« February 2009 | Main | April 2009 »

March 31, 2009

Congress Blocked Navy's Grab of Radio Airwaves


Source of book image: online version of the WSJ review quoted and cited below.

(p. A15) "Hello Everybody!" is at its most valuable when it chronicles the early regulatory fights over the new medium. In the days after World War I, the Navy pushed hard for control of all "wireless" facilities, which were then used primarily used for point-to-point messaging. If the admirals had succeeded in that grab, which was blocked by Congress, the advent of broadcast radio would no doubt have been delayed and the industry might have developed more along the lines of European radio, with a great deal of government control.

For the full review, see:

RANDALL BLOOMQUIST. ""Bookshelf; A Journey Across the Dial." The Wall Street Journal (Thurs., OCTOBER 9, 2008): A15.

The reference to the book under review, is:

Rudel, Anthony. Hello, Everybody! Orlando, FL: Houghton Mifflin Harcourt Publishing Company, 2008.

March 30, 2009

The Difference Between Shirts and Ideas

In the discussion of public goods, economists distinguish between rivalrous goods (like shirts) and non-rivalrous goods (like ideas). With a rivalrous good, if I consume the good, the good is no longer there for you to consume it. With a non-rivalrous good, we can both consume it at the same time.

Entrepreneur Wayne Copeland, Jr., as quoted by Gilder, states it with over-the-top exuberance:

(p. 127) "If you give a man your shirt, you no longer have it. That is the world before the integrated circuit. But if you give a man an idea, you both have it. That is the magic of the solid-state world; it is essentially an ever-expanding circuitry of ideas. A truth that sets us free . . ."


Gilder, George. The Spirit of Enterprise. 1 ed. New York: Simon and Schuster, 1984.

(Note: ellipsis in original.)

March 29, 2009

Vaclav Klaus: The Czech Republic's Free Market Crusader

KlausVaclav2009-02-15.jpg "President Vaclav Klaus of the Czech Republic is known for his economic liberalism." Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A6) To supporters, Mr. Klaus is a brave, lone crusader, a defender of liberty, the only European leader in the mold of the formidable Margaret Thatcher. (Aides say Mr. Klaus has a photo of the former British prime minister in his office near his desk.)

. . .

As a former finance minister and prime minister, he is credited with presiding over the peaceful 1993 split of Czechoslovakia into two states and helping to transform the Czech Republic into one of the former Soviet bloc's most successful economies.

But his ideas about governance are out of step with many of the European Union nations that his country will lead starting Jan. 1.

While even many of the world's most ardent free marketeers acknowledged the need for the recent coordinated bailout of European banks, Mr. Klaus lambasted it as irresponsible protectionism. He blamed too much -- rather than too little -- regulation for the crisis.

A fervent critic of the environmental movement, he has called global warming a dangerous "myth," arguing that the fight against climate change threatens economic growth.

. . .

Those who know Mr. Klaus say his economic liberalism is an outgrowth of his upbringing. Born in 1941, he obtained an economics degree in 1963 and was deeply influenced by free market economists like Milton Friedman.

Mr. Klaus's son and namesake, Vaclav, recalled in an interview that when he was 13, his father told him to read Aleksandr Solzhenitsyn to better understand Communism's oppressiveness.

"If you lived under communism, then you are very sensitive to forces that try to control or limit human liberty," he said in an interview.

For the full story, see:

DAN BILEFSKY. "A Fiery Czech Is Poised to Be the Face of Europe." The New York Times (Tues., November 25, 2008): A6.

(Note: ellipses added.)

March 28, 2009

"Government Interventions Only Prolonged the Crisis"

The comments of Maart Laar, former prime minister of Estonia, are worth considering:

(p.A13) It is said that the only thing that people learn from history is that people learn nothing from history. Looking at how the world is handling the current economic crisis, this aphorism appears sadly true.

World leaders have forgotten how the collapse of Wall Street in 1929 developed into a world-wide depression. It happened not thanks to market failures but as a result of mistakes made by governments which tried to protect their national economies and markets. The market was not allowed to make its corrections. Government interventions only prolonged the crisis.

We may hope that, even as we see several bad signs of neo-interventionist attitude, all the mistakes of the 1930s will not be repeated. But it is clear that the tide has turned again. Capitalism has been declared dead, Marx is honored, and the invisible hand of the market is blamed for all failures. This is not fair. Actually it is not markets that have failed but governments, which did not fulfill their role of the "visible hand" -- creating and guaranteeing market rules. Weak regulation of the banking sector and extensive lending, encouraged by governments, are examples of this failure.

For the full commentary, see:

MART LAAR. "Economic Freedom Is Still the Best Policy." Wall Street Journal (Fri., FEBRUARY 13, 2009): A13.

March 27, 2009

Google Not Likely to Be "An Unstoppable Juggernaut"


Source of book image: online version of the WSJ review quoted and cited below.

(p. A25) But Messrs. Page and Brin, when they launched Google, had no idea how to make money from it. Two years into their venture, they developed a service that delivered small text ads based on the search terms that a user submitted. As Randall Stross notes in "Planet Google," his even-handed and highly readable history of the company, the service proved to be a turning point in the history of advertising, offering ads tailored for "an audience of one at the one best moment, when a relevant topic was on the user's mind." It also proved to be a goldmine for Google. The company started serving up ads in 2000. In 2002, it had revenues of $400 million; in 2005, $6.1 billion; in 2007, $16.5 billion. Roughly 99% of its income stills springs from those modest text ads that appear at the top of Google's results page.

. . .

Is Google an unstoppable juggernaut fated not only to "organize all information" -- as the company has itself put its goal -- but to control it as well? Mr. Stross poses the question but does not answer it. He notes that one of Google's ambitions is to usher in an age of "cloud computing," in which all the work we do on our personal computers would actually take place on servers that Google owns. The servers would hold the programs we use and store our data. That image -- Google as Skynet from the "Terminator" movies -- is a mite unsettling.

Yet the evidence in "Planet Google" suggests that this eventuality is less likely than Googlers might hope. Outside its core search and advertising business, Google has had few successes. Its home-grown products, such as Orkut, Knols and Google Checkout (knockoffs of Facebook, Wikipedia and PayPal, respectively), have largely been failures. Google's biggest successes have come from acquisitions. Google bought YouTube only after its own attempt at video on the Web, Google Video, crashed and burned. And even the "successful" acquisitions that Google has made -- Google Earth, Google Maps, Google Docs and Blogger were all purchases, too -- have taken up resources without creating significant revenue.

. . .

Remember, people thought that Microsoft was fated to rule the world, too. Today, the once-feared operating-system giant is fighting to stay relevant. And the evolutionary parallels between Google and Microsoft are strikingly similar: Both hit upon a Big Idea at the perfect moment; both parlayed it into a mountain of cash; and both used the money to embark on a string of expansions that paid few dividends. The years have brought Microsoft back to Earth. They'll probably do the same to Planet Google.

For the full review, see:

Last, Jonathan V. "BOOKS; Search for Tomorrow." The Wall Street Journal (Weds., SEPTEMBER 17, 2008): A25.

(Note: ellipses added.)

he book under review is:

Stross, Randall E. Planet Google: One Company's Audacious Plan to Organize Everything We Know. New York: Free Press, 2008.

March 26, 2009

High Progressive Income Taxes Result in "Demoralization of Entrepreneurs"

(p. 127) High progressive and unnegotiable gouges like those in Sweden and England drive people altogether out of the country into offshore tax havens, out of income-generating activities into perks and leisure pursuits, out of money and savings into collectibles and gold, and, most important, out of small business ventures into the cosseting arms of large established corporations and government bureaucracies. The result is the demoralization of entrepreneurs and the stultification of capital. The experimental knowledge that informs and refines the process of economic growth is stifled, and the metaphysical capital in the system collapses, even while all the indices of capital formation rise.


Gilder, George. The Spirit of Enterprise. 1 ed. New York: Simon and Schuster, 1984.

March 25, 2009

Steuben Saw "The Genius of this Nation"


"German soldier of fortune and American ally Baron von Steuben (1730-94)" Source of caption and photo: online version of the WSJ review quoted and cited below.

(p. W9) The essence of Steuben's achievement was his modification of the brutal, robotic precision of the Prussian system to fit American conditions. He was able to do this because he was one of the first foreign observers, military or civilian, to grasp an essential strain of the American character. "The genius of this nation," he wrote a European friend, "is not in the least to be compared with that of the Prussians, Austrians or French. You say to your soldier, 'Do this,' and he doeth it. I am obliged to say, 'This is the reason why you ought to do that,' and then he does it."

. . .

While Mr. Lockhart tends to soft-pedal some of Steuben's more dubious deeds -- ignoring, for instance, his attempt to interest Prince Henry of Prussia, Frederick the Great's younger brother, in becoming king of the independent colonies before the adoption of the Constitution -- the author generally treats his subject with balance, understanding and great good humor, aptly concluding that, "although he blurred a few details of the past in order to seek preferment in the United States, somewhere between his arrival and the achievement of American independence, the Baron became something very much like the man he had pretended to be."

For the full review, see:

ARAM BAKSHIAN JR. "BOOKS; Revolutionary Scamp." The Wall Street Journal (Sat., NOVEMBER 8, 2008): W9.

The reference to the book under review is:

Lockhart, Paul. The Drillmaster of Valley Forge. New York: HarperCollins Publishers, 2008.


Source of book image: http://robertos-book-picks.blogspot.com/2008/11/drillmaster-of-valley-forge-baron-de.html

March 24, 2009

FDR's 1935 Revival Prediction Proved False

(p. C1) Despite the reputation of the New Deal, deep government interventions are unpredictable and sometimes harmful, reminds Amity Shlaes, who wrote a popular history of the Depression, "The Forgotten Man."

Ms. Shlaes points to the period of 1936 and 1937, when the Federal Reserve used New Deal laws to tighten reserve requirements on the nation's banks. The goal was to make the banks stronger, but the result was that banks tightened still further. That cut off credit to the economy at a sensitive period. The Dow Jones Industrial Average fell by more than a third between August 1937 and January 1938. Unemployment surged. It was the "depression within the Depression."

It wasn't the revival that FDR had predicted back in 1935, when he boasted: "Never since my inauguration in March 1933, have I felt so unmistakably the atmosphere of recovery."

. . .

"When you're in the expert business, after a while you realize there are no experts," says Richard Sylla, New York University's Henry Kaufman Professor of The History of Financial Institutions and Markets.

The important thing to know, it seems, is how little we know.

For the full commentary, see:

DENNIS K. BERMAN. "THE GAME; Tomorrow's Recession Recovery Is Today's History Lesson." Wall Street Journal (Tues., MARCH 3, 2009): C1.

(Note: ellipsis added.)

The reference to the excellent Shlaes book, is:

Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.

March 23, 2009

Gilder Explored "The Spirit of Enterprise"


Source of book image:

Gilder presents many case studies of entrepreneurs, with plenty of thought-provoking commentary and generalization.

I read the 1984 version because it is the version that is available in audio that can be listened to while walking the dachshund. I also own the 1992 updated version, and can say from a flip-through that this it is a major revision (not just a "revision" that consists of a new introduction, as is often done).

Gilder justly, and eloquently, takes economists to task for generally ignoring the role of the entrepreneur in improving our lives.

For the early edition, see:

Gilder, George. The Spirit of Enterprise. 1 ed. New York: Simon and Schuster, 1984.

For the revised version, see:

Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.


Source of the book image: http://www.icspress.com/images/recapturing.jpg

March 22, 2009

"Venturesome" Consumers May Help Save the Day

Bhidé makes thought-provoking comments about the role of the entrepreneurial or "venturesome" consumer in the process of innovation. The point is the mirror image on one made by Schumpeter in Capitalism, Socialism and Democracy when he emphasized that consumer resistance to innovation is one of the obstacles that entrepreneurs in earlier periods had to overcome. (The decline of such consumer resistance was one of the reasons that Schumpeter speculated that the entrepreneur might become obsolete.)

I would like to see Bhidé's evidence on his claim that technology rapidly advanced during the Great Depression. The claim seems at odds with Amity Shlaes' claim that New Deal policies often discouraged entrepreneurship.

(p. A15) Consumers get no respect -- we value thrift and deplore the spending that supposedly undermines the investment necessary for our long-run prosperity. In fact, the venturesomeness of consumers has nourished unimaginable advances in our standard of living and created invaluable human capital that is often ignored.

Economists regard the innovations that sustain long-run prosperity as a gift to consumers. Stanford University and Hoover Institution economist Paul Romer wrote in the "Concise Encyclopedia of Economics" in 2007: "In 1985, I paid a thousand dollars per million transistors for memory in my computer. In 2005, I paid less than ten dollars per million, and yet I did nothing to deserve or help pay for this windfall."

In fact, Mr. Romer and innumerable consumers of transistor-based products such as personal computers have played a critical, "venturesome" role in generating their windfalls.

. . .

History suggests that Americans don't shirk from venturesome consumption in hard times. The personal computer took off in the dark days of the early 1980s. I paid more than a fourth of my annual income to buy an IBM XT then -- as did millions of others. Similarly, in spite of the Great Depression, the rapid increase in the use of new technologies made the 1930s a period of exceptional productivity growth. Today, sales of Apple's iPhone continue to expand at double-digit rates. Low-income groups (in the $25,000 to $49,999 income segment) are showing the most rapid growth, with resourceful buyers using the latest models as their primary device for accessing the Internet.

Recessions will come and go, but unless we completely mess things up, we can count on our venturesome consumers to keep prosperity on its long, upward arc.

For the full commentary, see:

Amar Bhidé. "Consumers Can Still Spot Value in a Crisis." Wall Street Journal (Thurs., MARCH 11, 2009): A15.

(Note: ellipsis added.)

March 21, 2009

The Values of the Belgian Diamond Market

DiamondTradeOrthodoxJews.JPG "Orthodox Jews have been at the center of Antwerp's diamond trade since the late 19th century, when they fled Eastern Europe." Source of the caption and photo: online version of the NYT article quoted and cited below.

Markets will work better when a critical mass of participants hold certain core values, including those of tolerance and honesty.

(p. A11) ANTWERP, Belgium -- Teetering on their bicycles or strolling amiably while chattering into cellphones in Yiddish, Dutch, French, Hebrew or English, the Orthodox Jews of this Belgian port city have set the tone of its lively diamond market for more than a century.

Hoveniersstraat, or Gardener's Street, is the backbone of the market, where four-fifths of the world's uncut diamonds are traded. It winds past the L & A Jewelry Factory and the office of Brinks, the armored car company, and on to the World Diamond Center just opposite the little Sephardic synagogue. On any given day but Friday, it is sprinkled liberally with Orthodox Jewish diamond traders, many of them Hasidim.

. . .

Ari Epstein, 33, is the son of a diamond trader, whose father emigrated from a village in Romania in the 1960s. "It's a typical shtetl environment," he said, wearing the yarmulke with a business suit. "It's live and let live. Most important is to do business together and to be honorable."

For the full story, see:

JOHN TAGLIABUE. "Antwerp Journal; Belgian Market's Luster Dims, but Legacy Stays." The New York Times (Tues., January 6, 2009): A11.

(Note: ellipsis added.)


"The market employs about 7,000 and creates work indirectly for another 26,000." Source of the caption and photo: online version of the NYT article quoted and cited above.

March 20, 2009

Pro-Obama Economist Krugman Predicts Higher Taxes on Middle Class

(p. A23) . . . even if fundamental health care reform brings costs under control, I at least find it hard to see how the federal government can meet its long-term obligations without some tax increases on the middle class. Whatever politicians may say now, there's probably a value-added tax in our future.

For the full commentary, see:

PAUL KRUGMAN. "Climate of Change." The New York Times (Fri., February 27, 2009): A23.

March 19, 2009

Globalization Helps U.S. During Financial Crisis

ExportsAsShareLocalGDP2006Graph.jpg Source of the graphic: screen capture from the online version of the WSJ article quoted and cited below.

(p. A1) Much of the world may be struggling with the economic downturn, but life has been getting better in Columbus, Ind., Kingsport, Tenn., and Waterloo, Iowa.

These out-of-the-way places have become trade hot spots as U.S. exports, fueled by the dollar's fall, continue to provide a rare spark in an otherwise gloomy economy.

While many economists expect a recent snapback in the value of the dollar and a spreading global slowdown to soften that growth, exports have become a key to greater local prosperity more than at any time in decades.

. . .

(p. A16) Export-driven growth marks a dramatic shift in an economy that has relied heavily on consumer spending. That has slowed in recent months as Americans, nervous about job losses, teetering banks, falling home values, and rising gasoline and food prices, have tightened spending. Against that background, exports have emerged as a powerful motor.

Over the past year, real-goods exports have risen $115 billion, or 12%, and are up across every major category. They now make up nearly 13.5% of gross domestic product, the highest percentage since World War II. Critics often grumble that the U.S. exports masses of scrap steel and other waste materials to recyclers in China and elsewhere, which is true, but exports of manufactured goods, commodities and services are also growing. Consumer products, from sporting goods to art supplies, have risen 12%, and even autos, which are languishing on showroom floors in the U.S., saw a 4% bump up in exports.

Service exports -- which include media, entertainment, financial services, computer software and foreign tourism in the U.S. -- have grown strongly right along with the larger goods side of the trade ledger. Through the second quarter of 2008, real-service exports are up nearly 10% over the past year.

It's a badly needed tonic for the beleaguered U.S. economy.

For the full story, see:

TIMOTHY AEPPEL. "Exports Bolster Local Economies." The Wall Street Journal (Thurs., SEPTEMBER 11, 2008): A1 & A16.

(Note: the title of the article on the web is: "Exports Prop Up Local Economies.")

(Note: ellipsis added.)

March 18, 2009

Entrepreneurs Are Key to Ending Economic Crisis

(p. A15) The passage of the $787 billion stimulus bill has so far failed to stimulate anything but greater market pessimism. This suggests to us that the strategy behind the American Reinvestment and Recovery Act is wrong -- and worse, that the weapons it is using to fight the recession are obsolete.

Just as generals are notorious for fighting the last war, Congress and the White House seem intent on fixing an economy of hidebound and obsolete companies and industries, while ignoring the innovative ones rising before us and those waiting to be born.

Missing from this legislation is anything more than token support for the long-proven source of most new jobs and new growth in America: entrepreneurs. These are the people who gave us everything -- from Wal-Mart to iPhones, from microprocessors to Twitter -- that is still strong in our economy. Without entrepreneurs, we will never get out of our current predicament.

For the full commentary, see:

TOM HAYES and MICHAEL S. MALONE. "Entrepreneurs Can Lead Us Out of the Crisis What Are the Odds of a Depression?" Wall Street Journal (Tues., FEBRUARY 24, 2009): A15.

(Note: ellipses added.)

March 17, 2009

Pay and Profits at Finance Firms Became "Divorced from Actual Economic Activity"

FinanceIndustryPayAndProfitsGraph.jpg Source of graphs: online version of the NYT article quoted and cited below.

(p. 3) Nonetheless, a significant portion of the finance boom also seems to have been unrelated to economic performance and thus unsustainable. Benjamin M. Friedman, author of "The Moral Consequences of Economic Growth," recalled that when he worked at Morgan Stanley in the early 1970s, the firm's annual reports were filled with photographs of factories and other tangible businesses. More recently, Wall Street's annual reports tend to highlight not the businesses that firms were advising so much as finance for the sake of finance, showing upward-sloping graphs and photographs of traders.

"I have the sense that in many of these firms," Mr. Friedman said, "the activity has become further and further divorced from actual economic activity."

Which might serve as a summary of how the current crisis came to pass. Wall Street traders began to believe that the values they had assigned to all sorts of assets were rational because, well, they had assigned them.

For the full story, see:

PETER S. GOODMAN. "Debt Sweat; Printing Money and Its Price." The New York Times, Week in Review Section (Sun., December 28, 2008): 1 & 4.

(Note: ellipsis added.)

Benjamin Friedman's book is:

Friedman, Benjamin M. The Moral Consequences of Economic Growth. New York: Knopf, 2005.

March 16, 2009

Barro Estimates 20% Chance of Depression

Robert Barro is a Harvard economist who specializes in issues of macroeconomics and economic growth.

(p. A15) The U.S. macroeconomy has been so tame for so long that it's impossible to get an accurate reading about depression odds just from the U.S. data. My approach uses long-term data for many countries and takes into account the historical linkages between depressions and stock-market crashes. (The research is described in "Stock-Market Crashes and Depressions," a working paper Jose Ursua and I wrote for the National Bureau of Economic Research last month.)

The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.

. . .

In the end, we learned two things. Periods without stock-market crashes are very safe, in the sense that depressions are extremely unlikely. However, periods experiencing stock-market crashes, such as 2008-09 in the U.S., represent a serious threat. The odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression.

The bright side of a 20% depression probability is the 80% chance of avoiding a depression. The U.S. had stock-market crashes in 2000-02 (by 42%) and 1973-74 (49%) and, in each case, experienced only mild recessions. Hence, if we are lucky, the current downturn will also be moderate, though likely worse than the other U.S. post-World War II recessions, including 1982.

. . .

Given our situation, it is right that radical government policies should be considered if they promise to lower the probability and likely size of a depression. However, many governmental actions -- including several pursued by Franklin Roosevelt during the Great Depression -- can make things worse.

I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.

For the full commentary, see:

ROBERT J. BARRO. "What Are the Odds of a Depression?" Wall Street Journal (Weds., MARCH 4, 2009): A15.

(Note: ellipses added.)

Barro's co-authored textbook on economic growth is:

Barro, Robert J., and Xavier Sala-i-Martin. Economic Growth. 2nd ed: The MIT Press, 2003.

March 15, 2009

The Bailouts Are Like Giving Bottles of Scotch to Drunkards

MoneyPrintingPress.jpg Printing press for $20 bills. Source of photo: online version of the NYT article quoted and cited below.

(p. 4) "We got into this mess to a considerable extent by overborrowing," said Martin N. Baily, a chairman of the Council of Economic Advisers under President Clinton and now a fellow at the Brookings Institution. "Now, we're saying, 'Well, O.K., let's just borrow a bunch more, and that will help us get out of this mess.' It's like a drunk who says, 'Give me a bottle of Scotch, and then I'll be O.K. and I won't have to drink anymore.' Eventually, we have to get off this binge of borrowing."

"This is a dangerous situation," says Mr. Baily, essentially arguing that the drunk must be kept in Scotch a while longer, lest he burn down the neighborhood in the midst of a crisis. "The risks of things actually getting worse and us going into a really severe recession are high. We need to get more money out there now."

. . .

The most frequently voiced worry about the bailouts is that the Fed, by sending so much money sloshing through the system, risks generating a bad case of rising prices later on. That puts the onus on the Fed to reverse course and crimp economic activity by lifting interest rates and selling assets back to banks once growth resumes.

But finding the appropriate point to act tends to be more art than science. The Fed might move too early and send the economy back into a tailspin. It might wait too long and let too much money generate inflation.

"It's a tricky business," says Allan H. Meltzer, an economist at Carnegie Mellon University, and a former economic adviser to President Reagan. "There's no math model that tells us when to do it or how."

For the full story, see:

PETER S. GOODMAN. "Debt Sweat; Printing Money and Its Price." The New York Times, Week in Review Section (Sun., December 28, 2008): 1 & 4.

(Note: ellipsis added.)

March 14, 2009

Bailouts Reduce Resources Left for Entrepreneurs

Columbia University Professor Amar Bhidé has authored two important books on entrepreneurship. Some of his thoughts on the current economic crisis follow:

(p. A15) Our ignorance of what causes economic ailments -- and how to treat them -- is profound. Downturns and financial crises are not regular occurrences, and because economies are always evolving, they tend to be idiosyncratic, singular events.

After decades of diligent research, scholars still argue about what caused the Great Depression -- excessive consumption, investment, stock-market speculation and borrowing in the Roaring '20s, Smoot-Hawley protectionism, or excessively tight monetary policy? Nor do we know how we got out of it: Some credit the New Deal while others say that that FDR's policies prolonged the Depression.

. . .

Large increases in public spending usurp precious resources from supporting the innovations necessary for our long-term prosperity. Everyone isn't a pessimist in hard times: The optimism of many entrepreneurs and consumers fueled the takeoff of personal computers during the deep recession of the early 1980s. Amazon has just launched the Kindle 2; its (equally pricey) predecessor sold out last November amid the Wall Street meltdown. But competing with expanded public spending makes it harder for innovations like the personal computer and the Kindle to secure the resources they need.

Hastily enacted programs jeopardize crucial beliefs in the value of productive enterprise. Americans are unusually idealistic and optimistic. We believe that we can all get ahead through innovations because the game isn't stacked in favor of the powerful. This belief encourages the pursuit of initiatives that contribute to the common good rather than the pursuit of favors and rents. It also discourages the politics of envy. We are less prone to begrudge our neighbors' fortune if we think it was fairly earned and that it has not come at our expense -- indeed, that we too have derived some benefit.

To sustain these beliefs, Americans must see their government play the role of an even-handed referee rather than be a dispenser of rewards or even a judge of economic merit or contribution. The panicky response to the financial crisis, where openness and due process have been sacrificed to speed, has unfortunately undermined our faith. Bailing out AIG while letting Lehman fail -- behind closed doors -- has raised suspicions of cronyism. The Fed has refused to reveal to whom it has lent trillions. Outrage at the perceived use of TARP funds to pay bonuses is widespread.

For the full commentary, see:

Amar Bhidé. "Don't Believe the Stimulus Scaremongers." Wall Street Journal (Tues., FEBRUARY 17, 2009): A15.

(Note: ellipsis added.)

Bhidé's two books on entrepreneurship are:

Bhidé, Amar. The Origin and Evolution of New Business. Oxford and New York: Oxford University Press, 2000.

Bhidé, Amar. The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. Princeton, NJ: Princeton University Press, 2008.

March 13, 2009

Distinguished Macroeconomist Irving Fisher Lost a Lot in the 1929 Crash

Irving Fisher is widely viewed as one of the handful ot top United States economists of the 1920s and 1930s. In addition, he focused on topics that today are considered part of macroeconomics. His not forecasting the economic downturn can be given different interpretations. Some, such as Taleb, would attribute it in part to fundamental uncertainty. Until recently, many economists would have said that Fisher still had a lot to learn, but we are now know more than him.

That may be true, but we still have a lot to learn.

(p. 5) IRRATIONAL exuberance? As the nation entered recession in the summer of 1929, there were still plenty of economists, business leaders and politicians who looked to the future with optimism. And why not? The Dow Jones industrial average was soaring. Then the stock market bubble burst on Oct. 24, which led to several days of panicked selling -- an opening bell for the worldwide economic collapse that soon followed. Here's what some leading politicians, economists and business leaders had to say in the months before and after the crash. Sound familiar?

. . .

Irving Fisher, professor of economics at Yale University, in The New York Times, Sept. 6, 1929. He ended up losing much of his wealth in the crash:

"There may be a recession in stock prices, but not anything in the nature of a crash."

. . .

The Harvard Economic Society, November 1929:

"A severe depression like that of 1920-21 is outside the range of probability. We are not facing protracted liquidation."

For the full story, see:

"Word For Word; I'm Having a Flashback; A Storm Unforeseen, Always About to Pass." The New York Times, Week in Review Section (Sun., October 11, 2008): 5.

(Note: no author is listed.)

(Note: ellipses added.)

March 12, 2009

Hugh Laurie SNL Protest Song Lyrics

At a "Workshop on Creative Ideas to Teach Principles," organized by Jim Gwartney at the Stavros Center in Tampa, I presented some brief video clips that I use to make various points in my principles classes. The first was Hugh Laurie's Protest Song.

After playing the song, I tell my students that to make the world better, you need more than a guitar and good intentions---you also need to know something about how the world works (in particular, you need to know some economics).

After my presentation, one of the participants asked if I knew where he could find the lyrics. In response, I found the lyrics posted online, and re-post them here in case they may be of use to other economic educators.

Hugh Laurie's Saturday Night Live Protest Song

[ open on Hugh Laurie standing at Home Base strumming a guitar ]

Hugh Laurie: This is a protest song. [ blows on a harmonica attached to his neck ]

[ singing ]

"Well, the poor keep getting hungry, and the rich keep getting fat
Politicians change, but they're never gonna change that.
Girl, we got the answer, it's so easy you won't believe
All we gotta do is.. [ mumbles incoherently ]

Well, the winds of war are blowin', and the tide is comin' in
Don't you be hopin' for the good times, because the good times have already been.
But, girl, we got the answer, it's so easy you won't believe
All we gotta do is.. [ mumbles incoherently ]

It's so easy, to see
If only they'd listen, to you and me.
We got to.. [ mumbles incoherently ] as fast as we can
We got to.. [ mumbles incoherently ] every woman, every man
We got to.. [ mumbles incoherently ] time after time
We got to.. [ mumbles incoherently ] vodka and lime.

Well, the world is gettin' weary, and it wants to go to bed
Everybody's dyin', except the ones who are already dead.
Girl, we got the answer, starin' us right in the face
All we gotta do is
All we gotta do is
All we gotta do is."

[ pauses, then blows on the harmonica and finishes ]

[ the audience cheers wildly ]

Hugh Laurie: Thank you.

Source of lyrics:


March 11, 2009

80% of Officials Base Infrastructure Decisions on Politics


Source of graph: online version of the NYT commentary quoted and cited below.

(p. B1) It's hard to exaggerate how scattershot the current system is. Government agencies usually don't even have to do a rigorous analysis of a project or how it would affect traffic and the environment, relative to its cost and to the alternatives -- before deciding whether to proceed. In one recent survey of local officials, almost 80 percent said they had based their decisions largely on politics, while fewer than 20 percent cited a project's potential (p. B6) benefits.

There are monuments to the resulting waste all over the country: the little-traveled Bud Shuster Highway in western Pennsylvania; new highways in suburban St. Louis and suburban Maryland that won't alleviate traffic; all the fancy government-subsidized sports stadiums that have replaced perfectly good existing stadiums. These are the Bridges to (Almost) Nowhere that actually got built.

For the full commentary, see:

DAVID LEONHARDT. "Economic Scene; Piling Up Monuments of Waste." The New York Times (Weds., November 18, 2008): B1 & B6.

March 10, 2009

Larry Moss Made a Difference


Laurence S. Moss

Source of photo: http://www3.babson.edu/academics/faculty/lmoss.cfm

On Sunday (3/8/09) I learned that Larry Moss passed away on February 24, 2009.

Larry was full of the joy of life. He was intense. He was an amateur magician, and a wit, and an energetic conversationalist. I used to run into him once a year at the History of Economics Society meetings, and always enjoyed our conversations.

He was a neo-Austrian, though not "pure" enough for some of the ultra-Rothbardians. I first met him at a long-weekend seminar in Austrian economics when I was a graduate student, and he was a presenter.

I remember that he and I thought that the dialogue would be richer, and the neo-Austrian position ultimately strengthened, if its defenders understood better some of the alternative positions. So we announced a kind of rump session during one of the free-time periods. During this session, Larry gave the attendees a brief summary of what Walras had been up to, and I summarized Becker's paper on the robustness of the law of demand to various forms of irrational and habitual behavior.

If memory serves, we suffered some mild heckling, and Larry was more severely criticized for disloyalty to the cause. (I cannot prove it, but I believe he paid a price for that in terms of invitations to future similar gatherings.)

I did not follow Larry's research systematically, but know that he wrote the definitive account of Mountifort Longfield's economics. He also had a nice, early paper in the JEL on the uses of film in teaching economics.

He took Schumpeter seriously, and wrote the script for the wonderful Schumpeter tapes in the Knowledge Products series on great economists that Kirnzer edited.

A couple of year's ago, I invited Larry to participate in the Schumpeter session that I organized at George Mason's Summer Institute for the Preservation of the History of Economic Thought. He initially agreed, but then had to withdraw because of his health.

More recently, I submitted one of my more idiosyncratic efforts (on the career consequences of writing on polywater) to the journal that Larry edited. I received excellent comments, and the editorial process was handled with grace and efficiency.

Larry was one of the "good guys" in many different ways, and the world is worse for his passing.

Here are a couple of Larry's more obscure writings, that I have found useful:

Moss, Laurence S. "Film and the Transmission of Economic Knowledge: A Report." Journal of Economic Literature 17, no. 3 (1979): 1005-19.

Moss, Laurence S. "Review: Robert Loring Allen's Biography of Joseph A. Schumpeter." American Journal of Economics and Sociology 52, no. 1 (1993): 107-18.

The reference to Larry's Schumpeter tapes is:

Moss, Laurence S. Joseph Schumpeter & Dynamic Economic Change: Capitalism as "Creative Destruction". Nashville, TN: Knowledge Products, Inc., 1988. audio.

March 9, 2009

"Firms that Made Wrong Decisions Should Fail"


Anna J. Schwartz.

Source of image: online version of the WSJ article quoted and cited below.

(p. A11) Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.

. . .

These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."

Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.

Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."

For the full story, see:

BRIAN M. CARNEY. "OPINION: THE WEEKEND INTERVIEW with Anna Schwartz; Bernanke Is Fighting the Last War." The Wall Street Journal (Weds., OCTOBER 18, 2008): A10.

(Note: ellipsis added.)

March 8, 2009

FDR's Treasury Secretary Morgenthau Concluded that Big Spending Stimulus "Does Not Work"


Henry Morgenthau, Jr.

Source of portrait: http://en.wikipedia.org/wiki/Henry_Morgenthau,_Jr.

Henry Morgenthau, Jr. was FDR's Secretary of the Treasury from 1934-1945. In the following important quote, he admits that the big New Deal stimulus spending programs had failed.

(p. 2) We have tried spending money. We are spending more money than we have ever spent before and it does not work. And I have just none interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job, I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this administration we have just as much unemployment as when we started . . . . And an enormous debt to boot!


Folsom, Burton W., Jr. In New Deal or Raw Deal? How FDR's Economic Legacy Has Damaged America. 4th ed. New York: Threshold Editions, 2008.

(Note: ellipses in Folsum's version of the quotation.)

Folsum says that this statement was from testimony before the House Ways and Means Committee in May 1939; and can be found in Morgenthau's Diary entry for May 9, 1939 at the Roosevelt Presidential Library.


Source of book image: http://www.flickr.com/photos/roscoe/3121498653/

March 7, 2009

Bailouts Damage "System Based on the Premise that Risk Can Bring Failure, as Well as Rewards"

CapitalismCommunismCartoon.jpg Source of the cartoon: online version of the WSJ quoted and cited below.

(p. A8) William O. Perkins III says he turned a $1.25 million profit trading Goldman Sachs Group Inc. stock last week.

You would think that would count as a pretty good paycheck for the Houston energy trader. Instead, the experience left him so angry about the demise of capitalism that he says he has decided to spend his profits on advertisements attacking President George W. Bush's planned $700 billion Wall Street bailout.

. . .

So he says he bought Goldman Sachs at $129 a share. The stock fell, so he bought more at $100 a share. It fell again, and he bought at $90. The next day it rallied and he sold out at an average price of $130 a share, for a net gain of about $1.25 million over three days of trading, he said.

Trouble was, the stock didn't rally because of the fundamental strength of the company, Mr. Perkins said. It rallied because the federal government announced that it would rescue Wall Street from its own subprime follies, he said.

"The stock did OK because the government came in and said, 'No one can fail,'" he said. "It's capitalism on the way up and communism on the way down."

His success left him furious, and he decided that someone had to speak out about the damage such a plan would cause to a system based on the premise that risk can bring failure, as well as rewards.

For the full story, see:

MICHAEL M. PHILLIPS. "Trader Makes a Quick $1.25 Million on Rescue, Then Slams It." The Wall Street Journal (Weds., SEPTEMBER 24, 2008): A10.

(Note: ellipsis added.)

March 6, 2009

Rajan Foresaw Risks of Financial Disaster


"Raghuram Rajan, shown at 2005 symposium, warned of rising risks." Source of caption and photo: online version of the NYT article quoted and cited below.

I praised Rajan's analysis in a blog entry back in January 2008. Rajan deserves credit for seeing the situation earlier and more clearly than most other experts:

(p. A7) To outline his fears about the U.S. economy, Raghuram Rajan picked a tough crowd.

It was August 2005, at an annual gathering of high-powered economists at Jackson Hole, Wyo. -- and that year they were honoring Alan Greenspan. Mr. Greenspan, a giant of 20th-century economic policy, was about to retire as Federal Reserve chairman after presiding over a historic period of economic growth.

Mr. Rajan, a professor at the University of Chicago's Booth Graduate School of Business, chose that moment to deliver a paper called "Has Financial Development Made the World Riskier?"

. . .

He says he had planned to write about how financial developments during Mr. Greenspan's 18-year tenure made the world safer. But the more he looked, the less he believed that. In the end, with Mr. Greenspan watching from the audience, he argued that disaster might loom.

Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money, but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products with potentially big payoffs, which could on occasion fail spectacularly.

. . .

Mr. Rajan is now focused on coming up with ways to avoid a regulatory backlash akin to what happened during the Great Depression, when governments around the world threw up protectionist barriers and clamped down on financial markets.

Instead of heavy regulation, he says, the incentives of Wall Streeters need to change so that punishments for losing money are in line with rewards for earning it.

At the start of 2008, he suggested that bonuses that financial workers make during boom times should be kept in escrow accounts for a period of time. If the firm experienced big losses later, those accounts would be drained.

Facing withering criticism over the bonuses paid out in the boom, financial giant UBS and Wall Street firm Morgan Stanley have recently announced they're adopting policies along the lines of what Mr. Rajan proposed.

Mr. Rajan also urges other safeguards. Along with Chicago colleagues Anil Kashyap and Harvard economist Jeremy Stein, he's come up with a plan to create a form of financial-catastrophe insurance that firms would buy into.

For the full story, see:

JUSTIN LAHART. "Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party." The Wall Street Journal (Fri., JANUARY 2, 2009): A7.

(Note: ellipses added.)

March 5, 2009

Japan's Stimulus Package Stimulated Debt, but Not Recovery


Source of graphs: online version of the NYT article quoted and cited below.

(p. A10) In the end, say economists, it was not public works but an expensive cleanup of the debt-ridden banking system, combined with growing exports to China and the United States, that brought a close to Japan's Lost Decade. This has led many to conclude that spending did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations.

In the United States, it has also led to calls in Congress, particularly by Republicans, not to repeat the errors of Japan's failed economic stimulus. They argue that it makes more sense to cut taxes, and let people decide how to spend their own money, than for the government to decide how to invest public funds. Japan put more emphasis on increased spending than tax cuts during its slump, but ultimately did reduce consumption taxes to encourage consumer spending as well.

For the full story, see:

MARTIN FACKLER. "Japan's Big-Works Stimulus Is Lesson." The New York Times (Fri., February 5, 2009): A1 & A10.

MarineBridgeHamadaJapan.JPG "The soaring Marine Bridge in Hamada, Japan, built as a public works project, was almost devoid of traffic on a recent morning." Source of caption and photo: online version of the NYT article quoted and cited above.

March 4, 2009

Only 24% of Obama's Campaign Money Came from Small Donors

(p. A16) An analysis of President-elect Barack Obama's campaign fund-raising punctures one of the most enduring pieces of conventional wisdom from his presidential run: that small donors powered his record-breaking money machine.

. . .

The institute found that while nearly half of Mr. Obama's donations came in individual contributions of $200 or less, in reality, only 26 percent of the money he collected through Aug. 31 during the primary and 24 percent of his money through Oct. 15 came from contributors whose total donations added up to $200 or less. The data is the most recent available.

For the whole story, see:

MICHAEL LUO. "FUND-RAISING; The Myth of the Small Donor." The New York Times (Tues., November 25, 2008): A16.

(Note: ellipsis added.)

March 3, 2009

"This is a Crisis of Excessive Debt"


Source of book image: http://ecx.images-amazon.com/images/I/41gD4n5UkHL._SL500_.jpg

Niall Ferguson has a recent book on money that has received a great deal of attention (but that I have not yet seen). Here are some of his views, as expressed at the 2009 World Economic Forum, in Davos, Switzerland:

(p. B4) "Even before Obama walked through the White House door, there were plans for $1 trillion of new debt," said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.

"You either crowd out other borrowers or you print money," Mr. Ferguson added. "There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term."

Mr. Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from homeowners to Wall Street banks.

"This is a crisis of excessive debt, which reached 355 percent of American gross domestic product," he said. "It cannot be solved with more debt."

While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama's plan -- rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts -- even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.

For the full story, see:

NELSON D. SCHWARTZ. "Global Worries Over U.S. Stimulus Spending." The New York Times (Fri., January 29, 2009): B1 & B4.

The latest Ferguson book, is:

Ferguson, Niall. The Ascent of Money: A Financial History of the World. New York: Penguin Press, 2008.

March 2, 2009

Japan's Huge Stimulus Spending Led to Economic Stagnation

(p. A2) Rep. Paul Ryan of Wisconsin, a young and economically astute Republican leader, has numerous problems with the economic-stimulus package working its way through Congress, but essentially they boil down to this: He fears the U.S. is repeating the mistakes Japan made trying to get out of its own economic ditch in the 1990s.

The Ryan critique is important in part because it's popping up with increasing frequency among congressional Republicans.

. . .

Here's the critique in a nutshell: Japan in the early 1990s, like the U.S. today, saw a real-estate bubble burst, spawning a banking and credit crisis that drove the whole economy down, hard. The Japanese then tried stimulating the economy with giant doses of government spending, which didn't pep things up -- but did bring on deficits that required tax increases later, dragging out Japan's problems for years.

For the full commentary, see:

GERALD F. SEIB. "CAPITAL JOURNAL; Avoiding Japan's Stimulus Miscues." Wall Street Journal (Tues., FEBRUARY 2, 2009): A2.

(Note: ellipsis added.)

March 1, 2009

The Ad Hoc Growth of the Regulatory Snarl

RegulatorySnarlGraphic.jpg Source of graphic: online version of the NYT article quoted and cited below.

(p. 9) Who's to blame for the implosion of financial markets? The finger-pointing has gone in every direction, and it's easy to see why: the regulatory structure points in every direction.

The apparatus that oversees the nation's financial system is an ad hoc creation: every time there is a fiscal panic, new agencies are formed and existing ones receive new responsibilities.

For the full comment, see:

HANNAH FAIRFIELD. "Metrics; A Snarl of Regulation." The New York Times, SundayBusiness Section (Sun., October 4, 2008): 9.


The StatCounter number above reports the number of "page loads" since the counter was installed late on 2/26/08. Page loads are defined on the site as "The number of times your page has been visited."

View My Stats