an organization with strong historic ties to Nazism. Seldom has the media bias against the Jewish people in Israel been so clearly explained and blatantly put on display.
Cross posted on The Trebach Report.
David T. Beito
Here is the informative article on the event from the Tuscaloosa News.
Jeffrey Rogers Hummel
To understand why, we need to look more closely at the relationship between the flows in the Fed’s income statements and the stocks reported in the Fed’s balance sheet. The Fed’s income primarily consists of interest earnings (and any capital gains) on its assets, whether Treasury securities, loans, or private securities. That income is used to cover the Fed’s operating expenses and to pay a fixed dividend of 6 percent on the “shares” owned by member banks, with most of the residual kicked back to the Treasury. Thus, during calendar year 2009, the Fed’s total income was $63.1 billion. Of that, operating expenses (including interest paid out) accounted for $9.7 billion, dividends paid to member banks for $1.4 billion, increases in the Fed’s capital account (about which more later) for $4.6 billion, and remissions to the Treasury for $47.4 billion (or 75 percent of the total).
What makes these transactions unlike those of any private firm or household is that they are nearly all conducted in the Fed’s very own liabilities: dollar-denominated notes and Fed deposits. Moreover, these are not genuine liabilities, being only claims to more of the same. Assume for a moment that the Treasury pays any interest it owes to the Fed in the form of dollar bills it has just received as taxes from the general public. Because those dollars when outstanding were listed as liabilities on the Fed’s balance sheet, the payment will have no impact on the total balance sheet, so long as the Fed takes no further action. Outstanding Federal Reserve notes along with the monetary base will fall by the amount of the payment, and the Fed’s capital account rises by the same amount. Total assets remained unchanged on one side of the balance sheet as will total liabilities plus net worth on the other side. Only if the Fed employs this income to purchase further assets does the balance sheet increase, with assets rising on one side by the same amount as the capital account on the other, while total outstanding liabilities (and the monetary base) remain constant. This later scenario is analogous to what usually happens in the short run to the balance sheet of private firms, whose dollar income is obviously not in the form of their own liabilities. Yet in either scenario, the flow of income to the Fed initially shows up as an increase in its capital account.
Of course, the Treasury does not pay interest to the Fed with actual dollar bills, much less ones that it has just acquired. When the Fed earns any interest on assets that have been privately issued, the payment is in the form of a check, or its equivalent, written against some bank. But the check is a claim on bank reserves, which are interchangeable with currency, so the process works out pretty much the same as above, with any initial decline appearing in the reserve component of the monetary base rather than the currency component. Although the Treasury, like private parties, has what are called “tax and loan” accounts at private commercial banks, these accounts are used mainly for the deposit of tax revenue rather than for Treasury payments. The rationale for the tax and loan accounts is to diminish the impact of tax payments on the total reserves of the banking system.
Treasury payments, in contrast, are made from Treasury deposits maintained at the regional Federal Reserve banks. Funds are routinely funneled out of the tax and loan accounts into these deposits before they are paid out to cover Treasury expenditures. These deposits, however, are just another liability of the Federal Reserve, although in this case one that does not count as part of the monetary base. So with no further action by the Fed, much as in the first scenario above, a Treasury interest payment would cause its deposits to fall by the same amount that Fed capital rises, with no change either in the Fed’s balance sheet totals or the monetary base. If the Fed on the other hand uses the payment to acquire a net asset, as in the second scenario above, the balance sheet totals and the monetary base go up by the amount of the payment. Except for the differing impact on the monetary base, everything else therefore works out the same as if the payment had been made in dollar bills.
Now just reverse all these transactions when the Fed remits its residual earnings to the Treasury. Treasury deposits at the Fed will go up with an equal and offsetting decline in the Fed’s capital account. If the Fed takes no further action, balance sheet totals are unchanged. If the Fed sells off assets decreasing the monetary base, balance sheet totals fall by the amount of the remittance. However, decisions about monetary policy dominate changes in Fed assets and the base, with the Fed easily offsetting any perturbations arising from earnings and remittances, leaving no discernable impact on the base. To top that off, since excess earnings are distributed to the Treasury on a weekly basis, the amounts involved are trivial, when compared to the size of the Fed’s $2 trillion plus balance sheet, and never amount to more than a few billion dollars.
Which brings us finally to the January 6 announcement. It has brought about two related changes in the accounting procedures, neither of which seems at first glance to be significant. First, the residual earnings slated to go to the Treasury are now listed not as surplus capital but instead as a separate liability, somewhat misleadingly labeled “Interest on Federal Reserve notes due to U.S. Treasury.” (The label is misleading because Federal Reserve notes actually earn no explicit interest for the Fed, nor does the Fed’s remittance to the Treasury bear any direct relationship to the amount of Federal Reserve notes outstanding.) This new liability gets its own line toward the bottom of the H.4.1 release in the “Statement of Condition of Each Federal Reserve Bank,” which gives individual balance sheets for each of the twelve Fed district banks, but is lumped into the category of “Other liabilities and accrued dividends” in the “Consolidated Statement of Condition of All Federal Reserve Banks,” which combines the balance sheets over all districts and sits just above in the release. In other words, a trivial item that once showed up as fluctuations in the capital account now shows up as a fluctuating liability.
The second change in the January 6 announcement requires a closer look at the Fed’s capital account. Both before and after the announcement, the account has been subdivided into three categories: “Capital paid in,” “Surplus,” and “Other capital accounts.” The last of these three is where the residual earnings to be remitted to the Treasury used to show up, but now that they have been shifted into a liability, the amount in “other capital accounts” has so far stayed at zero. “Capital paid in” refers to the nominal shares, mentioned above, that member banks hold in the district Fed where they are located. These shares are fixed in value and cannot be resold on a secondary market; and the amount each member bank must purchase is required to equal 3 percent of the bank’s own capital. So rather than representing true ownership, it is more accurate to think of these shares as a bond-collateral requirement once removed. The banks must invest in the Fed, which in turn buys Treasury securities. The banks then get a fixed 6 percent dividend out of the Fed’s earnings. Whether that return is a good deal or not depends on prevailing interest rates and where the banks that are members of the Fed might have invested their funds otherwise.
As banks change in size or join and leave the Fed, the number of such shares can grow (or shrink), and consequently so does the amount of “capital paid in.” But the Federal Reserve Act further required the total capital of each district Fed to be twice the amount of capital paid in by member banks, and that additional amount is listed in the Fed’s capital account as “surplus.” In essence, this represents retained earnings, a small part of the Fed’s income that does not cover operating expenses and yet is not remitted to the Treasury. Prior to the January 6 announcement, the amount of surplus capital was only adjusted to exactly equal (as required by law) the amount of capital paid in at year’s end, so the two could vary slightly from week to week. But as a result of the January 6 change, these two amounts are being equalized on a daily basis. And doing so necessarily alters slightly the liability shown as owed to the Treasury. For some of the Fed’s twelve districts, therefore, the category of “Interest on Federal Reserve notes due to U.S. Treasury” can temporarily appear as negative, although this washes out for the system as a whole. In short, both of these changes result only in minor shifts in where the flows of Fed income and payments temporarily show up on the balance sheet.
It is true that these two changes could affect how the Fed’s balance sheet reports any losses. What if the Fed’s portfolio of mortgage-backed securities and other risky assets reduces its income so low that its residual earnings completely disappear and turn negative? Such losses conventionally would cause first a decline in the Fed’s surplus capital, and when that is wiped out, a decline in the paid-in capital of member banks. The worry is that the January 6 change will now permit the Fed instead to book losses as a negative liability, appearing to leave the capital account untouched. However, if the Fed can now permanently carry a negative liability on its balance sheet, it could have just as easily permanently carried a negative entry for “other capital accounts,” with the same result: no decline in paid-in and surplus capital. Admittedly, total capital would still have registered a decline. But the reason the Fed can easily get away with either form of accounting legerdemain is because its income and payments are in its own liabilities. Consequently, the Fed cannot de facto go bankrupt (at least unless the Treasury or the entire U.S. government does as well). It can continue to cover its operating expenses, to buy more assets, or even to make subventions to the Treasury simply be increasing the monetary base, ad infinitum.
In this respect, the Fed is like the Treasury, which issues that part of the monetary base consisting of coins. Indeed, it is at least conceivable that the Treasury, on its own, could generate severe inflation by minting lots of quarters and dollars. Despite the fact the pennies and nickels now cost more to produce than their face value, the U.S. Mint’s operations overall still generate positive seigniorage, which shows up in the U.S. government’s budget as a receipt. Because most of the national government’s assets consist of uncertain future tax revenue, the government never compiles or reports a complete balance sheet for itself. In fact, future revenue is the only ultimate asset that backs up all the Treasury securities in the Fed’s portfolio. Consequently, the asset that corresponds to the Treasury’s “liability” of outstanding coins is never directly reported. But you can indirectly figure it out from the Fed’s H.4.1 release. The weekly release not only provides the consolidated balance sheet for the Federal Reserve System standing alone, but the release’s first section, “Factors Affecting Reserve Balances of Depository Institutions” has always combined the Fed’s balance sheet with the monetary accounts of the Treasury in order to present a full picture of all the factors affecting the monetary base.
This is why “Treasury currency outstanding” in that section of the release is a “factor supplying reserves” to the banking system. In effect, it is an “asset” in the combined monetary accounts. The vaults of the Fed hold a small amount of coin, which is therefore listed in the balance sheet for the Fed alone as an asset. But most Treasury coin is included with Federal Reserve notes as “Currency in circulation” as a “factor absorbing reserves,” or a “liability,” in the release’s combined monetary accounts. This total, which includes the vault cash of banks as well as cash held by the general public, is consequently always slightly larger than the liability “Federal Reserve notes” in the balance sheet for the Fed alone. The difference between the two is the estimated amount of coin being held by the public (minus the small amount of cash that the Treasury holds in the form of actual Federal Reserve notes, which is listed in the combined monetary accounts as another “factor absorbing reserves”). The net effect is that in the combined monetary accounts, most Treasury coin appears as both a liability in the hands of the general public and a fictive asset.
The reason this sounds complicated, if not totally abstruse, is because it is. Since the Fed was created, it has combined its own balance sheet with the monetary accounts of the Treasury in a confusing fashion, originally driven in part by the real-bills doctrine and genuine misunderstanding at the time about how the Fed affects the money stock. Milton Friedman and Anna Jacobson Schwartz sorted out these accounting obscurities in their Monetary History of the United States, 1867-1960, at the very end of Appendix B (pp. 797-98), where they show how to consolidate the Fed and Treasury balance sheets in a simple, straightforward fashion. For anyone interested in working through the intricacies of this part of the Fed’s H.4.1 Release, I highly recommend those passages in their classic work. But for our purposes, the important conclusion illustrated by Friedman and Schwartz is that the only actual asset backing up most of monetary base—whether it takes the form of Treasury coin, Federal Reserve notes, or commercial bank deposits at the Fed—is a “book entry to balance,” or as they put it more succinctly, “fiat.” And just as the Treasury can issue coins to cover government expenses without acquiring any asset of market value, so too can the Federal Reserve. After all, that is what fiat money is about.
Admittedly, pure fiat does not back up the entire monetary base. Both the Treasury and the Fed hold some genuine assets. For instance, the Fed still holds gold certificates, an asset of the Fed and liability of the Treasury, which in turn owns the actual gold at Fort Knox. The certificates are valued on the Fed’s balance sheet at the historical price of $42.22 on once. At current market prices, this asset would jump from $11 billion to around $340 billion, surely enough to cover a lot of Fed losses on other assets. I do not know whether the Fed could conduct such a revaluation entirely on its own authority or whether it would require the cooperation of the Treasury and Executive or even of Congress. But the ease with which this asset can be revalued, and the very fact that it does not show up in the Fed’s balance sheet at its current market value, underscores the ultimate irrelevance of Fed profits or losses.
In essence, the Fed functions—as do nearly all of the world’s central banks—like a giant legalized counterfeiter. It generates revenue the same way as any counterfeiter, by issuing money that imposes an implicit tax on the general public’s real cash balances. Therefore, it can no more be driven insolvent de facto than a successful, undetected, and illegal private counterfeiter. This is not to deny that Congress, having established the Federal Reserve System and the rules by which it operates, could decide that the Fed has somehow violated those rules and is nominally insolvent. But Congress can just as easily alter such rules to allow the Fed to continue operation. The future viability of the Fed, in short, is entirely a political decision, with absolutely no necessary economic relationship to any losses the Fed may suffer on its portfolio of assets.
Hat Tip: Less Antman, Warren Gibson, David Henderson, Bob Murphy, and Bill Woolsey.
David T. Beito
Juan Cole, the great historian and the author of the"to go to" blog on the contemporary Middle East, Informed Comment, will speak tonight at the University of Alabama on the timely topic of"Liberty, Power, and Dictatorship: U.S. Foreign Policy in the Middle East."
His speech, which is the most recent installment of the Liberty and Power Lectures at UA, is open to the public and will be in 205 Smith Hall.
If you need more information, call me at 205-454-6759.
"In the event that force is used, however, organisers expect the demonstrations quickly to turn violent: unlike in Egypt or Tunisia, in Saudi Arabia there's a large number of guns in private hands. 'In Saudi Arabia an estimated 80 to 90 per cent of families have a weapon in their house and around 50 per cent of those weapons are AK-47s,' an opposition source told me. 'If I go on a peaceful demonstration and I am shot by the police and I am the son of a tribe then 100 per cent definitely my brother will bring a Kalashnikov and kill the policeman who killed me and he will kill more, five or ten. They know this, the police, and so I've been told by many ordinary individuals and officers that no way will they shoot us even if they are given orders and if force is used it will backfire in a very aggressive manner.'"
Aeon J. Skoble
Of Leebaert’s books, several deal with information technology and several with foreign and defense policies and events. In 2002, his book The Fifty-Year Wound: How America’s Cold War Victory Shapes Our World (Boston: Little, Brown) was published. This 700-page tome is, if not the best comprehensive history of the Cold War, certainly one of the better ones. Packed with carefully documented information, it is critical of U.S. policies and actions in many respects, yet it remains well within the bounds of respectable scholarship in establishment circles, as does everything Leebaert writes. He is not a radical.
His most recent book, Magic and Mayhem: The Delusions of American Foreign Policy from Korea to Afghanistan (New York: Simon and Schuster, 2010), is a less meaty, but even more critical book. By saying that it is less meaty, I do not intend to suggest that it lacks a great deal of factual evidence or careful documentation, but that it jumps about more, relying more on anecdotes and portraits of key actors, and less on a sustained analytical narrative. Nevertheless, it is a worthwhile book, especially for those who retain their faith that U.S. foreign and defense policymakers actually want to serve the general public interest better, if only they knew how to do so―a view I do not share.
Leebaert focuses on several dimensions of what he calls the foreign policy makers’ reliance on “magic”―a collection of assumptions and convictions about what the United States government can and should do in its dealings with the rest of the world. He calls it magic, he explains on page 1, because “shrewd, levelheaded people are so frequently bewitched into substituting passion, sloganeering, and haste for reflection, homework, and reasonable objectives.” As Leebaert illustrates with a great variety of cases, decision makers forgo careful study, detailed, factual evaluation, and judicious evaluation of alternatives (including the alternative of doing nothing) and instead opt for plunging almost blindly into efforts that almost any serious, informed thinker could have told them were doomed to fail. They are supremely self-confident, notwithstanding their all-too-frequent lack of any real basis for such confidence.
Such decision making almost always represents the work of what Leebaert calls “emergency men”―”the clever, energetic, self-assured, well-schooled people who take advantage of the opportunities intrinsic to the American political system to trifle with enormous risk” (p. 5). “Many people,” he notes, “are ready to play with dynamite” (p. 38). Emergency men may be found in the upper reaches of the government hierarchy―examples include such heavyweights as McGeorge Bundy, John F. Kennedy, Henry Kissinger, and Paul Wolfowitz―but they are also represented by a large number of political appointees at slightly lower levels and by many advisers and consultants, including putative experts on leave from academia or think tanks. All of these people may be distinguished from the officials who occupy permanent places in the bureaucracy in the State Department, the Defense Department, the armed forces, and the CIA. Such long-term functionaries receive relatively generous treatment in Leebaert’s assessment, being credited with greater knowledge of what they are doing and less eagerness to take the next big plunge.
Emergency men do not sit idly by, waiting for an emergency to arise. They look for one, and should they fail to find one, they may try to create one or the impression of one. Thus, Richard Nixon noted that Kissinger “would be ready to spark a crisis over Ecuador did Vietnam not exist” (p. 126). This search is scarcely a modest contribution to the promotion of national security. As Leebaert writes, “[T]he same policy expert who detects a ‘crisis’ will make darn sure that he or she is part of the effort to solve it. … Emergency men identify a calamity … then sound the tocsin, offer quick verdicts, and jump forth with action-oriented remedies” (p. 126).
To make matters worse, “emergency men, so often synonymous with war hawks, tend to prevail in policy arguments.” They exploit the “‘action bias’ in decision making. Individuals feel compelled to ‘do something,’ anything, when confronting a challenge,” even though “leaving a ‘crisis’ alone can be a better means of handling a problem” (p. 159). All serious students of history are familiar with this pattern. It is the story, for example, of Theodore Roosevelt’s rise to power and of nearly everything Franklin D. Roosevelt and his lieutenants did during the early New Deal. Rare is the government official who goes down in history as a great man because he had the mature judgment and sage willingness to recognize that “doing something” would only make matters worse. Until recently, for example, hardly anyone had credited Warren G. Harding’s hands-off approach to the depression of 1920-21 for helping to bring about a quick, full recovery from this sharp contraction.
Emergency men tend to make a hash of matters for a variety of reasons, and Leebaert devotes the heart of his book to an elaboration of a half dozen chronic problems along these lines. He identifies these categories in the introduction:
1. A sensation of urgency and of “crisis” that accompanies the belief that most [sic] any resolute action is superior to restraint … joined by the emergency man’s eagerness to be his country’s revealer of dangers, real and imaginary.
2. The faith that American-style business management … can fix any global problem given enough time, resources, and appropriately “can-do,” businesslike zeal.
3. A distinctively American desire to fall in behind celebrities, stars, and peddlers of some newly distilled expertise who, in foreign affairs especially, seem to glow with wizardry.
4. An expectation of wondrous returns on investment, even when this is based on intellectual shortcuts.
5. Conjuring powerful, but simplified images from the depths of “history” to rationalize huge and amorphously expanding objectives.
6. The repeated belief that America can shape the destiny of other countries overnight and that the hearts and minds of distant people are throbbing to be transformed into something akin to the way we see ourselves. (pp. 7-8)
Leebaert finds the origin of this syndrome in the U.S. response to the Korean crisis of the early 1950s, “the moment when magical thinking began regularly to insinuate itself with decisions of ‘national security’” (p. 28). As I have suggested, however, such modes of thought in policy making surely have earlier roots, although perhaps only from Korea onward were they so deeply embedded in defense and foreign policy making, as opposed to domestic policy making. Any activist U.S. government will probably tend toward this sort of “magical” syndrome because of its affinities with important strains in American politics and culture.
Leebaert’s book contains a number of finely etched cameos of emergency men such as Bundy, Robert McNamara, Kissinger, Douglas Feith, Dick Cheney, Donald Rumsfeld, Richard Perle, and Paul Wolfowitz. For the latter five―prime examples of the neocon emergency men who played leading roles in bringing about the disastrous Iraq war and the subsequent ill-fated U.S. occupation―Leebaert has scarcely a kind word. He subjects to scathing criticism even Cheney and Rumsfeld, the two who at one time seemed to have had genuine talents and accomplishments. Given that Leebaert seems to be fairly evenhanded―indeed, almost uninterested―in regard to ideology and political party affiliation, his disdain for the neocons is especially striking. In his view, their chief shortcoming was not their ideology as such, but the fact that with their less-than-half-baked ideas about cakewalk victories, Iraqi oil paying for the war, and democratic dominoes falling across the Middle East, among other things, they were simply disconnected from reality.
In view of the stupidity that goes into so many U.S. defense and foreign policies, Leebaert considers why the smart, well-educated people in decision making circles who see through the stupidity do so little to object to or obstruct the disastrous policies as they are being formulated. Part of the answer has already been given: Emergency men who are eager to “do something” tend to carry the day by dismissing those who prefer to go slower as obstructionists, defeatists, and saboteurs. Being on the receiving end of such internecine attacks does not generally promote one’s career. Of course, political leaders tend to surround themselves with cowardly yes men in the first place, so keeping one’s negative views to oneself often seems the obvious thing for such flunkies to do. Moreover, people who take a longer view of their careers must take care not to become known as a troublemaker, a pessimist, or a foot-dragger. One needs to remain a player.
To be a player entails consulting off and on for government, maybe getting confirmed by the Senate for a job or a sinecure on a presidential commission, participating on panels at the Council on Foreign Relations along with grandees from previous administrations, identifying yourself as an “owl” rather than as a hawk or a dove, and writing books that with any luck can get blurbed by Dr. Kissinger. This opulently carved door opens but narrowly, if at all; it can close completely on those who ask awkward questions or bring up troublesome facts.
In short, go along to get along, even if going along means keeping silent or voicing agreement when the emergency men are barking for precipitous, ill-considered, and potentially disastrous policies and actions.
Besides, if things do go wrong, one can always deflect the blame onto others. After the catastrophe of the U.S. war and subsequent occupation in Iraq, for example, all of the leading neocon warmongers have had the gall to publicly blame those who, they allege, poorly implemented the policies they formulated, while continuing to find nothing wrong with the policies themselves. Political actors rarely admit to having made mistakes in any event, but this blatantly twisted, self-serving interpretation leaves one aghast.
I wonder, however, whether Leebaert himself, notwithstanding all of his astute critical observations about policies and policy makers, also might have fallen victim to the temptation to express himself in a way that allows him to remain a player. As I noted at the beginning of this review, he is clearly a man of some consequence in the establishment. He has all of the right credentials, experience, and connections. His footnotes sometimes document a point as something a general, a diplomat, or another significant decision maker told him in person. Although he levels criticism at some people and some policies, he readily supports others, such as the first Gulf War and the U.S. war on Serbia, that in some eyes (including mine) seem to exemplify all of the foolishness he finds so obvious in other foreign engagements. Had his book ventured beyond the bounds of polite foreign-policy debate, it would not have received, as it has, dust-jacket endorsements by a former secretary of the U.S. Navy, a former vice chief of staff of the U.S. Army, and a former secretary of the U.S. Air Force and member of the Defense Science Board.
Leebaert’s approach to criticizing U.S. defense and foreign policies bears an interesting similarity to the criticisms Ludwig von Mises and F. A. Hayek leveled against socialism. These famous Austrian economists never criticized the socialists as bad people or as people who sought to act in a way that would harm the general public. They invariably gave their socialist ideological opponents the benefit of the doubt with regard to their good intentions. Although this approach has a certain theoretical justification in the development of economic theory, it flies in the face of historical reality. Many leading socialists, especially but by no means exclusively in the USSR, were little short of fiendish. It strains credulity to suppose that they were simply misguided men of good will.
Likewise, much of what seems merely foolish to Leebaert strikes me as the result, not of faulty thinking about policies and their likely consequences, but of the desire for political power and personal aggrandizement and of ideological and political motives that will not bear scrutiny. About such possibilities Leebaert has little―shockingly little, really―to say. In his view, it appears that the emergency men have been good men who allowed themselves to be seduced by “magical” thinking, when they should have gone about their business in a more rational, deliberate, and evidence-based manner. He therefore thinks that a book such as his might well serve to educate policy makers, leading them to abandon magic and to adopt a sounder approach to making their decisions. In this regard, I believe he has slipped into wishful thinking as much as did many of the foreign policy makers he so aptly criticizes.
Whenever we try to understand why policy makers act as they do, we must answer the question: Are they fools or charlatans? Leebaert concludes, in effect, that in the defense and foreign policy realm, they are often fools. I am inclined to the conclusion that they are both. Indeed, they are even worse: all too often, they are fools, bunglers, charlatans, liars, and murderers. Such persons’ playing with dynamite poses a grave danger to the rest of us. By now, we ought to have seen through them and their schemes a great deal more clearly than most of us have.
Aeon J. Skoble
"Desperate to avoid US military involvement in Libya in the event of a prolonged struggle between the Gaddafi regime and its opponents, the Americans have asked Saudi Arabia if it can supply weapons to the rebels in Benghazi."
"If the Saudi government accedes to America's request to send guns and missiles to Libyan rebels, however, it would be almost impossible for President Barack Obama to condemn the kingdom for any violence against the Shias of the north-east provinces.
"Thus has the Arab awakening, the demand for democracy in North Africa, the Shia revolt and the rising against Gaddafi become entangled in the space of just a few hours with US military priorities in the region."
Meanwhile the British lion beats a rapid retreat.
Aeon J. Skoble
Standard measures of the money stock, for example, have not increased greatly. The year-to-year change (ending in January 2011) in M2 was only 4.3 percent; the two-year change, only 6.4 percent. For MZM (money zero maturity), the corresponding rates of change were 2.6 percent and 4.4 percent, respectively. Thus, it would appear that by historical standards money has grown quite moderately in the past two years.
Bernanke and his supporting cast of monetary economists can also point to corroborating evidence that by historical standards the rate of inflation has been modest. The year-to-year change (ending in January 2011) in the all-items consumer price index (CPI) was only 1.7 percent; the two-year change, only 4.3 percent. The implicit price deflator for GDP, the broadest of all price indexes, reveals even less inflation. This index, which is computed on a quarterly basis, shows a one-year change of only 1.4 percent for the year ending in the fourth quarter of 2010, and a corresponding two-year change of only 1.8 percent.
(I have computed all of the figures mentioned in this article from basic data available at the website maintained by the Federal Reserve Bank of St. Louis.)
The foregoing variables are the ones that macroeconomists and monetary analysts at the Fed consult most often in their analysis of the economy’s performance and of the relation between money and inflation. So, if Bernanke tells us that inflation is not a problem, he is clearly resting his case on the kinds of evidence that the country’s recognized experts in the great universities view as scientifically de rigueur.
A serious problem lurks, however, in the way the mainstream experts think about the economy, and hence in the kind of analysis they undertake to assess its current performance and its likely future changes. All too often, they model the macroeconomy as a black box into which flow undifferentiated “labor” services and “capital” services and out of which flows a uniform substance called “output,” measured empirically by estimates of real GDP. Units of this output command a price known as the “price level,” measured empirically by the GDP deflator; otherwise, prices play no role in the model. The interest rate plays only a limited role as a determinant of the demand for money and as a minor determinant of saving and investment spending. Time is essentially irrelevant. There is no time structure of production in which certain kinds of production must precede others in a process running from raw materials to intermediate goods to completed consumer goods because, as mentioned, such distinctions among different kinds of goods are ignored in favor of positing a single homogeneous “output.” Just as time plays no role, and hence the interest rate (the price of goods available now relative to goods available later) plays no role in resource allocation, so location does not matter. It’s as though all production took place at a Euclidian point, and therefore no one need worry about, say, the government’s injecting “stimulus” money into Connecticut in order to lower unemployment in Nevada.
Although modern macroeconomic models, which have been constructed since the 1930s, vary in many ways, and some of them do not conform to the foregoing description in one way or another, the general approach of macroeconomic analysis fits my description all too well. It is a mode in analysis in which the time structure of production is ignored, interest rates play little or no role in allocating resources between time periods, a single output is produced, and inputs are viewed as homogeneous in kind, quality, and location. If one suspects that such extreme simplification may be squeezing every feature of the Prince of Denmark out of Hamlet, one’s instincts are alive and well.
Because this approach to thinking about the macroeconomy is essentially timeless―inputs flow in and outputs flow out simultaneously during any arbitrarily defined period of time―the Fed’s scrutiny of the economy’s performance tends to be extraordinarily focused on the recent past (from which its most up-to-date data come) and the near-term future. Truly long-run considerations scarcely come into play, as the Fed attempts to fine tune its policy instruments at monthly or more frequent intervals to keep the economy on a smooth growth path with a low rate of inflation and a low rate of unemployment―in truth, an impossible task even if performed with the greatest competence, because the number of targets exceeds the number of instruments. So, Bernanke is always referring to the most recent report on inflation, for example, to demonstrate that the Fed has taken the optimal policy stance; and he always assures us that whenever new data reveal a deviation from the desired economic conditions, the Fed will take appropriate steps to correct its misbehavior.
Such myopic monetary policy making has great potential for creating too much monetary stimulus in certain periods, then overreacting by creating too much monetary contraction, thereby introducing or amplifying fluctuations in the economy’s real growth or its rate of inflation that would not occur if the Fed did not exist. As Roger Garrison observes, the Fed is a loose cannon on the economy’s deck, rolling with great momentum here and there as the ship pitches and rolls and wreaking havoc as it crashes into everything in its compass. Bernanke claims to have absorbed Milton Friedman’s teachings about the Fed’s responsibility for causing the Great Depression, but he evidently skipped Friedman’s class on the day that the professor told the pupils that monetary policy exerts its effects with long and variable lags. Because of these unpredictable lags, the Fed is always, as it were, reacting to information that does not tell the full story about how the economy is already responding, or eventually will respond, to monetary policy changes that extend for a year or more into the past.
One error the Fed makes time and again is failure to recognize until it is too late that it has already built inflation into the system. So, we might well wonder whether the Fed is making that very error now. Several indicators suggest strongly that it is doing so.
Inflation does not usually appear equally throughout the economy. Instead, it usually begins in the markets for raw materials and intermediate goods and then works its way to consumer-goods markets, where retailers always explain to irate buyers that they are raising prices only because their cost of goods has risen. If such inflation is occurring now, we can identify it by checking the producer price index (PPI) and some of its components.
Looking first at the overall PPI, we find that the year-to-year change (ending in January 2011) was 5.7 percent, or 4 percentage points greater than the change in the CPI; the two-year change was 12.3 percent, or 8 percentage points greater than the change in the CPI.
Some important components of the PPI have risen even faster. For the PPI for crude foodstuffs and feedstuffs, the one-year change was 20.6 percent, the two-year change, 25.6 percent. The PPI for fuels and power shows a one-year change of 6.5 percent and a two-year change of 33.1 percent. Because food, feed, fuel, and power are so critical to many of the world’s poorer countries, these rapid increases in prices have already provoked riots and other displays of desperation throughout the world. It is reasonable to assume that before long the price increases in these markets will have an effect on the rate of increase in consumer-goods prices in the United States and other advanced economies.
We may also look for price changes that reflect market participants’ expectation of future inflation and hence their attempts to purchase real goods that might serve them as hedges against such price acceleration. Here the most notable indicators include, of course, the price of gold. For the closing gold price in January 2011, the one-year increase was 24.0 percent, the two-year increase, 44.3 percent. Other such indicators come from the stock market, where traders bid up share prices in the expectation of future net income to be earned from the firms’ sales of real goods and services. For the Standard & Poor’s 500 index, the one year increase (ending in January 2011) was 19.8 percent, the two-year increase, 55.7 percent.
Bernanke dismisses evidence such as the foregoing by noting, correctly, that the prices of producer goods typically vary more than the prices of consumer goods. In his view, one only muddies the waters of one’s analysis of inflation by taking note of producer prices. He might similarly dismiss the zooming prices of gold and corporate stocks as the product of forces unrelated to monetary policy―which they might be, of course, but in the present case I do not think they are.
Bernanke is a celebrated mainstream macroeconomist. His achievements in this field account for his having become Fed chairman in the first place. But this background, training, and research have predisposed him, as it has predisposed almost all mainstream macro and monetary economists, to think about the macroeconomy and about the relation between money and inflation in a way that hides essential elements of what is actually occurring. The root of all of these evils is excessive aggregation. The reigning macroeconomic analysis also has other important flaws, as I have suggested, but however these other problems might be dealt with, as long as mainstream analysts continue to work within the confines of such highly aggregated models, continued failures to understand and control the economy’s movements are well-nigh inevitable.