The Great Economist Carl Menger
It is an acid test of the power of an argument whether it can be looked upon as decisive in its own right, or whether it stands in need of a long string of supporting subsidiary arguments. Similarly, it is an acid test of the significance of a man's lifework whether one can discern in it a single achievement which by itself signifies greatness, or whether it can be portrayed only as a mosaic into which many small pieces have been assembled. Menger was one of those thinkers who can claim a single decisive achievement that made scientific history. His name will be forever linked with a new explanatory principle which has revolutionized the whole field of economic theory. Whatever significant or lovable traits one may ascribe to his character, whatever additional scientific achievements one may adduce, whatever one may say about his devoted teaching and outstanding scholarship — all that is pushed into the background behind the lofty height on which this figure stands. Menger's biographer, of course, will put all this material together into a composite picture of a strong and attractive personality. But this picture derives its significance from his one great achievement, and there is no need for those details to lend fame to Menger's name.
Menger has left us after twenty years of the strictest retirement, during which he explored and enjoyed at leisure the fields of his interests. Thus, we have gained sufficient distance to enable us to discuss his life's work as part of the history of our science. And it is indeed imposing. The background from which Menger's scientific personality emerged can be briefly sketched. Out of practical doubts, out of the needs of practical policy, a small fund of knowledge on economic matters had developed since the 16th century; questions of monetary and commercial policy had since that time — that is to say, since the modern exchange economy began to transcend the bounds of village and manor — led to discussions which in a primitive fashion linked together the causes and effects of striking economic events. The slow trend in the direction of an individualized economy and free trade was accompanied by an ever swelling stream of pamphlets and books by authors who were usually more inclined to solve the actual economic problems of the day than to think about more fundamental problems. During the 18th century, there emerged a consolidated science which had its own schools, results, disputes, textbook summaries, and scholarly experts. This was the first epoch of our science, an epoch which we may think of as culminating in Adam Smith. There then followed a period of analysis and specialization, with the English Classics dominating the field with which we are here concerned, since it is in this field that Menger's achievement lies. Ricardo stamped his name on this epoch. In its course, a coherent system of doctrines was evolved which claimed scientific character and general validity within wide limits; pure economic theory had arrived.
It will never be quite clear why such rapid success should have been followed by such complete defeat. Several of the leading brains of the new discipline were still at work; they had not yet passed beyond the stage of dealing with fundamentals; but already we witness paralyzing stagnation inside the circle of economists and general distrust, hostility, or neglect outside it. The fault lay partly in the inherent defects of what had been achieved, the primitive nature of some of the methods used, the superficiality of some of the thinking, and the clearly visible inadequacy of some of the results. All this, however, should not have been fatal since it was capable of improvement. But nobody started this work of improvement, nobody showed interest in the internal structure of the new theoretical edifice, because — and here lies the other cause of the failure — public opinion as well as the experts turned away for a different reason: the new doctrine had been in too much of a hurry to try to solve practical questions and to enter the quarrels of political and social parties with a claim to scientific validity. Thus, the defeat of liberalism became also the defeat of the new doctrine. As a result, especially since in some countries — particularly in Germany — there was antagonism to social theory generally and a tendency to cling to the intellectual heritage of philosophical and historical tradition, little more than the economic and social policy façade of the classical theory was transmitted to the next generation, while the way into its internal structure was actually blocked. The younger people were scarcely aware how much of scientific knowledge and even more of further possibilities there was to be had. And thus it looked as if theory had been no more than an interlude in the history of ideas, an attempted foundation for the economic policies of a particular fleeting period. It was, of course, inevitable that little pools of theory should be preserved here and there among experts. In isolated cases, achievements of major significance were accomplished, but essentially the field lay untilled. The names of Thünen and Hermann in Germany do not change this verdict. The socialist theory alone built on the classical methodological foundations without petrifying.
With the autonomy of scientific greatness, the lifework of Carl Menger stands out in sharp relief against this background. Without external stimulation, and certainly without external help, he attacked the half-ruined edifice of economic theory. What drove him on was not interest in economic policies or the history of ideas, nor a desire to add to the accumulated store of facts, but mainly the quest of the born theorist for new principles of knowledge, for new tools for marshalling the facts. And while usually the researcher scores at best a partial success — the solution of one of the many individual problems of a discipline — Menger belongs to those who have demolished the existing structure of a science and put it on entirely new foundations. The old theory was vanquished, not by the historians and sociologists who brushed it aside, not by the makers of economic and social policies who rejected its practical conclusions, but by one who recognized its inner organic deficiencies and who made it into something new by tackling it on its own ground.
It is always awkward to formulate the fundamental principle of a theory for a wider circle, for the final formulation of a fundamental principle always seems somewhat obvious. The intellectual achievement of an analyst does not consist in the content of the statement which expresses the fundamental principle, but in his knowing how to make it fertile and how to derive from it all the problems of the science concerned. If you tell someone that the fundamental principle of mechanics is expressed in the statement that a body is in equilibrium if it does not move in any direction, the layman will hardly understand the usefulness of the theorem or the intellectual achievement that went into its formulation. Thus if we say that the fundamental idea of Menger's theory is that people value goods because they need them, we must understand that this will not impress the layman — and even the majority of professional economists are laymen in theoretical matters. The critics of Menger's theory have always maintained that no one could ever have been unaware of the fact of subjective valuation, and that nothing could be more unfair than to put forward such a triviality as an objection to the Classics. But the answer is very simple: it can be demonstrated that almost every one of the classical economists tried to start with this recognition and then threw it aside because he could make no progress with it, because he believed that, in the mechanism of the capitalist economy, subjective valuation had lost its function as the engine of the vehicle. And like subjective valuation itself, so also the phenomena of demand based on it were regarded as useless in comparison to the objective facts of costs. Even today, the critics of Menger's school will declare now and then that the subjective theory of value can at best explain the prices of fixed stocks of consumption goods but nothing else.
What matters, therefore, is not the discovery that people buy, sell, or produce goods because and in so far as they value them from the point of view of satisfaction of needs, but a discovery of quite a different kind: the discovery that this simple fact and its sources in the laws of human needs are wholly sufficient to explain the basic facts about all the complex phenomena of the modern exchange economy, and that in spite of striking appearances to the contrary, human needs are the driving force of the economic mechanism beyond the Robinson Crusoe economy or the economy without exchange. The chain of thought which leads to this conclusion starts with the recognition that price formation is the specific economic characteristic of the economy — as distinct from all the other social, historical, and technical characteristics — and that all specifically economic events can be comprehended within the framework of price formation. From a purely economic standpoint, the economic system is merely a system of dependent prices; all special problems, whatever they may be called, are nothing but special cases of one and the same constantly recurring process, and all specifically economic regularities are deduced from the laws of price formation. Already in the preface of Menger's work, we find this recognition as a self-evident assumption. His essential aim is to discover the law of price formation. As soon as he succeeded in basing the solution of the pricing problem, in both its 'demand' and 'supply' aspects, on an analysis of human needs and on what Wieser has called the principle of 'marginal utility,' the whole complex mechanism of economic life suddenly appeared to be unexpectedly and transparently simple. All that remained to be done was merely elaboration and advance along the road of increasingly complicated details.
The main work, which contains the solution of this fundamental problem and clearly hints at all future developments, and which, together with the roughly simultaneous, independent writings of Jevons and Walras, must be considered as the foundation of modern economic theory, bears the title Grundsätze der Volkswirtschaftslehre, Erster Allgemeiner Teil and appeared in 1871. Calmly, firmly, and clearly, perfectly certain of his cause, in careful elaboration of each sentence, he presents to us the great reform of the theory of value. Menger's admirers have often compared his achievement with that of Copernicus; his critics have ridiculed the comparison even more frequently. Today it has become possible to form an opinion on this issue: Menger reformed a science in which rigidly exact thought was much more recent and imperfect than in the science which Copernicus placed on new foundations. To that extent, the technical achievement of the latter was much greater and more difficult, not to mention the fact that it lay in a field where results cannot be tested by the layman and are shrouded in mystery. But in essence and quality, Menger's work is in the same category, just as an army commander who leads a small army to success in a neglected theater of war may rank in personal achievement with Napoleon and Alexander, even though the classification would surprise someone not familiar with the circumstances. Comparisons are generally deceptive and likely to lead to useless discussions. But since they are a means of defining a man's position for those who are not experts in the narrowest sense, we shall risk a comparison of Menger with other economists. If we compare him, for example, to Adam Smith, it strikes us immediately that his achievement is much narrower than that of the Scottish professor. Adam Smith gave expression to the practical needs of his time, and his name is inseparably linked to the economic policy of the epoch. Menger's achievement is purely scientific, and as a scientific contribution, again purely analytical. His work can be compared to only a part of Smith's. Smith was not at all original, and more particularly in basic scientific problems he was remarkably superficial. Menger burrowed deep, and entirely by himself he discovered truths which were quite inaccessible to Smith.
Ricardo was more his peer. Here we have two theoretical talents, though within the realm of theory, two fundamentally different talents. Ricardo's fertility and acuteness lie in the many practical conclusions and insights which he managed to call forth from very primitive foundations. Menger's greatness lies precisely in those foundations, and from the standpoint of pure science it is he who should be ranked higher. Ricardo is a prerequisite for Menger — a prerequisite which Menger himself certainly could not have created. But Menger is the vanquisher of the Ricardian theory.
Since Menger and his school soon came to be considered as the only serious competitor of the Marxist theory, a comparison with Marx may also be attempted. Here again one must completely disregard Marx the sociologist and prophet, and confine oneself to the purely theoretical skeleton of his work. Menger competed with only one sector of Marx's work. In this sector, however, he excels Marx considerably, both in force of originality and in success. In the field of pure theory, Marx is the pupil of Ricardo and even of some of Ricardo's followers, especially of the socialist and semi-socialist value theorists who wrote in England during the 1820s. Menger is nobody's pupil, and what he created stands. To avoid misunderstanding: no economic sociology or sociology of economic development can be derived from Menger's work. It makes only a small contribution to the picture of economic history and the struggle of social classes, but Menger's theory of value, price, and distribution is the best we have up to now.
I have said that Menger was nobody's pupil. In fact, he had only one forerunner who had already recognized his basic idea in its full significance — namely, Gossen. Menger's success roused the forgotten book by that solitary thinker from its slumber. Apart from that, there are, of course, many hints of a subjective theory of value, and even of a price theory based on it, from the scholastic school onwards, especially by Genovesi and Isnard, and then again by some German theorists during the first decades of the nineteenth century. But all this amounted to little more than that matter of obvious fact which we have mentioned before. In order to see more in these hints, one must have already worked out their significance through one's own labors. On the other hand, any scientific achievement is always the blossoming of old trees. Otherwise mankind does not know what to do with it, and the blossom falls to the earth, unregarded. But in so far as there can be any originality in scientific life, or in human life generally, Menger's theory belongs entirely to him to him and to Jevons and Walras.
This also explains the way in which his gift was received and its early fate. His gift was the fruit of his thought and struggle during the third decade of his life, that period of sacred fertility which, in the case of every thinker, creates what is subsequently worked out. Born on February 23, 1840, he was just thirty-one years old when his book appeared. Originally, it was addressed to Vienna, for by it he wanted to qualify to teach; and the magnitude of his personal achievement can be realized only if we remember in what a desert he planted his trees. For long there had been no sign of life in the field of our discipline. One must go back as far as 1848, to Sonnenfels whose book was the first official textbook, to find even a good average performance. Everything presentable was imported from Germany. The men whom Menger encountered when he started at the University had hardly any understanding of his ideas or of the whole field which he could make bear fruit. They gave him that chilly reception of which he later told us. Finally, however, he established himself, became a professor, and the course of time brought him the usual honors of the man of science; but he never forgot that first struggle. In Germany, furthermore, he remained neglected, if only because the field was dominated by social policy on the one hand, and by research into details of economic history on the other hand. Quite alone, without a platform from which his voice could have carried into the world, without any sphere of influence, and without that apparatus which traditionally is everywhere at the disposal of the holder of an eminent chair, he saw himself confronted by a complete lack of comprehension, which in turn gave rise to hostility.
Anyone who understands the inner history of scientific progress will be aware of all the tactics employed in small circles in order to gain acceptance for new ideas. Menger did not know how that is done; and even if he had known, he lacked the means of conducting his own campaigns. But his powerful strength penetrated through all the jungles and triumphed over all the hostile armies. That, in the first place, was entirely his own merit. There is within the human soul a fine and intimate connection, not always apparent and often seemingly absent, between the intellectual energy which can liberate itself from traditional views and burrow independently into the depths of things, and the faculty of founding schools — that peculiar fascination which attracts and convinces the future thinkers. In the case of Menger, the concentration of his intellectual work led directly to concentration on proclaiming his results. Although he never again expressed himself on the subject of the theory of value, yet he implanted his principles into a whole generation of students. Beyond that, he correctly perceived that in Germany it was not so much his own theory, but rather all theory, that was rejected, and he took up the battle to establish the rightful place of theoretical analysis in social matters. To this battle — all too well known as the Methodenstreit — we owe his work on the methodology of social sciences in which he tried, with systematic thoroughness and by formulations which have not often been bettered to the present day, to clear the field of exact research from an undergrowth of methodological confusion. This contribution, too, is of permanent value, even though subsequent advances in the theory of knowledge may have carried us beyond it in many respects. It would be unfair to his chief contribution to present this later work as equally important; yet its educational influence on his contemporaries was incalculable. It had no influence outside Germany, and there was no need for it to have had. For outside Germany, the ideas which it tried to establish had for the most part already been commonly accepted. For the development of the science in Germany it was a milestone.
Furthermore, a kind fate favored him, in the propagation of his ideas, with such good fortune as rarely falls to the lot of founders of schools: an alliance with two intellectual peers who could directly continue his work at the same level of original power, Böhm-Bawerk and Wieser. The work and efforts of these two men — which were directly linked to his own and which, despite their own calling to intellectual leadership, did not prevent them from constantly referring back to Menger — created the 'Austrian School,' which slowly conquered the scientific world of this special field for its basic ideas. Success was slow in coming. It appeared frequently in a form which is psychologically comprehensible, but all the same not very pleasant, and which we can always observe in the history of science if a group lacks what one can only call the means of scientific advertising. Thus the essential things were accepted, but this acceptance was accompanied not by grateful acknowledgment, but instead by formal rejection based on subsidiary issues. This is what happened in Italy. The leading English theorists also were not quite free from this weakness. The reception in America and also — when it finally took place — in France was much more cordial and generous, and this was particularly the case in the Scandinavian countries and in Holland. Only after this degree of success had been achieved was the new tendency accepted in Germany as an accomplished fact. So Menger finally lived to see his doctrines discussed in scientific circles wherever our discipline flourishes, and to see his basic ideas slowly and imperceptibly transcend the plane of current discussion and become part of the uncontested store of scientific knowledge. He himself was keenly aware of that, and even though — like a true scholar — he was sometimes furious about some little pinprick or other administered by a colleague, he was nevertheless conscious of having made scientific history and of the fact that his name could never vanish from the history of science.
All of us know that today no scientific achievement can be permanent in the sense that it is not subject to amendment by the progress of research. Menger's own successors, and in another direction all those researchers in our subject who follow Walras, have already made changes in the structure as he conceived it, and will doubtless continue to do so in the future. In another sense, however, his achievement had become timeless. This is so in the sense that today it is beyond question that he succeeded in taking an enormous step forward on the road of knowledge, and that his work will stand out from the mass of ephemeral publications, most of which are destined for oblivion, and will be recognizable through the generations.
If the one achievement were less great, there would be other things yet to mention: above all, his theory of money written for the Handwörterbuch der Staatswissenschaften, his contributions to the theory of capital and to practical currency problems. We would have to mention his work as a teacher, which is unforgettably stamped upon the memory of the older among us, far beyond the narrow circle of specialists, and also the amazing range of his interests. But all this counts for little beside his theory of value and price, which is, so to speak, the expression of his real personality.
But we mourn not only the thinker but also the lovable man. Thousands of memories which are dear to us linger in the minds of all who knew him.
A Free Market in Money?
Can the monetary system regulate itself, or does it require oversight by government regulators? According to Lawrence H. White, who gave a lecture entitled "Can the Monetary System Regulate Itself?" at Rhodes College this past March the answer to the first question is "yes" and the answer to the second question is "no."[1]
According to Professor White, who was until recently the F.A. Hayek Professor of Economic History at the University of Missouri-Saint Louis and who will join the faculty at George Mason University this fall, theory and history provide a strong case for a free market in money and banking.
The idea that a monetary system can regulate itself has a long tradition in economics and appears in the work of Adam Smith and David Hume. Both believed that the price mechanism would prevent money shortages. This stands in contrast to the ideas of 17th- and 18th-century European mercantilism. According to the mercantilists, the wealth of nations consisted of its stock of gold and silver reserves. In the minds of the mercantilists, the way to for a country to get rich was to encourage exports (which earn gold and silver) and to discourage imports. However, according to the "price-specie flow mechanism" identified by Hume prices adjust to ensure a balance of imports and exports.
In his March 9 lecture at Rhodes, Professor White pointed out that today's crisis is an artifact of the highly regulated monetary system. He proposed that banking deregulation would reduce exposure to external shocks and increase rather than decrease stability. White cited his research on the history of banking in Scotland to provide evidence that the banking system can correct itself without government intervention. Specifically, he argued that a market with private note-issuing banks has built-in mechanisms to constrain monetary over-expansion.
According to White, vigilant internal monitoring would be vital to a bank's ability to weather external storms, and the prospect of failure would provide banks with the incentive they need to be prudent stewards of their depositors' funds. Therefore, government intervention in the monetary system is superfluous when it is not destructive. The self-correcting tendency of an unregulated market for money suggests that it is time to reconsider whether we need the Federal Reserve.
The unregulated system's alleged susceptibility to bank runs is also over-stated. One of the most important reasons for bank failure is not bank runs but bad loan decisions: Professor White demonstrated that government loan guarantees and government willingness to bail out failing banks have in fact encouraged risky loaning behavior. Though the Federal Reserve aims to promote monetary and economic stability, they distort interest rates, worsen inflation, and cause business cycles by printing money.
In Scotland, as Professor White pointed out, people still use private bank notes issued by independent banks. These banks succeed in the market not through government regulation but by promoting the use of their notes (in order to promote their business, for example, they set up many ATM machines and charge no fee for withdrawal of their notes).
Canada's experience during the Great Depression also gives us reason to doubt the wisdom of monetary intervention. Canada has historically had low levels of government intervention and an unregulated banking system. Professor White noted that people did not run on Canadian banks in the same way that they ran on American banks during the Great Depression. In part, this was due to the absence of branch banking restrictions that prevented American banks from diversifying their risks. The Canadian banking system adjusted to new market conditions and did not undergo the protracted crisis that occurred in the United States.
Professor White's lecture showed that, historically, a free-market approach to the banking industry is less prone to crises and operates efficiently through the invisible hand of the market. From the ideas of David Hume and Adam Smith, through the experience of banking systems in Scotland and Canada, we can see that the case for government intervention in the monetary system has been overstated.
The Second Coming of Keynes
Paul Krugman wants to be our savior. Moreover, he wants to be a specific kind of savior: a magus of the scientific age, a blackboard prophet.
The roots of this curious ambition can be seen in his recent profile in Newsweek:
Krugman says he found himself in the science fiction of Isaac Asimov, especially the "Foundation" series "It was nerds saving civilization, quants who had a theory of society, people writing equations on a blackboard, saying, 'See, unless you follow this formula, the empire will fail and be followed by a thousand years of barbarism.'"
Now here we are at an economic zero hour for the American empire, and perhaps for modern civilization itself, and many in the global urban elite think this establishment triathlete with his Princeton professorship, his New York Times column, and his Nobel Prize, has the equation for salvation. So what is Krugman's formula? What commandments does the magus have scrawled on his blackboard for us, his plebian flock?
To understand that, one must understand Krugman's intellectual heritage, such as it is.
Paul Krugman is a devotee of John Maynard Keynes. He's such a hard core disciple that he was Keyensian when Keynesianism wasn't cool: the period between the 1970s stagflation, which seemed to disprove Keynesian doctrine, and now, when it is groundlessly renascent due to our society's stunted memory span. He himself proudly admits his devotion to Keynes. He has written such headlines as "The Greatness of Keynes" and "Why Aren't We All Keynesians Yet?" But what does it mean to be keen on Keynes? What diagnosis does Krugman's Keynesian economics have for the economic crisis, and what remedies does he prescribe?
The Keynesian Diagnosis: A Deadly Case of Frugality
In the Keynesian whodunit mystery of depression economics, the culprit is nothing other than savings. That's right, savings: that necessary precondition for all capital development, thereby all gains in productivity, and thereby all increases in general human prosperity.
The Keynesian story of depressions in a nutshell is that (1) excessive savings leads to (2) underconsumption which leads to (3) unemployment. Unemployment engenders even more dread savings, completing the loop of a vicious cycle. This theory was a spit in the face of hundreds of years of progress in economic thought. Economists before Keynes painstakingly, analytically, and progressively built up a mighty edifice of knowledge and truth, all of which centered around how markets find optimal prices and equilibrate in response to changing situations. Keynes blithely dismissed it all as "orthodoxy" and falsely characterized the market as an inherently dysfunctional mechanism that tends to seize up into long-lasting depression without intervention from the wise government.
Paul Krugman completely buys the Keynesian story. He wrote recently,
one of the high points of the semester, if you're a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone's income.
So to Krugman, the road to economic hell is paved with the good intentions of frugality. This "underconsumption theory" is basically what he's talking about whenever you read Krugman warning ominously about "saving gluts," the "paradox of thrift," "consumer capitulation," "insufficient aggregate demand," etc., etc. It's all just adult jargon dressing up a childish theory. As Gary North wrote, underconsumption theories
speak of saving as if it were a system for hiding paper currency under a mattress. They refuse to answer this crucial question: What does the bank do with the money that a consumer deposits instead of spending? Put another way: What analytical or conceptual difference does it make whether a saver deposits a dollar [in] his bank, which the bank will lend, or whether he spends it, enabling the seller to deposit the dollar in his bank, which his bank will lend?
And even if saving were a matter of greenbacks and mattresses, any particular amount of such "hoarding" would not lead to underconsumption, as Murray Rothbard showed in his economic treatise Man, Economy, and State, but merely "an increase in the real value of their cash balances and of the monetary unit." This would depress business revenues in nominal terms, but it would lower business costs as well, leaving businesses just as profitable in real terms as before.
The Keynesian Remedy: Spend Your Way to Riches
Since Krugman has such a backwards diagnosis of depressions, it should be no surprise that his Keynesian remedies would be equally wrongheaded, and disastrously destructive. The Keynesian prescription to ward off depression is government stimulus. This is what Krugman is talking about whenever he calls for "priming the pump." Keynesian stimulus comes in two forms: monetary and fiscal. With monetary stimulus, a central bank (like the Federal Reserve) greatly increases the money supply, which dramatically lowers interest rates, which in turn stimulates spending. This is the "pro-bubble" side of Krugman's economics, which I've written about here and here. His now-notorious prescription of an induced housing bubble was to be accomplished (and was actually accomplished) via monetary stimulus. Krugman said in an interview with Lou Dobbs:
Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer. (emphasis added)
This was his prescription for the recession in 2001. The rest is housing bubble history.
The ironic thing is that monetary expansion, Krugman's cure for depressions, is the very poison that causes them in the first place. According to the Austrian Business Cycle Theory, which was first expounded in 1912 by Ludwig von Mises, the great Austrian economist who predicted the Great Depression, monetary expansion misdirects resources, causing excessive investment in stages of production that are more removed from the final products. This lengthening of the chain of production is unsustainable, given the actual amount of savings available for continuous investment. Eventually, businesses realize this fact, and that the malinvestments need to be liquidated and resources reallocated toward sustainable projects. Further monetary stimulus (or any government intervention for that matter) only serves to retard that reallocation process and to prolong the depression. For a nice primer on the true story behind business cycles, I recommend this article and this speech (video) by Thomas Woods.
According to Krugman's assessment of the current state of the economy, monetary stimulus has done pretty much all it could do (thank God for that!), and we are now coming upon a Keynesian "liquidity trap," which, as he characterizes it, is "a situation in which conventional monetary policy loses all traction. When short-term interest rates are close to zero … " What does Keynesian doctrine prescribe in such situations? It calls for massive fiscal stimulus: government spending intended to fill the hole in aggregate demand that underconsumption has left. This is how Krugman himself characterized it in February, according to a University of Pennsylvania e-newsletter:
With monetary policy a non-starter, "That leaves nothing but government spending" to prime the pump, Krugman said. "That's pure Keynes."
Krugman estimated that the "spending hole" in the U.S. economy is $2.9 trillion dollars. Because of that, he complained, President Obama's stimulus package should be over three times its present size!
"It's helpful, but it does not cover even one-third of the gap, so it's disappointing," Krugman said. Out of the $789 billion approved, only about $600 billion adds real stimulus, in Krugman's opinion. "So you've only got $600 billion to fill a $2.9 trillion hole."
The only hole that needs filling is the one in Krugman's understanding. As we have already seen, the notion that stimulus does any good by moving money out of mattresses and bank vaults is fallacious. And as Ludwig von Mises wrote,
a government can spend or invest only what it takes away from its citizens … its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.
This leads to the question of whether government spending and investment does more good than private spending and investment. Sound economics answers this question with a resounding "no"; yet we don't even need to consider the question in regards to Krugman's Keynesianism. This is because ultimately, Keynesian fiscal stimulus is not even about the goods and services produced by the additional spending (infrastructure, welfare, etc). You see, the fiscal stimulus might as well be literally filling holes, since according to Keynes's ridiculous understanding of how an economy works, it doesn't matter what the government spends money on; even digging up holes just to refill them would qualify as beneficial stimulus. You might think that this must not be literally true. "Keynes may have been wrong on some things," you may protest, "but no economist as prominent as him would believe something so foolish!" Read the man's words for yourself:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
The above passage is not some off-hand note written to a colleague in a fit of academic speculation. It is part of Keynes's chief contribution to economics, upon which his reputation rests: The General Theory of Employment, Interest, and Money. I don't care how prominent, credentialed, or "accomplished" an economist is. If he says that burying cash in the ground can be a boon to society, then he should be immediately dismissed from public and academic discourse.
The simple fact that Krugman regards such a fellow as an exemplar of economic scholarship would be highly telling by itself. "Okay," you might think, "Keynes was a bit extreme. But Krugman himself wouldn't go so far as to believe something like that."
Wrong again. In April, Krugman actually bemoaned the fact that Obama's stimulus projects were under budget.
President Obama hails the fact that stimulus projects are coming in ahead of schedule and under budget. Yay — but boo.
Ahead of schedule is good. Under budget — well, ordinarily that's a good thing. But the point of the stimulus is to increase spending!
That's right: Krugman would, all other things being equal, prefer government stimulus spending to be inefficient. He then goes on to quote the very same ridiculous passage from Keynes's General Theory, which I quoted above, but favorably. And the title of the piece in which he made this complaint? "Time for Bottles in Coal Mines."
I told you he's hard core.
This brings me to a side point I'd like to make. One might think that in writing in such, let's say "direct," language, I'm needlessly vilifying both Keynes and Krugman. I certainly wouldn't write this way about just anyone who I happened to disagree with. But, as should now be evident, Keynesians are special. Their economic doctrines are so fallacious, and their policies are so destructive that, for the sake of truth and humanity, one cannot be too forthright in denouncing them.
Conclusion
Paul Krugman wants to be our savior. Like a savior, he would perform a miracle for us: that of turning consumption into wealth. But who would accept a messiah with such a John the Baptist as John Maynard Keynes, who proclaimed that credit expansion could perform the "miracle … of turning a stone into bread"? In any case, Krugman is a curious kind of savior: one more interested in exercising his brilliance than in actually helping people. In the Newsweek profile, he said of his policy advocacy,
"I am not overflowing with human compassion. It's more of an intellectual thing."
Indeed, there is something almost calculated in the unblinking wrongheadedness of both Keynes and Krugman. You're not likely to get much notoriety as a public intellectual advocating common sense.
What's more, you can't express common sense in calculus, which is actually useful in the natural sciences, but which only provides a fallacious veil of obscurity and elitism over the social sciences. In other words, sound economics just doesn't make for a cool-looking blackboard. And without a cool-looking blackboard, how could Paul Krugman be the "nerd saving civilization"?
John Maynard Keynes reveled in the ballyhoo over his bold "new economics," even though his doctrines were merely age-old inflationist fallacies dressed up in mathematical jargon. When confronted with the fact that his solutions would never work in the long run, he would dismissively say, "In the long run, we're all dead." But, as Murray Rothbard used to say, now Keynes is dead, and we're all stuck living in his "long run."
For our own sake, let's hope Paul Krugman's tenure as an influential economist — as well as the current renascence of Keynes he represents — is a mercifully short-run affair.
GM auctions Opel
A disputed bid
General Motors and the German authorities differ over Opel's future
THE endgame to decide the ownership of Opel/Vauxhall, General Motors’ European unit, has begun. On Friday July 24th GM is expected to recommend one of the final bids submitted on Monday of three potential suitors to the Opel/Vauxhall Trust. This entity was set up to run the business and administer a €1.5 billion ($2.1 billion) bridging loan from the German government while the parent company was in Chapter 11 bankruptcy.
GM, which left bankruptcy two weeks ago, has undertaken to consult closely with the governments of the countries affected, primarily Germany, which is home to nearly half of GM Europe’s 55,000 employees, but also Britain, Belgium and Spain. Next week it will report its conclusions to its main shareholder, the American Treasury. A final decision on granting one of the bidders exclusivity should be announced before the end of July.
Of the three bids, the easiest to dismiss will be that of Beijing Automotive Industry Corporation. According to people close to the process, as well as being late to submit detailed plans, the Chinese firm would present insuperable difficulties over the transfer of intellectual property. Of the two remaining bidders, the favourite remains Magna, a Canadian car-parts firm with close ties to Germany through its Austrian-born boss, Frank Stronach, and its partner, Sberbank, Russia’s biggest (and state-owned) bank. A few weeks ago Magna looked almost certain to prevail. But RHJ International, a Brussels-based industrial holding company that has links with Ripplewood, an American private-equity firm, has emerged as a serious rival.
On the face of it, there is little to separate the two bids. Both will result in about 10,000 job losses (though relatively few in Germany). Both require substantial loans from the German and other governments: RHJ wants €3.8 billion and Magna €4.5 billion. Both bidders will put in some cash of their own: Magna and Sberbank say up to €700m, whereas RHJ has promised €275m. Under Magna’s latest proposal, it will hold 27.5% of the equity, Sberbank the same and GM 35%. RHJ envisages holding 50.1%, leaving 39.9% for GM. Both are putting aside 10% for employees.
Each of the two bidders also has important supporters. Magna is the preferred choice of the leftist ministers in Germany’s ruling coalition and Opel’s powerful works council. Chancellor Angela Merkel was thought at first to have favoured a proposal by Fiat on the grounds of its superior industrial logic. But since the Italian company in effect dropped out of the bidding, she has swung behind Magna. The Kremlin is also firmly behind the deal, as Sberbank’s Russian industrial partner, GAZ, a big automotive firm owned by Oleg Deripaska, an embattled oligarch, will provide the manufacturing capacity for Russian-built Opels.
However, GM has become progressively less enthusiastic about the Magna plan. It is worried about some of the intellectual-property issues that could arise if Sberbank were to sell out to GAZ or if Magna were to enter into manufacturing agreements with other carmakers. It also fears it could lose control of or even access to some technology Opel developed at great expense, such as clean diesel engines. A further irritant is a proposal by Magna to create a separate “Opel Russia” in which the main company would have a stake of only 70%. The other 30% would be acquired by Sberbank on what GM reckons to be ridiculously discounted terms.
Above all, GM is keen for any agreement to include a clause that would give it the option of regaining control of its former subsidiary when it has sufficient financial strength to do so. RHJ is happy to oblige. But Magna and Sberbank are dead against any such condition, as is the German government. A view persists in Germany, especially among Opel’s unions, that GM has been a poor steward of what was once the country’s biggest carmaker. Will the new, post-bankruptcy GM be as easily cowed into accepting a deal it fears may not be in its long-term interests as the wounded giant of only a few weeks ago?
America's Federal Reserve
On the mend
The Fed's chairman talks up the economy
IT HAS been a long time since comments on the economy by an official of America’s Federal Reserve comments could be described as cheerful. Yet there was no denying the upbeat tone of Ben Bernanke’s testimony to Congress on Tuesday July 21st.
Markets have experienced “notable improvements,” the Fed’s chairman told Congress. The fear of investors has “eased somewhat,” and “many markets are functioning more normally.” As for the economy, consumer spending has been stable, the drop in the housing market has moderated and many “of our trading partners are also seeing signs of stabilisation.” His fingers may be crossed but it is clear that Mr Bernanke thinks the recession, if not over now, soon will be.
That is a far cry, though, from seeing a threat from inflation and Mr Bernanke made it clear that the federal funds target rate, now near zero, will remain there for a long time. On Wall Street, most reckon that means until well into 2010 at least.
Yet the Fed is already under pressure to explain how it intends to tighten monetary policy, even by congressmen who usually want nothing of the sort. The source of their angst is the explosion in the size of the Fed’s balance sheet. It has financed its emergency loans to the financial system and purchases of long-term government and mortgage-related bonds (the latter designed to push down long-term interest rates) by printing money, or, more technically, creating new reserves for banks. Such reserves now stand at $782 billion compared with a typical level of around $10 billion before the crisis. And people who know nothing else about inflation do understand that it is what you get if you print enough money.
In fact the connection between bank reserves and inflation is rather weak. Inflation is the result of demand exceeding supply. Excess reserves are only a problem if banks turn them into new loans that generate new spending. That’s unlikely to happen when the demand for credit is in the ditch and loan losses are crimping banks’ capital and lending capacity.
Still, both loan demand and bank capital will be healthy again some day. Whether inflation follows depends on if the Fed raises interest rates in time and thereby curbs the appetite for credit. Mr Bernanke spent much of his testimony explaining how he can do just that. First, the Fed can pay higher interest on those reserves, giving an incentive to banks to leave them at the Fed rather than turn them into loans. It could, if necessary, induce banks to lock up the reserves for long periods by offering them the equivalent of certificates of deposit. It could soak up those reserves by borrowing from financial firms in the form of secured loans called “reverse repos.” And if necessary, it could sell some of its bonds, which would push up long-term interest rates. That, though, is not a preferred option.
Politics could also interfere with the Fed’s willingness to tighten monetary policy in time. Congress’s nonpartisan investigative arm, the Government Accountability Office, can now audit the Fed with the exception of its monetary policy, lending programmes or relations with foreign central banks. A bill in Congress would lift those prohibitions. Mr Bernanke argued that the threat of such audits would lead investors to question the Fed’s willingness to do unpopular things, like tighten monetary policy, unsettling them and driving up long-term interest rates.
This is not idle speculation. Anti-Fed sentiment was also strong in the 1970s, when Congress first sought to have the GAO audit the central bank. Arthur Burns, chairman at the time, fought back, and a compromise was struck to allow audits, but with the current prohibitions. Mr Burns later reflected that the effort of “warding off legislation that could destroy any hope of ending inflation” involved “political judgments” that may have weakened his anti-inflationary resolve.
For all the discussion, any tightening of policy is a long way off. Housing may be stabilising but Mr Bernanke noted that commercial-property borrowers are struggling to refinance; their defaults may pose the next big threat to the banking system.While the threat of deflation disappeared from the Fed’s official post-meeting statement last month, it reappeared in the monetary-policy report that accompanied Mr Bernanke’s testimony. The focus of monetary policy, it said, is “to prevent a sustained decline in inflation below levels consistent” with the Fed’s goals. The report also noted that despite their success in raising new capital, banks’ lending contracted by nearly 7% at an annual rate in the first half of the year. That’s due both to lower demand and tighter lending standards: unused lines of credit fell by a dramatic 30% in the first quarter.
Indeed, further easing should not be ruled out. But how? Not only is the Fed funds rate in effect at zero, but the Fed’s foray into bond buying did not have the intended impact on long-term rates: they have risen, not fallen. That is partly because of lower panicked demand for the shelter of bonds but also fear that such purchases would ultimately lead to inflation. No wonder Mr Bernanke likes to discuss his options for tightening monetary policy; they are better than his options for easing.
'Atlas' may no longer be shrugging
By Steven Zeitchik
The 37-year effort to bring "Atlas Shrugged" to the screen is finally gaining momentum.
Sort of.
Oscar winner Charlize Theron has been meeting during the past several months with Lionsgate and producers Howard and Karen Baldwin, who are developing the project's latest iteration, about starring as main character Dagny Taggart.
Theron has been eager to play the role but has been concerned that a feature would lose many of the nuances of the monster-sized novel. So the Rand adaptation would, under a plan she and producers discussed, be turned into a miniseries for Epix, the pay-cable network Lionsgate is forming with MGM and Viacom/Paramount.
The project, according to this plan, would be to make the mini one of the fledgling network’s programming linchpins. While insiders are not ruling out the possibility of releasing a condensed version to theaters, the main thrust would be the network, where the mini could be used to lure the book’s legion of fans to subscribe.
Theron, who recently signed with WME after years without an agent, has a history of embracing difficult roles. She took the role of a prostitute-turned-killer in “Monster,” which won her an Oscar. She’s also had parts in the sexual-harassment drama “North Country” and the upcoming apocalyptic tale “The Road.”
But her involvement remained uncertain at press time.
While those familiar with the discussions say she has been driving the development process, her reps say that she has recently come to a decision but has not yet informed the studio or producers. WME and longtime manager J.J. Harris told THR late Monday that Theron "is not moving forward with the project."
The uncertainty surrounding Theron's involvement continues a long tradition of murkiness for “Atlas Shrugged,” the project with more go-rounds than Ayn Rand’s book has pages.
Regarded as a difficult book to film, an “Atlas” project nonetheless has been tried by countless producers, dating back to an attempted effort with writer-producer Albert Ruddy in 1972 (he and Rand couldn't see eye-to-eye on creative issues).
Most recently, the Baldwins and Philip Anschutz tried at Crusader Entertainment and the Baldwins, who produced “Ray” and other well-regarded pics, took it with them when they split from Anschutz.
Angelina Jolie had been loosely attached to the material with the Baldwins but has a number of projects that could go first, and producers are keen to shoot “Atlas” next year. That’s in part because of the timeliness of the material but, more important, because an option with the Rand estate expires if principal photography does not begin in 2010.
With Theron's involvement, it could finally get a boost, especially since financiers also have come aboard; a high net-worth individual is said to find the themes resonant is said to be close to investing in the project. If Theron’s involvement falls through, Lionsgate and producers could bring on another lead, with several other well-known actresses expressing interest.
A 1,000-page novel filled with Rand’s ideas about the future of Western civilization, “Atlas” centers on Taggart, a railroad executive trying to keep her corporation competitive in a world she sees as hostile to innovation. Among its most famous passages is a 50-page speech from mysterious character John Galt, regarded as a veiled expression of Rand’s own ideas.
The book, which has sold tens of millions of copies since being published in 1957, has gained new traction in this era of Wall Street bailouts and corporate responsibility. Those opposed to Washington intervention have frequently cited it as a cautionary manifesto.
Producers own several drafts of the script adapting the difficult material, including one by “Braveheart” scribe Randall Wallace, which compressed the longer, more miniseries-friendly version by James Hart. It’s possible that several drafts could be synthesized to create the basis for a mini.
Although the miniseries idea is a new twist for Lionsgate, it has been considered before for “Atlas,” most recently as a development project a decade ago at TNT. Rand, who died in 1982, had favored television over film, thinking the medium would give her ideas more room to breathe.
Epix was created in part as an output pipeline for the films of the three studios but also is developing original programming. This year, it announced it was developing the pilot “Tough Trade,” a country music-set drama from “Weeds” creator Jenji Kohan.
Still, there are business obstacles for Epix, which has no carriage deals with cable or satellite operators. Some Wall Street analysts wonder how a network might be launched in a climate of consolidation — and one in which HBO, Starz and Showtime are competing for pay-cable subscribers.
But insiders hope the fact that there’s now another outlet for premium programming — and a climate favorable to prestige longform projects on the small screen — could ensure Hollywood finally is shrugging no more.
Maybe.
Q&A: Ophelia Benson
The co-author of the new book Does God Hate Women? discusses patriarchy, the burka and capitalism
What inspired you to write your new book Does God Hate Women?
My co-author, Jeremy Stangroom! It was his idea. More broadly though, I've been following women's rights issues at Butterflies and Wheels for about six years, and I've published many articles by women who are right at the coal face on issues of religion (Maryam Namazie, Azar Majedi, Homa Arjomand, and Gina Khan to name a few). It interests both of us strongly, and once Jeremy thought of it it seemed inevitable.
Do you believe that religion represents the primary threat to women's rights today? Many socialist feminists would argue that capitalism remains the greater foe.
I think religion represents the primary threat at least in some places - in places where religion is strong and has not been liberalised. Religious beliefs about female subordination are more all-pervading and intimate than capitalism is. Unfettered capitalism is of course a giant threat to workers' rights, and women are workers - so the picture is complex. But capitalism doesn't shape people's lives from birth in quite the searching way that religion can.
Religion also gets a particular kind of respect that even capitalism can't match. Saying 'God says women are complementary rather than equal' has a kind of force that saying 'What's good for General Motors is good for the nation' did not, even before the recent unhappy events. Capitalism lacks the God or Jesus or Prophet Mohammed or Blessed Virgin that believers love, so that particular emotional charge is missing. The acolytes of Ayn Rand might be an exception to that - but that's a subject for Alan Greenspan, not for me.
What was your reaction to President Sarkozy's support for legislation banning the burka? And how do you respond to Muslim women who argue they have reappropriated the garment as a feminist symbol?
Very, very ambivalent. All over the place. I hate the idea of making special new laws on dress, and all the more so when the laws can't help targeting immigrants or any other vulnerable minority. I also realise that Sarkozy's motives may be very suspect, or at least a mixture of suspect and defensible. And yet, I could not help (and that's what it was like, I had a lot of inner resistance) being pleased that he said "The burka is not a sign of religion, it is a sign of subservience." I would much rather hear it from someone else, but I certainly do want to hear it, because it's true. That doesn't mean I flat-out approve of the idea of a ban - but I don't flat-out oppose it either. I'm torn. I'm glad it's not up to me to decide.
One reason I don't flat-out oppose it is because community pressure can force other women and girls to wear the hijab or the burqa, and from that point of view a ban is like any other law that creates a level playing field. If no one can wear the burqa on the street, then no one will be forced to wear it on the street. This is hard on women and girls who want to wear it but good for women and girls who don't want to. If I have to choose which should be helped, I choose the latter.
I respond with great weariness to Muslim women who claim they have reappropriated the garment. Given the reality of what happens to women who try not to wear it in Afghanistan, I think it's simply grotesque to think it can be any kind of feminist symbol. I get the point about freedom from the male gaze, and believe me, I wish women around here would stop reappropriating stiletto heels and plunging necklines as 'feminist symbols,' but a stifling face-covering tent is not a feminist symbol.
Does the British model of multiculturalism prioritise community rights at the expense of women's rights?
In some ways, yes, though people are beginning to catch on to that. To name just one example there is the awful habit of appealing to 'leaders of the community' who all too often turn out to be male heads of religious groups. Too often multiculturalism leads to thinking of putative communities as unified blocs, which can be represented by (self-appointed) 'leaders' who can tell the world what 'the community' thinks or wants. The BBC used to ask the Muslim Council of Britain, in the person of a male head or spokesman, for an opinion on anything affecting 'the Muslim community'; this all by itself distorted news coverage and thus public perceptions. They've expanded their Rolodex a bit now though.
Do you believe that scientific progress sounds the death knell for religion or is faith ultimately ineradicable?
No, I don't think scientific progress sounds the death knell or even the closing time bell for religion. I think science is a powerful rival to religion for many people, and that technology makes it less necessary for many people, but I also think religion is extremely resilient.
I don't quite believe that faith is ultimately ineradicable though. I think that's an unknown. There have been in the past and are in the present societies that have very little of what we would recognize as religious faith. It dies off as easily as it is formed. Travellers in the American backcountry in the early 19th century were shocked at how entirely godless the European settlers were - they'd never even heard of the basic tenets of Christianity. I think current ideas about ineradicable faith and god-shaped holes are greatly exaggerated.
In a Q&A for Norman Geras's blog you named fellow atheist author Christopher Hitchens as your intellectual hero. Could you sum up his appeal and do you believe he has been an effective advocate for atheism?
I named him as one intellectual hero - the others were Montaigne and Hazlitt. Also this was almost six years ago - I might still name him, but I also might linger over other choices.
The salient word was 'intellectual' - I chose him in his capacity as an intellectual rather than as a political figure. His appeal is that he's a brilliant writer with a huge range of knowledge. I admire that kind of thing. He's also a brilliant talker, and I admire that too. When he was at the Hay festival a few years ago, even hardened BBC presenters were admitting he was hard to beat for impromptu wit and erudition.
I think he's been an effective advocate for atheism, although I don't think God is Not Great is one of his best books. It can't be only indignant believers who bought his book and made it a best-seller, so he must have had some effect.
How should critics of religion respond to those who argue that Osama Bin Laden and Jerry Falwell discredit Islam and Christianity no more than Stalin discredited left-wing politics?
Well one way would be to say that Stalin did quite a lot to discredit left-wing politics!
That's a serious point as well as a joke of sorts. It is for instance at least reasonable to think there was something about the loyalty - the solidarity -that was a value in left-wing politics that made it hard for people to admit the truth about Stalin. Perhaps solidarity is a double-edged sword, and left -wing politics thus has something dangerous at its heart.
It works the same way with religion. Bin Laden and Falwell don't have to be typical of religion in order to discredit at least some aspects of religion. It's not much of a leap to think that religion's respect for authority and revelation may lead to an unhealthy subservience to charismatic male leaders. That's certainly not all there is to say about religion, but it's one aspect of it.
Finally, in which country are women most free from religious patriarchy and in which are they most oppressed?
The Scandinavian countries for the first, I would guess (I don't know for a fact). Afghanistan is certainly a strong contender for the second. But then life is hell for women in the Democratic Republic of Congo too, and there the reasons are not religious. Religious patriarchy is a problem, but it's certainly not the only problem.
Ophelia Benson is the co-author of Does God Hate Women? and Why Truth Matters. She is also the editor of the website Butterflies and Wheels and the deputy editor of The Philosophers' Magazine
Daily Buzzkills: Ayn Rand (and Charlize Theron) will save us all
It’s almost quitting time, which means you’re mere moments away from shrugging off the working world and heading to hearth and home. But before you go whistling down the sunny side of the street, shoulders lightening under the lengthening shadows of another day well spent, we have some bad news for you, wrapped up in a last-minute memo we call Daily Buzzkills.
As our Most Exalted Leader Barack Obama tightens his sinister stranglehold on the nation’s economy, forcing America’s lashed and mewling innovators to bend like browbeaten willows before the all-encompassing might of his regulatory fist, and feeding ravenously on all of their hard-earned farthings only to poop out great lumps of communist coal to put in everyone’s stocking this Christmas, many conservatives have taken refuge in their scriptures. No, not that socialist screed The Bible. We're talking about the capitalist stroke-books of Ayn Rand, the thinking asshole’s author. In the wee hours of the morning, when they’re all chasing away nightmares of the federal boogeyman coming to take away their money and give it to heroin addicts who want to create government-subsidized drum circles, they hide under their goose down bedcovers with their rumpled photos of Rand—looking very “kitten with zero tolerance for charities” in her alluring dollar-sign pendant—and weep great, fat, Republican tears about the way no one listened to her when they had the chance. “If only someone had made Atlas Shrugged into a film,” they blubber, “the bailouts never would have happened.”
Weep no more, bruised and battered libertarians: After 37 years of being shot down by rational people who see the book as a stilted and masturbatory work suitable only for college freshmen who haven’t figured out that, if everyone did exactly what they wanted all the time, civilization would collapse on itself—and by the way, dudes, most ladies don’t enjoy being raped into submission, even by rugged industrialists—your sticky dreams of turning Rand’s rambling screed about the values of selfishness and laissez-fare capitalism into a brutally dull, unwatchable movie are about to become a reality! We know: You’ve heard all this before. In fact, not long ago, self-avowed Rand fanatic Angelina Jolie was attached to the film, but someone must have gently taken her aside and explained that it’s hard to be both an objectivist and staunch opponent of collectivism when you’re also asking people to give all their money to Third World countries or working closely with those evil cooperation-lovers at the UN—which basically amounts to criminal activity amongst the book’s more fervent fans. Thankfully those acolytes have a brand new, Teutonically ideal actress to provide the integrity-filled bodice of economically principled sexpot Dagny Taggart in Charlize Theron, and all will soon be right with the world.
Of course, there’s one thing that’s been standing in the way of an Atlas Shrugged film all these years: Its major themes are both reactionary and really fucking, like, insultingly stupid. Ha ha, no, just kidding. No, it’s the pervasive fear that all of Rand’s precious, life-changing, hippie-evaporating word-nuggets would never survive the transition to celluloid in the hands of those Hollywood jackals, who would most likely leave all of the weightier lessons on the cutting room floor in favor of a more facile, Fight Club-esque reading about individualism in the face of corporations and lots and lots of rough sex scenes—which is in there, yeah, but that’s not, like, the point. Fortunately, Theron is all over that one, already worrying aloud that a movie would lose the “nuances” of the novel—you know, like the scene where the book’s mythical hero of both engineering and “keeping it real” John Galt stands in a ditch and barfs out a 70-page speech about the awesomeness of objectivism—and making plans to develop Atlas not into a stultifying three-hour-plus feature film, but rather an epic miniseries on Lionsgate’s upcoming pay-cable network, Epix. Oh, yay. That should get every last drop of the nuance, all right.
Because hey, what better time than the Greatest Recession to sing an insufferably long hosanna to self-interest—to preach the gospel of laissez-fare capitalism, just when it was most recently proven to be so fucked in the head that even No. 1 Ayn Rand Fanboy Alan Greenspan seemed taken aback that he’d ever believed in it? And just because certain unscrupulous loose cannons took “rational self-interest” to its natural conclusion, and gave Rand’s beloved free markets a violent rogering worthy of one of her heroines, regardless of the cost to “looters,” “moochers,” and other “parasites,” it doesn’t mean that selfishness can’t work as a philosophy, right? Oh, except that Rand wrote in a weird, superficial bubble where every character was either a brilliantly creative, brazenly individualistic industrialist with a lean physique and strong jaw-line; an oily, vampiric, socialist-in-disguise; or a clueless sheep caught in the middle—and guess which one all the fans of Rand’s books tend to identify with? Unfortunately, you don’t see a whole lot of John Galts and Howard Roarks out there; just a bunch of fat, greedy corporate fucks chasing short-term profits to the detriment of everyone, then willingly getting in line for the very same big government intervention they used to bloviate about at frat parties when they were trying to get laid. (But, of course, somebody else is already making that movie.)
But whatever! It’s all totally prescient because Rand called this whole “government intervention” thing—and Charlize Theron is pretty, also; don’t forget that—and so unsuspecting people will be excited to see it, and then they’ll be all like, “Man, what if the smart people stopped creating things because the government keeps bailing the not-so-smart people out? That would totally suck. And what if someone created a magical energy-making machine, but then Al Gore wouldn’t let us use it because its carbon footprint was too big? That would suck as well. Who is John Galt??!” And then finally, everyone will come around to objectivism, and the government will shut its dollar-spewing piehole, and we can all finally get back to the business of making money again! Thank God (except don’t, because according to Rand, he’s not good for business either)!
Loose Money And the Roots Of the Crisis
No one can believe in the omniscience of central bankers anymore.
JUDY SHELTON
This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.
-- T.S. Eliot
"The Hollow Men" (1925)
The world is not ending. Despite the wrenching turmoil in global financial markets and morbid allusions to the death throes of capitalism, it ain't over. Not until people quit believing in themselves, not until people quit believing in a better future.
![[Loose Money and the Root of the Crisis]](http://s.wsj.net/public/resources/images/ED-AI299_shelto_D_20080929153122.jpg)
CorbisBut the whimpering is real, and justified, because it hurts to have your world come crashing down. And global financial markets are definitely crashing, even when the impact is momentarily softened through massive injections of artificial money -- "artificial" because the fiat money does not represent a store of genuine value but rather an airy government claim to future wealth yet to be created.
In the aftermath of this financial catastrophe, as we sort out causes and assign blame, with experts offering various solutions -- More regulation! Less complex financial instruments! -- let's not lose sight of the most fundamental component of finance. No credit-default swap, no exotic derivative, can be structured without stipulating the monetary unit of account in which its value is calculated. Money is the medium of exchange -- the measure, the standard, the store of value -- which defines the very substance of the economic contract between buyer and seller. It is the basic element, the atom of financial matter.
It is the money that is broken.
These days, we don't often refer to the validity of the money itself but rather to "monetary policy" and how the Federal Reserve has managed to calibrate the money supply to economic activity over the last two decades. There are plenty of critiques; the most pointed ones blame former Fed chief Alan Greenspan for keeping interest rates too low, too long.
During his 19 years at the monetary helm -- from 1987 to 2006 -- Mr. Greenspan served under four different U.S. presidents. At least one of them, George H.W. Bush, blamed Mr. Greenspan for keeping interest rates too high. The stock market crash that occurred in October 1987, two months after Mr. Greenspan's confirmation under Ronald Reagan, sent the Dow Jones Industrial Average down 508 points (23%). It required huge injections of liquidity, which subsequently needed to be mopped up with tighter monetary policy. "I reappointed him," the elder President Bush said. "And he disappointed me."
President Clinton likewise reappointed Mr. Greenspan -- and soon learned the terms of the trade-off for reduced short-term interest rates: Bring down the fiscal budget deficit. Spurred on by a Republican Congress, it actually happened; the federal budget was balanced in 1998. All too briefly, the Fed's biggest concern was how to carry out future monetary policy if we ran out of government debt securities for open-market operations. The fiscal deficit subsequently ballooned after 2001, due to spending in excess of revenue growth, while interest rates and unemployment -- and inflation, counterintuitively -- remained low. One thing for sure: We will have more than enough government debt securities.
There's a reason for this short diversion into Mr. Greenspan's long watch. While he is readily demonized today -- Italy's finance minister recently characterized him as the man who, after Osama bin Laden, "hurt America the most" -- Mr. Greenspan is also the man who was awarded the Presidential Medal of Freedom and whose honorary titles include Knight Commander of the British Empire and Commander of the French Legion d'honneur.
So how does such an accomplished central banker turn out to be a monetary doofus?
Scapegoats are wonderfully convenient receptacles for our collective disappointment, but that's all. When credit markets seize up, when financial instruments disintegrate, when the dollar fails -- it's not because Alan Greenspan was not sufficiently omniscient. He wasn't, true. But no one ever was. No one ever could be.
If capitalism depends on designating a person of godlike abilities to manage demand and supply for all forms of money and credit -- currency, demand deposits, money-market funds, repurchase agreements, equities, mortgages, corporate debt -- we are as doomed as those wretched citizens who relied on central planning for their economic salvation.
Think of it: Nothing is more vital to capitalism than capital, the financial seed corn dedicated to next year's crop. Yet we, believers in free markets, allow the price of capital, i.e., the interest rate on loanable funds, to be fixed by a central committee in accordance with government objectives. We might as well resurrect Gosplan, the old Soviet State Planning Committee, and ask them to draw up the next five-year plan.
"There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard." It would be easy to dismiss this statement as a quaint relic from Mr. Greenspan's earlier days as an Ayn Rand acolyte; his article on "Gold and Economic Freedom" appears in her 1966 compendium "Capitalism: The Unknown Ideal." But Mr. Greenspan said it, rather emphatically, last October on the Fox Business Network. He was responding to the interviewer's question: "Why do we need a central bank?"
Whatever well-intentioned reasons existed in 1913 for creating the Federal Reserve -- to provide an elastic currency to soften the blow of economic contractions caused by "irrational exuberance" (and that will never be conquered, so long as humans have aspirations) -- one would be hard-pressed to say that the financial fallout from this latest money meltdown will have less damaging consequences for the average person than would have been incurred under a gold standard.
Moreover, the mission of the central bank has been greatly compromised. Can anyone have faith that Fed policy decisions going into the future will deliver more reliable money? Don't we already know in our bones that the cost of this latest financial nightmare will be born by all of us who store the value of our labor and measure our purchasing power in the form of dollars? As John Maynard Keynes, the famous British economist, observed in his "Tract on Monetary Reform," published in 1923:
"It is common to speak as though, when a Government pays its way by inflation, the people of the country avoid taxation. We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit."
The entire world has been affected by the breakdown of the U.S. financial system, thanks to the globalization of investment capital. But the free flow of capital -- along with free trade -- is a good thing, the best path to global prosperity. The problem is that the role of the dollar as the world's primary reserve currency has been called into serious question, both by allies and adversaries. Writing in the People's Daily, Chinese economist Shi Jianxun laments: "The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."
Let's do exactly that. It is time to take on the task of establishing a new foundation for international economic relations and financial relations -- one dedicated to open markets and based on monetary integrity. Every country is responsible for anchoring its own currency to the universal reserve asset, and every citizen has the right to convert the national currency into the universal reserve asset.
That's how a gold standard works. A bimetallic system, linked to silver and gold, works the same way. In either case the money is fixed to a common anchor -- and thus automatically functions as a common currency to serve the needs of legitimate producers and consumers throughout the world.
How would such an approach cure financial market ills? Nothing can rescue humans from occasionally making bad choices or succumbing to herding instincts. But on the same principle as democracy and free elections, embedded in the aggregate judgment of individuals over time is a wisdom that outperforms the most ostensibly savvy administrator. Sound money would go a long way toward eliminating the distortions that pervert financial decisions and credit allocations. Price signals do matter; if they don't, then free markets don't matter, and capitalism doesn't work. In which case, let government dictate demand and regulate supply.
No, we need to fix the money. Literally.
One of the candidates for president of the United States might issue the call for international monetary reform. Bad timing? The memo that resulted in the 1944 Bretton Woods international monetary agreement was written three weeks after Japan attacked Pearl Harbor. The next global conference need not take place in Bretton Woods, N.H., but rather Paris or Shanghai. Countries should participate on a voluntary basis, no coercion, in full recognition that the goal is to hammer out a new financial order where the validity of the monetary unit of account is not determined by hollow men roaming the marble halls of government central banks.
This is where the new world of sound money begins. This is where the unknown ideal of capitalism takes form.
Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).
The IMF's gold gambit
The Fund's Misuse of Bullion Reserves is Crucial to its Plan to Use the Financial Crisis to Expand its Power.
By Judy Shelton
The International Monetary Fund deserves credit, figuratively speaking, for cleverly manipulating the financial troubles of emerging and low-income nations to procure a fresh infusion of capital for itself. But its tactics at this month's G-20 summit in London -- where President Barack Obama signed off on tripling the IMF's lending resources -- should not hoodwink anyone, least of all American taxpayers who pay the largest share of IMF expenses.
Lost in the lofty talk about putting the IMF in the center of world economic recovery is the fact that the organization has been quietly attempting to ensure its own survival by seeking permission to engage in gold sales. While IMF officials insinuate that the receipts would be used to help poor countries, the real goal is to set up a permanent endowment fund for the IMF.
The U.S. should not replenish the coffers of a multilateral bureaucracy that quite literally lost its reason for being on Aug. 15, 1971 -- the day President Richard Nixon "closed the gold window" and brought an end to the Bretton Woods agreement, which allowed countries to convert their dollar holdings, via the IMF, into gold at a fixed price. Instead, Congress should call for the IMF's dismantlement and restitution of its assets.
The most solid asset owned by the IMF, purely as a legacy of its original incarnation, is gold. The IMF holds 3,217 metric tons (103.4 million ounces) of gold, which makes it the world's third largest official holder. Actually, it's a misnomer to say the IMF "owns" the gold since the bullion belongs, according to the IMF articles of agreement adopted at Bretton Woods in 1944, to its member nations.
Nevertheless, the IMF is now seeking to sell a considerable chunk of those gold holdings -- some 12.9 million ounces -- which it insists are exempt from restitution to members in the event of IMF liquidation.
Its reason? Between December 1999 and April 2000, to fund its Heavily Indebted Poor Countries (HIPC) initiative, the IMF arranged to sell gold it held on its books at a price of roughly $50 to two member countries, Brazil and Mexico, at the market price of $355. It put the profits of close to $4 billion in a special HIPC account; simultaneously, the IMF accepted back the gold sold to Brazil and Mexico in settlement of their financial obligations of that amount.
Bottom line: The balance of IMF holdings of physical gold was left unchanged, although it raked in the substantial difference between the gold's market price and its book value. The IMF asserts a propriety claim over the 12.9 million ounces it "acquired" through these transactions.
Unfortunately, artful accounting -- from the deceptive practice of carrying gold at its former official price (about $52) rather than its current market value (about $914), to the arcane usage of an intangible monetary unit called a Special Drawing Right (SDR) -- has become the IMF's defining characteristic.
The IMF once served as administrator for the gold-anchored Bretton Woods system of fixed exchange rates among currencies. It now stands for laxity, for endless government fixes, for ineptitude, and political compromise. The IMF preaches budgetary discipline one moment, only to abandon it under pressure from the current crop of presidents, prime ministers, and potentates who authorize its spending.
Now the IMF is attempting an end run around Congress, as it quietly moves toward selling gold, most likely to China. Why does the IMF need the money? Just three years ago the bloated organization (half of its 2,600 staff are economists) was nearly defunct; headquartered in Washington, the IMF was desperate to create an endowment fund to provide for its continued existence.
But in 2007 a specially convened committee of "eminent persons" helpfully suggested that if the IMF could sell those 12.9 million ounces of gold and set up a trust fund with the windfall profits, the investment returns could plug the gap between its administrative expenditures and the amount it earns as an intermediary that channels funds from rich countries to poor countries.
Sound familiar? Only one problem: IMF gold sales must be approved by an 85 percent voting majority of its members. The U.S. has a 17 percent vote; thus the IMF cannot sell gold without the explicit consent of Congress. But Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee, has indicated his openness to approving IMF gold sales -- conditional that some of the receipts be used to "help finance debt relief for poor countries."
Ah, yes, it is always about helping the poor. Which is why the IMF emphasized its willingness to assist "poor countries" in its carefully calibrated request for additional resources from G-20 nations. Not surprisingly, the London stratagem proved successful. It was readily embraced by G-20 leaders eager to demonstrate how much they care about the human consequences of economic meltdown. Ironically, the IMF has been widely blamed by recipient nations in Africa and Latin America for perpetuating poverty. Excessive transfers to less-developed countries have the perverse effect of suppressing the entrepreneurial reserves of citizens. It is only when nations manage to get off the global dole that they are taken seriously by global capital markets and can start to achieve bankable growth.
The IMF has shown an uncanny ability to transmogrify into whatever politically acceptable form necessary to ensure its survival. Throughout the intervening decades since the end of Bretton Woods, the IMF has scrambled to redefine itself as (in rough chronological order): a global debt-collection agency, an economic-research organization, a referee for financial disputes among the Group of Seven leading industrialized nations, and a front to permit Western nations to avoid being blamed for problems arising in the transition to democratic capitalism for formerly communist nations.
In its latest manifestation as global financial surveillance monitor and G-20 sidekick, the IMF has taken to delivering somber pronouncements about the world economic outlook, concluding in mid-April: "The current recessions are likely to be unusually severe, and the forthcoming recoveries sluggish." And what does the IMF recommend? "Aggressive monetary and, particularly, fiscal policies could strengthen and bring forward recoveries."
This sage advice conveniently dovetails with the agenda of Mr. Obama, who, as mentioned earlier, agreed to tripling the IMF's lending resources at the London summit. And to remain au courant with British Prime Minister Gordon Brown, IMF chief Dominique Strauss-Kahn has also called for expanding "the regulatory perimeter to encompass all activities that pose economy-wide risks."
Zhou Xiaochuan, China's powerful central banker, has authored a proposal for international monetary reform that would replace the dollar with "a super-sovereign reserve currency managed by a global institution." Citing "the inherent deficiencies caused by using credit-based national currencies," he suggests the SDR could assume this role. In the view of Mr. Zhou, the way to enhance international monetary and financial stability is to have member countries gradually entrust their reserves "to the centralized management of the IMF."
Before anyone gives any credence to the notion of having the IMF take on the task of issuing a new global currency, however, we need to remember that the original Bretton Woods system worked precisely because the dollar was convertible into gold at a fixed price. And gold is real money.
Congress should just say no.
Tuesday, July 21, 2009
BOMBSHELL! Supreme Court now has Obama Citizenship AP- WASHINGTON
Along with the evidence that he was first born in Kenya and there is no record of him ever applying for US citizenshi
Britain 's Daily Mail also carried the story in a front-page
In a related matter, under growing pressure from several groups, Justice Antonin Scalia announced that the Supreme Court agreed on Tuesday to hear arguments concerning
Gary Kreep of the United States Justice Foundation
Techdom’s Two Cold Wars
Why didn’t the U.S. and the USSR just ignore each other and save themselves the cost of an arms race? Answer: Each had the potential to do such serious damage to the other, they dared not risk it.
Microsoft and Google also have the power to damage each other, and are better off if they don’t. They too spend a lot of money on deterrence—a puzzle since both are inevitably owned by many of the same shareholders, including large mutual and pension funds. Even more than the Cold War superpowers, they have every incentive quietly to agree to be deterred without investing quite so much on an arms race.
These are thoughts designed to trouble the naïve delight of many who heard Google’s announcement last week that it intends to roll out an operating system to compete with Windows. Partisan Google fans imagine Google finally is preparing to go toe-to-toe with its nemesis. They couldn’t be more wrong.
Google might do so if Microsoft were unilaterally to disarm in some way. That’s not going to happen. Microsoft merely is being reminded that its fat Windows margins are vulnerable to attack.
Microsoft sent the parallel message to Google when it spent millions to launch Bing, a new search engine that’s receiving good reviews even from Microsoft haters. Bing, Microsoft hopes, will finally prove a weapon that can seriously threaten Google’s margins, though only to keep Google from raiding Microsoft’s.
Or take Microsoft’s newly announced move (foreshadowed here last year) to launch a free, ad-supported version of Office. Steve Ballmer and company are showing they aren’t lying down in the face of Google Apps, also offered free. Be assured, however, that Microsoft has no intention of seriously cannibalizing its own Office cash flows just to stop Google from doing the same.
Their little secret is that neither Google nor Microsoft really have an interest in challenging each other’s core franchises if it means risk to their own. Their posturing is primarily defensive—fear of loss is greater than hope of gain.
And both companies by now have a well-earned reputation for being willing to invest large sums simply to threaten the profits of companies that potentially threaten theirs. Microsoft gave the world MSN, Internet Explorer, Xbox, Zune and now Bing—aimed at AOL, Netscape, Sony, Google or whatever new player might threaten to bypass Microsoft’s dominance on the desktop.
For its part, Google has forked over billions for YouTube, Gmail, its phone software, Google Apps—meant to pre-empt strategic turf that someone else might conceivably use to claim a large share of Web advertising.
That doesn’t mean their skirmishes aren’t meant to draw blood, which is what makes them credible. Their threats and gestures probably do take a modest toll on each other’s profits. Google undoubtedly is more susceptible to pushback from advertisers who can say, semi-believably, that they might shift some of their business to Bing. Microsoft might bend a little more for corporate clients on the price of Windows or Office if a customer can point to, say, a Google alternative he might patronize.
Naturally, the fondest wish of both companies’ shareholders is that they find a cheaper way to deter each other, or better yet strike a cease-fire. In short, they wish Google and Microsoft would reach the kind of condominium that Google and Apple have reached.
For, whatever the advertised purpose of Google CEO Eric Schmidt’s presence on Apple’s board, the obvious purpose is to manage competition between the two companies. Of all the dabbling Google has done, notice that it hasn’t dabbled in music-playing software, in cataloging music files (though Google says its mission is to “organize all the world’s information”), or even in allowing users to create playlists of YouTube music videos. Google’s dabbling has been restricted to markets where Microsoft, Nokia or others are dominant, not where Apple is dominant.
How long the Apple-Google cold peace can last is, in some ways, a more interesting subject than the latest dustup between Google and Microsoft. The Justice Department’s antitrust division already is known to be looking into Mr. Schmidt’s role on the Apple board as a potential violation. Yet Mr. Schmidt remained on the Apple’s board even as Google launched Android, its mobile phone operating system that competes with Apple’s iPhone. He remains on the Apple board even as Google now prepares to launch a computer operating system, which means competing not just with Microsoft but with Apple.
One thing that keeps Apple and Google maneuvering so cautiously with respect to each other is that both currently benefit from an aura of “coolness” that would be jeopardized if they found themselves clashing in public. Keep your friends close and your enemies closer.
Even if antitrust weren’t in the way, Microsoft and Google would find it harder to engage in a similar frigid entente simply because Microsoft’s “uncoolness” requires Google partly to define itself as anti-Microsoft. But don’t doubt the two would opt for a competitive cease-fire if they could figure out how.
How to Make Health-Care Reform Bipartisan
BOBBY JINDAL
In Washington, it seems history always repeats itself. That’s what’s happening now with health-care reform. This is an unfortunate turn of events for Americans who are legitimately concerned about the skyrocketing cost of a basic human need.
In 1993 and 1994, Hillary Clinton’s health-care reform proposal failed because it was concocted in secret without the guiding hand of public consensus-building, and because it was a philosophical over-reach. Today President Barack Obama is repeating these mistakes.
The reason is plain: The left in Washington has concluded that honesty will not yield its desired policy result. So it resorts to a fundamentally dishonest approach to reform. I say this because the marketing of the Democrats’ plans as presented in the House of Representatives and endorsed heartily by President Obama rests on three falsehoods.
First, Mr. Obama doggedly promises that if you like your (private) health-care coverage now, you can keep it. That promise is hollow, because the Democrats’ reforms are designed to push an ever-increasing number of Americans into a government-run health-care plan.
If a so-called public option is part of health-care reform, the Lewin Group study estimates over 100 million Americans may leave private plans for government-run health care. Any government plan will benefit from taxpayer subsidies and be able to operate at a financial loss—competing unfairly in the marketplace until private plans are driven out of business. The government plan will become so large that it will set, rather than negotiate, prices. This will inevitably lead to monopoly, with a resulting threat to the quality of our health care.
Second, the Democrats disingenuously argue their reforms will not diminish the quality of our health care even as government involvement in the delivery of that health care increases massively. For all of us who have seen the Federal Emergency Management Agency’s response to hurricanes, this contention is laughable on its face. When government bureaucracies drive the delivery of services—in this case inserting themselves between health-care providers and their patients—quality degradation will surely come. House Democrats seem willing to accept that problem to achieve their philosophical aim—the long-term removal of for-profit entities from the health-care landscape.
Third, Mr. Obama’s rhetoric paints a picture of a massive new benefit that will actually cost average Americans less than what they pay today. The Democrats want middle-class taxpayers to believe they won’t feel the pinch of this initiative, even as their employers are assessed massive new taxes. They might as well try to argue that up is down. The analysis of the Democrats’ proposal by the Congressional Budget Office shows that it will not reduce government spending on health care, and that it will substantially increase the federal deficit—and this despite all the tax increases.
I served in the U.S. House with a majority of the current 435 representatives, and I am confident that if given the proper amount of legislative review, they will not accept the flawed Pelosi plan that is currently stuck in committee. Yet there is general agreement among Republicans and Democrats that we need health-care reform to bring costs down. This agreement can be the basis of a genuine, bipartisan reform, once the current over-reach by Mr. Obama and Mrs. Pelosi fails. Leaders of both parties can then come together behind health-care reform that stresses these seven principles:
•Consumer choice guided by transparency. We need a system where individuals choose an integrated plan that adopts the best disease-management practices, as opposed to fragmented care. Pricing and outcomes data for all tests, treatments and procedures should be posted on the Internet. Portable electronic health-care records can reduce paperwork, duplication and errors, while also empowering consumers to seek the provider that best meets their needs.
•Aligned consumer interests. Consumers should be financially invested in better health decisions through health-savings accounts, lower premiums and reduced cost sharing. If they seek care in cost-effective settings, comply with medical regimens, preventative care, and lifestyles that reduce the likelihood of chronic disease, they should share in the savings.
•Medical lawsuit reform. The practice of defensive medicine costs an estimated $100 billion-plus each year, according to the American Academy of Orthopaedic Surgeons, which used a study by economists Daniel P. Kessler and Mark B. McClellan. No health reform is serious about reducing costs unless it reduces the costs of frivolous lawsuits.
•Insurance reform. Congress should establish simple guidelines to make policies more portable, with more coverage for pre-existing conditions. Reinsurance, high-risk pools, and other mechanisms can reduce the dangers of adverse risk selection and the incentive to avoid covering the sick. Individuals should also be able to keep insurance as they change jobs or states.
•Pooling for small businesses, the self-employed, and others. All consumers should have equal opportunity to buy the lowest-cost, highest-quality insurance available. Individuals should benefit from the economies of scale currently available to those working for large employers. They should be free to purchase their health coverage without tax penalty through their employer, church, union, etc.
•Pay for performance, not activity. Roughly 75% of health-care spending is for the care of chronic conditions such as heart disease, cancer and diabetes—and there is little coordination of this care. We can save money and improve outcomes by using integrated networks of care with rigorous, transparent outcome measures emphasizing prevention and disease management.
•Refundable tax credits. Low-income working Americans without health insurance should get help in buying private coverage through a refundable tax credit. This is preferable to building a separate, government-run health-care plan.
These steps would bring down health-care costs. They would not bankrupt our nation or increase taxes in the midst of a recession. They are achievable reforms with bipartisan consensus and public support. All they require is a willingness by the president to slow down and have an honest discussion with Americans about the real downstream consequences of his ideas. Let’s start there.
Mr. Jindal is governor of Louisiana.
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