by Nat Hentoff
Through the years of reporting on how we have become notorious around the world fighting terrorism by torturing suspects in our custody, I was not surprised when in April 2004, President Bush guaranteed that the United States would "investigate and prosecute all acts of torture and undertake to prevent other cruel and unusual punishment in all territory under our jurisdiction." ("Inside the Detainee Abuse Task Force," The Nation, May 13, 2011.)
This grand assurance was of the same flimsiness as President Barack Obama's pledge that his was to be "the most transparent administration" in our history.
Almost immediately after he was sworn in, Obama also offered us a pie in the sky by assuring Americans that he would close all CIA secret prisons ("black sites") and end "renditions" of terrorism suspects to countries known for torture.
Nat Hentoff is a nationally renowned authority on the First Amendment and the Bill of Rights. He is a member of the Reporters Committee for Freedom of the Press, and the Cato Institute, where he is a senior fellow.
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Yet, as of Jeremy Scahill's verifiable article "The CIA's Secret Sites in Somalia" (The Nation.com, July 12), "the CIA ... uses a secret prison buried in the basement of Somalia's National Security Agency." This prolonged on-the-ground investigation reveals that we pay the salaries of Somalia intelligence personnel, but the CIA "directly interrogates prisoners."
Moreover, international lawyer Scott Horton, whom I've found reliable, adds in "Obama Secret Prisons and Torture" (Ed Brayton, Science Blogs.com, July 21) that the CIA is "maintaining a series of 'special relationships' under which cooperating governments maintain proxy prisons for the CIA," raising "'questions' about 'whether the CIA is using a proxy regime ... to skirt Obama's executive order' banning black sites and torture."
This accusation was further illuminated by Department of Defense Secretary Leon Panetta (previously the CIA director) speaking openly ("At Pentagon, Panetta Era Begins With Blunt Talk," New York Times, July 12) "of supposedly secret CIA activity ... (that) the CIA has a 'big presence' in Afghanistan and 'a lot of bases' in Iraq and is conducting 'a number of operations' in Yemen." (This from the recent head of the CIA!)
Under whose rule of law is the CIA operating? Obama's — not ours. Back in the CIA interrogation center in Somalia, one of the prisoners was abducted from Nairobi, thereby he "bears all the hallmarks of a classic U.S. rendition operation" (The Nation.com, July 12).
Now here is Amnesty International, long a carefully detailed chronicler of the Bush-Cheney-Obama renditions to torture. Says Amnesty International USA's Adotei Akwei, managing director of its government relations (July 13, 2011):
"President Obama should disclose the identities and whereabouts of all persons held at secret sites and their legal status and ensure that all detainees are held only in officially recognized places of detention with access to independent monitors, family, lawyers and courts."
Demanding that this president of the United States actually insist on these basic American values is like telling him to confront Iran with his Nobel Peace Prize and demand its rulers end all nuclear arms planning — and reveal how far they've come.
What about our federal courts? Will they continue to absolve of all responsibility for torture those high-level officials who have been personally involved in directing and implementing renditions, secret prisons and other American war crimes? But one court is awakening.
With insufficient attention from our media, on Aug. 8, the 7th Circuit Court of Appeals ruled in what Josh Gerstein of Politico calls "the highest-level court success (yet) for lawyers seeking to use the courts to impose accountability for what critics view as national security excesses under President George W. Bush." This particular "excess" was torture. ("Court allows torture suit against Rumsfeld," Politico, Aug. 8, 2011.)
I rushed on March 24, 2010, to explore and report on the first historic ruling on this case, Donald Vance and Nathan Ertel v. Donald Rumsfeld, United States of America and Unidentified Agents, in a lower federal court.
At the time, it was the first continuance of a torture case against a senior Bush official. He is being defended by the Obama Justice Department! Of course.
As I wrote then ("Was Donald Rumsfeld a torturer?"), American citizens Vance and Ertel charged the then-defense secretary for being personally responsible for their being tortured in 2006 by American forces in Iraq.
Members of a private security firm in Iraq, they had suspected their employers of illegal activities there. Nonetheless, as I'll describe next week, they were imprisoned and tortured by American forces.
Although these were American citizens being tortured, it's vital to keep in mind what 7th Circuit Court of Appeals Judge David Hamilton — permitting this case to go forward this year — emphasized: "United States law provides a civil damages remedy for aliens who are tortured by their own governments. It would be startling and unprecedented to conclude that the United States would not provide such a remedy to its own citizens."
And, this being the first Bush high official prosecuted this far for abuse of American prisoners, also involved to prove accountability are the U.N. Convention Against Torture and our own torture laws. They require that American officials must also be held accountable for the torture of non-American prisoners, too, in U.S. custody.
If the Supreme Court ultimately upholds a Rumsfeld conviction, what of future cases against him and other officials — including in the present administration — accused of being accountable for the torture of others of our prisoners in Afghanistan, Pakistan, Yemen and various "black sites" to this day? Which president will move to have those acts of torture investigated?
The Fed vs. the Recovery
by Alan Reynolds
One year ago, on Aug. 27, 2010, Federal Reserve Chairman Ben Bernanke explained the rationale for a second round of quantitative easing. "A first option for providing additional monetary accommodation is to expand the Federal Reserve's holdings of longer-term securities," he said, thereby supposedly "bringing down term premiums and lowering the costs of borrowing."
Yet the bond market promptly reacted by raising long-term interest rates. The yield on 10-year Treasurys, which was 2.57% at the time of his Jackson Hole, Wyo., address, climbed to 3.68% by February 2011 and did not dip below 3% until late June when QE2 was coming to an end. The price of West Texas crude oil, which was $72.91 a year ago, remained above $100 from March to mid-June and did not come down until QE2 ended and the dollar stopped falling.
When Mr. Bernanke spoke, the price of a euro was less than $1.27. By the week ending June 10, 2011, 15 days before QE2 ended, the dollar was down about 15% (a euro cost $1.46). In that same week, The Economist commodity-price index was up 50.9% from a year earlier in dollars—but only 22.8% in euros. How could paying much more than Europe did for imported oil, industrial commodities, equipment and parts make U.S. industry more competitive?
In the end, quantitative easing turned out to be an anti-stimulus which stimulated nothing but the cost of living and the cost of production.
The chart nearby subtracts the contribution of government purchases (such as hiring and construction) from real GDP growth to gauge the growth of the private economy. The generally negative contribution of government purchases (column two) does not mean government spending has slowed, as some contend. Instead it reflects the fact that federal and state spending has been increasingly dominated by transfer payments (such as Medicaid, food stamps and unemployment benefits) which do not contribute to GDP, and in some cases reduce GDP by discouraging work.
The chart also shows that growth of private GDP was also much faster before QE2 than it has been since, and the increase in producer prices (i.e., U.S. business costs) was much more moderate. And that is no coincidence.
Former Obama adviser Christina Romer, writing in the New York Times in late May, said that "a weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working."
Well, foreign goods certainly did become more expensive during the second round of quantitative easing, but it is doubtful that "more Americans are working" as a result. Industrial supplies and materials accounted for 34.5% of U.S. imported goods so far this year, according to the Census Bureau, and capital equipment and parts accounted for an additional 23%. As Fed policy pushed the dollar down, higher prices for imported inputs such as oil, metals and cotton meant higher costs (producer prices) for U.S. manufacturing and transportation.
In demand-side theorizing, monetary stimulus means the Fed buys more bonds. The Treasury has certainly been selling a lot of bonds, and the Fed has been buying (monetizing) a huge share of those bonds. That helped push the broad M2 money supply up at a 6.8% rate over the past six months. Yet the only thing we have to show for all that stimulus over the past year has been rapid inflation of producer prices and a simultaneous slowdown in the growth of the private economy. Consumer price inflation also accelerated to 5.2% in the first quarter and 4.1% in the second, from just 1.4% in the third quarter of 2010.
Imported goods did indeed become more expensive while the dollar was falling, rising at a 15.1% annual rate over the past three quarters according to the government's report on GDP. But exported U.S. goods also became more expensive, rising at an 11.4% rate over that same period.
The fourth column in the chart shows that net exports were a subtraction from GDP in early 2010 when the private economy was growing most briskly, thus raising the demand for imported materials and components. The rise of dollar commodity costs and producer prices in the wake of QE2 reduced the growth of real imports because it reduced the growth of real GDP.
Many journalists credit QE2 with raising asset prices, which was certainly true of precious metals but not of housing. It is also true that stock prices generally rose over the past year, but it is implausible to link that to quantitative easing.
Operating earnings per share for the Standard & Poor's 500 companies rose to an estimated $24.86 by June 30, up from $20.40 a year earlier. Fed policy cannot possibly explain that rise in earnings because domestic output slowed and producer prices rose under QE2, while more than 46% of the sales of S&P 500 companies have come from foreign countries.
Berkeley economist Brad DeLong, writing in the Economist, suggests that, "Aggressive central banks can shift expected inflation upward and thus make households fear holding risky debt and equity less because they fear dollar devaluation more." But individual investors often react to such fears by dumping equities and speculating in gold and silver. What good does that do?
Alan Reynolds, a senior fellow at the Cato Institute, is author of Income and Wealth (Greenwood Press, 2006).
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In short, the Fed's experiment with quantitative easing from November 2010 to June 2011 was accompanied by a falling dollar and inflated prices of critical industrial commodities, including oil. The net effect was to reduce the profitability of manufacturing and distributing products in the United States, and therefore to shift such activities (and jobs) to other countries which were less handicapped by the dollar's weakness.
Every postwar recession but one (1960) has been preceded by a spike in oil prices of the sort we experienced when the dollar fell and oil prices doubled from August 2007 to July 2008 (reaching $142.52), and to a lesser extent when the dollar fell and oil prices rose to $112.30 at the end of April 2011 from $72.91 in late August 2010. Conversely, during the 1997-98 Asian currency devaluations (and soaring dollar), the U.S. experienced a booming domestic economy as the dollar price of oil dropped to $11 by the end of 1998.
Those who are now looking backwards at how poorly the U.S. economy performed under QE2 in order to "forecast" the future appear to be neglecting the potentially beneficial effects of a firmer dollar in deflating the bubble in U.S. commodity costs. In the end, quantitative easing turned out to be an anti-stimulus which stimulated nothing but the cost of living and the cost of production. Good riddance.
Get Real: Hurricane Irene Should Be Renamed "Hurricane Hype"
by Patrick J. Michaels
Over the years the National Hurricane Center (NHC) has employed the world's best experts on Atlantic tropical cyclones, from "Dr. Bob" Simpson, to the mediagenic Neil Frank and on to the current director, Bill Read.
The lifesaver-in-chief was probably Frank, who indefatigably crisscrossed the nation educating the public to the dangers — hidden and obvious — that accompany these curiously seductive weather systems. His era was one of many innovations, including extensive use of satellites, and tailoring the "names" of storms to the culture where they roam in order to attract attention.
One of Frank's nightmare scenarios goes like this: A strong hurricane threatens a heavily-populated resort area with few escape routes, such as the North Carolina Outer Banks. Vacationers reluctantly abandon their $20,000/week palaces on Pine Island for 36 hours in an immobile SUV conga line, drenching tropical showers, and no toilets. The storm falls apart or unexpectedly turns away from land. Lotsa folks rent for more than a week, so they return, an equally strong storm shows up, and they don't leave. The title of this movie is "how to die in a 10,000 square foot house-boat".
Patrick Michaels is senior fellow in environmental studies at the Cato Institute and author of Climate Coup: Global Warming's Invasion of our Government and our Lives.
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We have just lived through something pretty close to this nightmare. Last April 27, in Tuscaloosa, Alabama, 41 died because they disregarded a weather warning.
While the number of strong tornadoes is hardly changing (there may even be a slight decline), the number of tornado warnings has increased exponentially as Doppler radar picks up twisting circulations embedded in thunderstorms that could produce a ground tornado.
The number of false positives has so cheapened the currency of tornado warnings that few now bother to interrupt their work when one is given. While the very good forecasters at the National Weather Service were not at all happy when veteran TV meteorologist James Spann blamed a large number of Tuscaloosa deaths on the very high false alarm rates, he had a point.
Now on to Hurricane Irene:
Up until now (Friday evening) Irene has been very similar to 1985 hurricane Gloria, though a bit weaker. But the level of hype — because of its projected path near all of the I-95 major cities — is similar to that of 26 years ago.
See the track here.
When Gloria proved less deadly than expected CBS's Dan Rather — a serial hurricane hyper who made his career on 1961 Hurricane Carla — he yelled at poor Neil Frank on live TV.
What had happened is that the night before landfall, Gloria took a sudden 40-mile jog to the east. The cyclone slid harmlessly east of the big cities, showing her weaker western side instead of the destructive northeast corner.
Irene has put on a remarkably similar show. Within the limits of forecasting error, Irene's projected path makes it was impossible to rule out a major disaster. But, as a dangerous Category 3 storm within two days of land, something similar to what happened to Gloria occurred. Instead of going slightly off course, the power of her winds dropped markedly, at least as measured by hurricane hunter aircraft. Because it is prudent to not respond to every little tropical cyclone twitch (such as Gloria's jog or Thursday's wind drop), the Thursday evening forecast was virtually unchanged, the Internet went thermonuclear, and the Weather Channel's advertising rates skyrocketed. From that point on, it became all Irene, all the time. With this level of noise, the political process has to respond with full mobilization. Hype begets hype.
A day later, the smart money is still riding a very Gloria-like track, but with a cyclone that will be weaker than projected (and hopefully kill fewer than the eight people who died in Gloria) though power outages east of where the center makes landfall (probably on Long Island) may be extensive.
As I complete this, there's another tropical depression out in the Atlantic, and a couple more on the way in the very near future. Suppose one of these takes a similar path, except that it improbably threads the needle of the Mid-Atlantic Bight and makes landfall immediately to the west of New York City as a Category 3 storm. How many people will the hyping of Irene have killed?
That's how Hurricane Hype followed by Hurricane Insanity leads to hurricane death.
I see a solution, in all places, in Washington DC, where a group of crackerjack weather forecasters, led Jason Samenow, have set up the Capital Weather Gang (www.capitalweathergang.com). It's become the go-to group for potentially severe winter storms here (including hurricanes), and, because they are serving a smaller community than, say, NHC, they aren't under the massive scrutiny of a politicized media. Is it time for similar diversity to develop all over the high-stakes world of tropical cyclones?
Or would that be an abject disaster? Consider if there are five competing hurricane forecasters, four suggesting evacuation while the fifth says "stay put", and the fifth one is wrong. Surely most people would choose to stay, with disastrous results. Given the nature of the Internet, such an experiment is sure to run in the near future.
Hurricane Irene as Economic Stimulus
Hurricane Irene as Economic Stimulus
Oh, dear. Oh, dear. No matter how many times economists debunk the broken window fallacy, not a natural disaster goes by that journalists don’t try to cheer us up by saying “at least it will stimulate economic growth.” This time it’s Josh Boak (no relation!), the economics reporter (!) at Politico, who was “educated at Princeton and Columbia.” And Sunday afternoon he posted this story:
Irene: An economic blow or boost?The power outages and shuttered airports may stop the engines of commerce for several days, but Hurricane Irene might have provided some short-term economic stimulus as billions of dollars will likely be spent to repair the damage to the East Coast over the weekend.
Cumberland Advisors Chairman David Kotok saw the storm as likely jolting employment in construction, an industry paralyzed by the bursting of the real estate bubble in 2008.
“We are now upping our estimate of fourth-quarter GDP in the U.S. economy,” he said in an email Sunday. “Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily.”
Kotok expects GDP growth — which limped along at less than a percentage point for the first half of the year — to exceed 2 percent in the last three months of the year and potentially reach 3 percent.
Mark Merritt, president of crisis-management consulting firm Witt Associates, said the hurricane should provide a bump in economic activity over the next few months.
“After a disaster, there’s always a definite short-term increase,” Merritt said. “There will be furniture bought, homes repaired, new carpet, new flooring, all the things affected by flooding.”
The story quotes no economist, who might have pointed out that the destruction of homes, businesses, and other property cannot actually be good for the economy. As economist Sandy Ikeda summed it up last year, the argument is that “paying $100 to replace a broken window somehow creates more prosperity than having an intact window and spending that $100 on something else.” He goes on to ask, as many economists have: If destruction is so good for an economy, why wait for a hurricane or a bombing raid? Why not just bomb your own cities?
As Frederic Bastiat explained the “broken window fallacy,” a boy breaks a shop window. Villagers gather around and deplore the boy’s vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, “Maybe the boy isn’t so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!”
But as Bastiat noted, “Your theory stops at what is seen. It does not take account of what is not seen.” If the shopkeeper has to buy a new window, then he can’t hire a delivery boy or buy a new suit. Money is shuffled around, but it isn’t created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, “Society loses the value of objects unnecessarily destroyed.”
In the comic strip “Pearls Before Swine,” the nefarious Rat used the destruction-as-stimulus argument to defend his client’s blowing up downtown:
But that’s a comic strip. Journalists should do better. Please, call one of these economists. They can tell you that destruction is destructive. When property is destroyed, people have less wealth. The money they had been saving for a new business or a new computer or a college education, now they have to spend it on rebuilding what they had. That is not “a bump in economic activity.”
Free Trade 101 for Members of Congress
by Daniel Griswold
If I were a member of Congress back home for the August recess and a constituent asked me at a town-hall meeting why I support free trade, here's what I would say in my policy-wonkish way:
Free trade empowers the individual and limits the state. The government should not be telling us where we can and can't spend our money. We don't need big government rigging markets to favor one producer over another at the expense of competition and the little guy.
Free trade helps American families balance their budgets. Import competition means lower prices, more choice, and better quality — for shoes, clothing, cars, computers and smartphones. Lower prices for consumer goods mean higher real wages for workers.
Free trade promotes liberty, prosperity, and peace. That's a good deal for America.
Protectionism is really a tax on the poor. Our highest remaining trade barriers unfairly tax products made and grown by poor people abroad and consumed disproportionately by poor families at home. We still impose unconscionably high tariffs on imported food, clothing, and shoes — the basics of a poor family's budget. The $26 billion we collect each year from duties on imports represent the federal government's most regressive tax. Free trade is a tax cut for the poor.
Trade is not about more jobs or fewer jobs; it's about better jobs. Trade only accounts for 3 percent of job displacement. Technology and internal competition displace far more workers. Just ask folks laid off from Borders, Blockbuster or Kodak. (Bought any film lately?) Our high unemployment today has nothing to do with trade but with our "Made in the USA" housing bubble and failed stimulus.
Imports fuel American industry. More than half of what we import each year is not consumer goods but the stuff businesses buy to produce their final products — raw materials, intermediate inputs and capital machinery. Anti-dumping duties on steel and import quotas on sugar drive up costs for U.S. manufacturers, giving them one more reason to relocate their production offshore.
Exports are key to expanding U.S. output. Three-quarters of the world's spending power is outside the United States, and most of the world's growth is now in emerging markets. China is now the No. 3 market for U.S. exports and the No. 1 market for U.S. agricultural exports.
Exports allow American companies to raise productivity through specialization and economies of scale. A quarter of a million small- and medium-sized U.S. companies are now selling abroad, accounting for almost a third of U.S. exports. Trade agreements such as NAFTA and the pending agreements with South Korea, Colombia and Panama give U.S. exporters the level playing field the politicians say they want.
Daniel Griswold is director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute and author of the 2009 book, Mad About Trade: Why Main Street America Should Embrace Globalization.
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Foreign investment in America is the flip side of the trade deficit. If foreigners don't use the dollars they earn selling in our market to buy U.S. exports, they buy U.S. assets — Treasury bonds, stock in U.S. companies, direct investment in U.S. factories. Today more than 5 million Americans work for foreign-owned affiliates in the United States, earning 30 percent more than the average American worker. Companies such as Honda, Nissan, Toyota, BMW, Michelin and Severstal steel employ one out of eight American manufacturing workers. Raising trade barriers will only make it harder for people in other countries to earn the dollars they need to buy our exports and invest in our economy.
Protectionism is a fool's game. The Smoot-Hawley tariff bill of 1930 didn't create or save jobs. Instead, it provoked retaliation against U.S. exports and only deepened the Great Depression. Republicans and Democrats worked together after the war to promote more open trade and peaceful commerce with our allies. It would be a huge mistake to turn our backs on such a successful bipartisan policy.
Free trade promotes liberty, prosperity, and peace. That's a good deal for America.
The Federal Reserve's Flawed Approach To Monetary Policy
by James A. Dorn
After two rounds of quantitative easing, unemployment is still above 9% while annual CPI inflation stands at 3.6%. Technically, the U.S. is now facing the prospect of stagflation. Yet, some economists are calling for up to 4% inflation to get the economy moving again.
Printing money is not a panacea for the ailing U.S. economy. The unemployment/slow growth quandary is due to structural problems and to policy uncertainty, not to the lack of monetary stimulus. High marginal tax rates, especially on capital, uncertainty about pension and health care costs, and the lack of rules in the formation of monetary and fiscal policy have disrupted the normal course of commerce.
In particular, by keeping interest rates too low for too long, the Federal Reserve under Ben Bernanke has underpriced credit and increased risk taking, fueling asset bubbles in the bond and commodity markets.
Printing money is not a panacea for the ailing U.S. economy.
The Bernanke Fed has kept the interest rate on federal funds near zero since December 2008, and that rate is likely to persist until mid-2013, as announced at the latest meeting of the Federal Open Market Committee. The low rates signal that the Fed is targeting asset prices –that it is pegging interest rates at low levels to prop up the prices of bonds and other assets.
Investments that normally would not be made occur. But those "malinvestments" cannot be sustained once rates return to normal. F. A. Hayek long ago pointed out the dangers of monetary manipulation to underprice credit and encourage risk taking. Easy money and credit do more than affect the price level; they distort relative prices and production, and thus misallocate resources. Artificially low interest rates adversely affect the structure of production and cause recession when interest rates rise and bubbles burst.
When President Nixon closed the gold window in August 1971, the dollar lost its anchor — even though it was a "wobbly anchor." Today the world is on a pure fiat money standard, which is no standard at all. The Federal Reserve must comply with its "dual mandate," which requires adherence to price stability and full employment, but there is no penalty for failure.
The 2008-2009 financial crisis has increased the Fed's discretionary power, but no one has been fired for failing to prevent the crisis. In buying up massive amounts of government debt, the Fed has sacrificed stable money for funding excessive government spending. Monetizing debt and allocating credit, rather than stabilizing the growth of nominal demand and achieving long-run price stability, have brought the Fed into dangerous waters.
Monetary policy has become more politicized. The Fed pretends to be "independent," but in reality Bernanke and Co. have become part of the Obama Cabinet, except for a few dissenters.
The lack of any monetary rule to constrain the Fed and the lack of any convertibility principle, as existed under the classical gold standard, means the Fed has a monopoly on base money (currency held by the public plus reserves), the supply of which is determined by a small group of Fed officials who presume to be able to forecast the future.
Under a true gold standard, the optimal quantity of money is determined by market forces—the money supply spontaneously adjusts to the demand for money, and long-run price stability is achieved. The long-run value of money is certain, unlike in a pure fiat money regime without rules or convertibility.
James A. Dorn is a monetary policy analyst at the Cato Institute in Washington, D.C., and editor of the Cato Journal.
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In theory, a discretionary central bank could limit the quantity of money and achieve long-run price stability by controlling the growth of nominal final demand. But in practice, the knowledge problem and public-choice problems make such an ideal bank an illusion.
James Madison, the chief architect of the U.S. Constitution, recognized the problem with discretionary government fiat money and the benefit of a commodity standard and convertibility long ago. In 1831 he wrote, "The only adequate guarantee for the uniform and stable value of a paper currency is its convertibility into specie. The least fluctuating and the only universal currency."
The Federal Reserve's policy is flawed because the institution itself is flawed. As Madison noted, "I am sensible that a value equal to that of specie may be given to paper or any other medium, by making a limited amount necessary for necessary purposes; but what is to ensure the inflexible adherence of the Legislative Ensurers to their own principles & purposes?"
That is a question that needs to be answered.
How Do Jobs Numbers Work?
How Do Jobs Numbers Work?
Americans are intensely interested in the state of the job market but trying to get a good sense of it recalls the story of the blind men describing an elephant by feeling it. The description depends on which part is felt. Without attempting a tusk-to-tail description of job statistics, here is a rough guide to the much-discussed numbers.
1. How is the job market doing, anyway?
There are two big headline numbers used to answer this question: the number of jobs in the economy (non-farm payroll employment) and the unemployment rate. Each comes from the federal government’s Bureau of Labor Statistics (BLS). The latest figure for the first number shows 117,000 net new jobs in July; it comes from a monthly “Current Employment Statistics” survey of approximately 140,000 employers and their hiring. The second number shows unemployment decrease to 9.1 percent; it comes from the monthly Current Population Survey, a sample of 60,000 households.
If life were simple, these two numbers would move in lockstep. It’s not and they don’t. The biggest reason is that the unemployment rate is defined as the number of people who are looking for jobs and cannot find them. Not only does this beg the question of what it means to look for a job (Visit the unemployment office? Update your LinkedIn listing? Read help wanted ads with morning coffee?), but it means that when workers stop looking for jobs, the unemployment rate can fall even with a declining number of jobs. A growing labor force also means the unemployment rate can rise when job growth is positive but slow.
Some of these other numbers paint a distinctly darker picture: broader measures of unemployment show 16.1 percent of the work force underemployed.
Because these are two different surveys with limited samples, it is also possible for them to tell different stories, and economists will argue about which survey is more reliable. A more comprehensive picture of the job market would resolve some of that uncertainty, but would be difficult to field monthly.
2. Why do some people say the unemployment rate paints too rosy a picture?
The two big numbers are just crude summaries of a more complicated situation. For example, suppose someone would like to be working 40 hours per week, but can only find part-time work (say 20). Does he have a job? Yes. Is he unemployed? No. But he’s underemployed and likely dissatisfied. Or what about a woman who looked in vain for a job for so long that she gave up? She would gladly take work if offered, but she is too discouraged to actively hunt for it.
Each of these scenarios is captured in more detailed statistics. The monthly report from the BLS includes information about the average hours worked in a week, average wages, and unemployment rates using several different definitions of underemployed and discouraged workers. It also looks at the number of people who have been unemployed for a long time—a rut from which it can be difficult to break free. Some of these other numbers paint a distinctly darker picture: almost 45 percent of the unemployed (over 6 million people) have been out of work for at least 27 weeks, and broader measures of unemployment show 16.1 percent of the work force is underemployed.
3. Is it really one big labor market, from data engineers to short-order cooks?
When workers stop looking for jobs, the unemployment rate can fall even with a declining number of jobs.
No. Those workers are not interchangeable. Nor does a job in Oregon necessarily do much for a high-school graduate in North Carolina.
The job numbers capture some of this, but not all. BLS surveys break jobs down into broad categories (manufacturing, construction, services) and then into narrower subcategories (wood products, residential building, motor vehicle dealers). The surveys do not report a geographic breakdown of jobs (likely because of sample limitations) and they are unable to capture skill mismatches. Both can be very important for job market health. One sees surprising newspaper stories, even in the midst of sharp recessions, about how manufacturers cannot fill jobs. The explanation, as one gets past the headline, is that manufacturers are not looking for high-school grads but rather for skilled workers who are good at math and can handle sophisticated computerized machinery. Those workers can be scarce, even when the high-school grads are lined up out the door.
4. What if you had a really big data set of employers and job seekers? Could you get a better picture?
Probably. There would be some big pitfalls to watch out for, though. That celebrated gain of 117,000 jobs in July? If you go to Table B-1 of the report and look, you’ll find that there were 130,920,000 jobs in July 2011 and 132,151,000 jobs in June 2011. That looks like a loss of 1,231,000 jobs, not a gain of 117,000. What gives?
Those big numbers are not seasonally adjusted, while the headline payroll employment number of 117,000 is. It really depends what question you want to ask. Seasonal adjustment helps answer whether the job market is doing better or worse than we would expect. Traditionally, lots of jobs disappear in the month of July. Thus, if 117,000 fewer jobs than we expect disappear, we say the labor market is showing some positive signs.
How do we know what we expect to see? That comes from estimation. It’s also part of the reason that each monthly announcement also includes revisions to the previous month’s numbers, which can sometimes be substantial. For example, in the most recent report, nonfarm payroll employment for May was revised from an increase of 25,000 to 53,000, while June was revised from 18,000 additional jobs to 46,000—a revised total of 56,000 more jobs than first reported, in addition to the 117,000 in July.
The two big numbers are just crude summaries of a more complicated situation.
5. Are these government surveys the only measure of the labor market?
No. There are a number of other measures and reports out there: mass layoffs; first-time claims for unemployment benefits; Challenger, Gray & Christmas’s job cuts. Each of these provides a different look at how workers are leaving their jobs. They are all different impressions of the elephant.
These first-time glimpses and second-look revisions at the state of the labor market all dribble out on a regular schedule. Leaders use them to assess just how much suffering there is in difficult times. Markets treat them as an important gauge of how the economy is doing and compare them both to their ex ante guesses about the numbers and to benchmarks for what might indicate a recovery. Friday’s numbers beat expectations but lagged behind targets for a healthy recovery. The composite picture is still one of a U.S. labor market that is faltering badly.
Philip I. Levy is a resident scholar of the American Enterprise Institute.
Goodbye, Gold Redemption of the Dollar
Forty years ago today, the entire world was launched into a brand new financial experiment: a peacetime global monetary system with no link at all to redemption of money in precious metals. In other words, for the first time without being in a big war, governments offered people purely fiat money on a worldwide basis. This could be viewed as the logical end point of the modern trend of increasing the power of central banks.
Viewing matters from 2011, how do we like the results of the experiment?
The global fiat money regime arrived with President Nixon’s announcement that the United States was abrogating its commitment to foreign governments under the Bretton Woods agreement to redeem their dollars for gold at the fixed value of one ounce per $35.
In his “Address to the Nation Outlining a New Economic Policy” on August 15, 1971, Nixon said the situation required “bold leadership ready to take bold action.” He went on to say why and how:
— “In the past seven years, there has been an average of one international monetary crisis every year.”
— “In recent weeks, the speculators have been waging an all-out war on the American dollar.”
— “We must protect the dollar from the attacks of international money speculators.”
— “Accordingly, I have directed [Treasury] Secretary Connolly to suspend temporarily the convertibility of the dollar into gold.”
Of course, the “temporary” suspension of convertibility turned out to be permanent, and a new international financial paradigm had been established. Thus ended the Bretton Woods system, which had been based on dollars being convertible into gold, and had been designed at the end of World War II. It was negotiated in 1944 and ratified in 1945, so it lasted about 26 years—not bad for a complex institutional construct.
The key institutions in the new situation were governments which increasingly used permanent deficit financing; central banks which could issue, against the governments’ debt they bought, irredeemable paper currency (accompanied by coins which clunked instead of ringing when you dropped them on a table); and, of course, commercial banks, which issued deposits redeemable only in the central banks’ fiat currency.
The entire new system depended on the foresight, wisdom, and knowledge of the managers of these institutions. It resulted in the general acceptance of permanent inflation and the redefinition of “price stability” to mean a stable rate at which the purchasing power of the fiat currency depreciated.
The series of accompanying charts reflects the operation of the new system. The price of the U.S. dollar in gold is shown by how many ounces of gold it took to buy $100 from 1970 to 2000 in Chart 1, and from 2000 to 2011 in Chart 2.
Chart 1
Chart 2
The theory in opposition to the new system had been previously voiced by George Bernard Shaw. He was hardly a qualified economist, but it is hard to improve upon his witty objection: “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect to these gentlemen, I advise you … to vote for gold.”
In my opinion, neither of these choices (indeed no human construct) is perfect and both (indeed all) present inevitable problems. However, as we can now observe from the four decades since President Nixon’s direction to Secretary Connolly, there are certainly many problems with the second choice—the pure fiat money system, which trusts to the knowledge, foresight, and “natural stability” of government officers and central bankers.
“The effect of this action,” Nixon predicted of closing the gold window, “will be to stabilize the dollar.” Refer to Chart 3, the price of the dollar in Swiss francs and Japanese yen; and Chart 4, the price of gold in Swiss francs, Japanese yen, and dollars, to see the inaccuracy of this prediction.
Chart 3
Chart 4
Another element of the 1971 “New Economic Policy” was a temporary government-ordered national price and wage freeze “to stop the rise in the cost of living.” This obviously bad idea could not be anything other than temporary. Intended to “break the back of inflation,” it preceded the Great Inflation of the 1970s to early 1980s, when annual inflation rates rose into double digits. The Great Inflation, like the recent Great Financial Crisis, was an international, not just a U.S. experience.
Economist Robert Z. Aliber, who has prepared updated editions of Charles Kindleberger’s classic Manias, Panics and Crashes, has observed that the decades we are considering have witnessed a remarkable international series of rolling banking and financial crises. When compared to other periods of comparable length, he concludes that, “there have been more foreign exchange crises” and “more asset price bubbles.” These have brought us, of course, to the Great Financial Crisis of 2007-2009, and now the Sovereign Debt Crisis of 2010-2011—so far.
Do these recurring financial crises display fundamental fault lines in the global fiat money experiment that started in 1971? Do they suggest that the top of the market for central bank paper currencies has passed, in the metaphor suggested by James Grant? Is the worldwide system of fiat currencies, government deficits, central bank monetization of the government debt, and permanent inflation actually sustainable for another few decades? If not, what would replace it?
I do not know the answer to these questions. But it seems to me beyond doubt, even though most of us do not remember it happened, that something extremely important did occur on August 15, 1971.
Alex J. Pollock is a resident fellow at the American Enterprise Institute and the author of Boom and Bust. He was president and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004.
Understanding Just How Harmful Obama’s Tax Hikes Would Be
Understanding Just How Harmful Obama’s Tax Hikes Would Be
In his 2012 budget, President Obama proposes reforming the tax system to help reduce the country’s fiscal deficit. Unfortunately for many small business owners, these reforms include tax hikes on them.
Among the tax increases that would hit small company owners proposed in the president’s budget are a higher marginal tax rate on income from sole proprietorships, Subchapter S corporations, and other pass-through entities; increased capital gains taxes on investments by high earners; repeal of the last-in-first-out approach to inventory accounting (LIFO); and treatment of private equity and venture capital carried interest as ordinary income.
While raising taxes on small business might help to reduce the deficit–so long as we do not just increase government spending at the same time–it decreases small business starts, growth, hiring, and investment, making it a bad economic move.
Progressive income taxes discourage business formation because they penalize people for successful risk taking but do not compensate them when they fail at the same activity. Research by Glenn Hubbard and William Gentry shows that higher marginal tax rates lead to lower rates of company formation, while analysis by the World Bank and Donald Bruce and Tami Gurley-Calvez shows a negative correlation between tax rates and new business formation.
Raising taxes on small business decreases small business starts, growth, hiring, and investment–making it a bad economic move.
High tax rates reduce owners’ incentives to expand their businesses. Research by David Bruce shows that higher taxes increase the likelihood that small business owners will shutter their companies. And analysis by Robert Carroll and co-authors reveals that a 10 percent drop in small business owners’ after-tax income is associated with a decrease of 8 percent in businesses’ revenues.
Additionally, high taxes stymie small business hiring and capital investment. A study by Carroll and co-authors reveals that slicing 10 percent off small business owners’ after tax income lowers their probability of hiring additional workers by 12 percent and shaves 4 percent off the wages they pay their typical workers. Another study by Carroll and colleagues shows that boosting entrepreneurs’ tax rates by 5 percent leads them to cut capital investment by 10 percent.
Research also shows that the specific tax increases proposed by the president in his 2012 budget would adversely affect small business owners. As Mark Zandi of Moody Analytics explains, the hike in marginal tax rates would fall heavily on small business because small business owners make up one-third of the tax payers in the highest marginal brackets.
While Americans may be in favor of soaking the rich, they do not like raising taxes on small business owners, who are seen as the embodiment of the American Dream.
Moreover, analysis by the House and Senate Joint Committee on Taxation shows that half of net-positive business income goes to tax payers hit by the top marginal tax rates.
The president’s proposal to end LIFO would also be problematic for small company owners. The Small Business Administration told the president’s Economic Recovery Advisory Board that “eliminating the ability to use LIFO would result in a tax increase for small business that could ultimately force many small businesses to close.”
The president’s proposal to increase capital gains taxes will also adversely affect entrepreneurial activity. Analysis by Christian Keuschnigg and Soren Bo Nielsen indicates that “even a small capital gains tax … diminishes incentives to provide entrepreneurial effort.” This is problematic for entrepreneurs, whose effort is needed to build businesses.
Moreover, small businesses pay a high cost for capital, which can be offset by lower capital gains tax rates. But when capital gains taxes go up, investors who provide risk capital to entrepreneurs have an incentive to put their money into tax-free bonds rather than into financing growth-oriented entrepreneurs.
Higher marginal tax rates lead to lower rates of company formation.
Raising taxes on small business owners is not even a good political move. While Americans may be in favor of soaking the rich, as recent polls indicate, they do not like raising taxes on small business owners, who are seen as the embodiment of the American Dream.
Moreover, small business owners are a major chunk of the electorate. Applying IRS data on the number of businesses to Federal Reserve data on the number of small businesses owners yields more than 60 million people, about half the number who voted in the last presidential election.
The massive U.S. fiscal deficit has prompted the Obama administration to consider raising taxes on small business owners. However, research shows that such a move would be an economic mistake. While I hold out little hope for the White House to recognize the economic arguments here, perhaps the president, with his political antennae out for a 2012 reelection bid, will realize the political folly of such a move.
Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.
The Henry Ford of Our Time
The Henry Ford of Our Time
Steve Jobs stepped down last Wednesday, saying that he “could no longer meet my duties and expectations as Apple’s C.E.O.” He had already been on a medical leave of absence since January, his third such absence since 2004. While one can only wish this uniquely talented man well, this would appear to be the end of one of the most remarkable careers in the history of American business and technology.
If you want to know just how remarkable, I would suggest a thought experiment. Keep in mind Arthur C. Clarke’s famous dictum that, “any sufficiently advanced technology is indistinguishable from magic.” Imagine there was some latter-day Rip Van Winkle who nodded off to sleep in 1970 and has just now woken up, asking what’s new. You show him a device that measures only 4½ X 2½ X ½ inches. It weighs just a few ounces and fits easily into the breast pocket of a dress shirt.
“What’s it do?” he asks.
“It’s a phone.”
“No wires?”
“Nope. And it works nearly anywhere in the world.”
“Cool!” he says, obviously impressed.
This would appear to be the end of one of the most remarkable careers in the history of American business and technology.
But then you tell him what else it can do: It’s an address book, a date book, a camera (both still and moving), a notebook, a clock that tells the time in any city in the world, a compass, a metric converter, and a calculator. It takes dictation. You can send and receive written messages with it. It will tell you where you are and help you get where you need to go. It will keep track of your investments and tell you your net worth as of that second. You can deposit a check in your bank account with it while lying in bed. It will give you the latest news, via every major news organization. It’s a dictionary, an encyclopedia, and a field guide to birds. It gives you the weather, both where you are and in any city in the world. It will tell you the phase of the moon, send you a bulletin when a new exoplanet has been discovered, tell you the sun rise and sunset times for any place on earth, show you the cloud cover around the globe, and tell you what that bright star in the sky is named.
You can play solitaire on it, or battleship, or chess (it will beat you), or any of thousands of other games. It’s a metronome. It can hold thousands of songs, get new ones on demand, and play them back with breathtaking fidelity.
There are, quite literally, more than 350,000 other things that it can do. In short, it’s not a phone, it’s an iPhone.
And our Rip Van Winkle would surely regard it as magic.
He put the pieces invented by others together to produce something both very new and commercially successful.
Many of us who use one every day regard it as magic. The iPhone and its larger brother, the iPad, are remaking the world before our astonished eyes. Already, communications, journalism, publishing, the music business, and the movies will never be the same. Even the revolutions of the Arab Spring were significantly impacted by iPhones.
But Steve Jobs is not a magician. He’s the Henry Ford of our time. Henry Ford didn’t invent anything. Instead, he took something that had largely been invented by others and made it into a world-transforming technology by making it accessible to the common man.
The iPhone and iPad are but the latest in a long series of innovations by Steve Jobs that have fundamentally shaped the technical revolution made possible by the microprocessor. The microprocessor—a cheaply manufactured computer on a chip—is the most consequential invention since the steam engine about 250 years ago and probably since agriculture, the invention that started humankind down the road to civilization itself some 10,000 years ago.
Steve Jobs didn’t invent the microprocessor any more than Henry Ford invented the automobile. Indeed, he and his companies did not invent much of the technology that makes the iPhone and such so extraordinary. What he and his partners did do was put the pieces invented elsewhere together to produce something profoundly new that the public loved and could also afford.
His legacy, like Henry Ford’s, is very much a new, wider, richer, more opportunity-filled world for the common man.
Jobs, along with his partner Stephen Wozniak, began with the Apple I, which was introduced in 1976. It was an advance over previous computer kits in that it featured a fully wired motherboard, but it lacked a keyboard, monitor, and even a case. It retailed for $666.66 (about $2500 in today’s money). They sold 200 of them.
The Apple II that soon followed, however, was a real personal computer; fully assembled, with keyboard, monitor, and floppy drives. Introduced at the West Coast Computer Faire in 1978, it created a sensation and kick-started the personal computer industry.
But personal computers were still very limited. After booting up you found yourself at the “C Prompt,” and had to enter code to get it to do anything. All commands were given through the keyboard. Screw up the exacting syntax of a command and the machine would just sit there.
Then, in 1984, Jobs introduced the Macintosh, the first personal computer to use a graphical user interface and a mouse to enter commands. This technology, too, was not invented by Jobs or even the Apple Corporation. Instead, most of it had been developed by Xerox over a decade earlier. But Xerox had never managed to develop a commercial product incorporating it. Jobs did. Again, he put the pieces invented by others together to produce something both very new and commercially successful.
The iPhone and its larger brother, the iPad, are remaking the world before our astonished eyes.
Although IBM, using the Microsoft operating system, soon captured the dominant share of the personal computer market thanks to its marketing clout and computing reputation, the Mac retained a wide and fiercely loyal following. That’s hardly surprising seeing as the Mac’s operating system remains far superior in terms of stability and ease of use. The Microsoft world is still playing technological catch-up with the always-one-jump-ahead Apple.
Unlike many geeks and inventors—who have long had a bad habit of dying broke—Steve Jobs has shown remarkable marketing and business acumen. The ad introducing the Macintosh at the 1984 Super Bowl is regarded as one of the most classic TV ads of all time. In recent years, his press conferences have become legendary for their iconic “and one more thing” announcements of often dazzling new technology. The brilliant ad campaign featuring the cool guy representing the Mac and the nebbishy stand-in for Windows-based computing has raised the Mac from a niche product to a major player in the personal computing market.
And, of course, Steve Jobs is anything but broke. Apple recently, if briefly, surpassed Exxon Mobil as the company with the world’s highest market cap and Jobs owns 5.4 million shares.
His investment in Pixar paid off big time when the company was sold to Disney, giving Jobs 138 million shares of that company and making him by far the largest single shareholder in Disney.
There are, quite literally, more than 350,000 other things that the iPhone can do.
In Aldous Huxley’s immortal science-fiction novel Brave New World, published in 1932, the calendar of the future civilization he depicts counts its years not from the birth of Christ but from the birth of the Model T in the year we call 1908. The calendar designates its years by the initials A.F., for After Ford.
Steve Jobs’s legacy won’t be a new calendar. But his legacy, like Henry Ford’s, is very much a new, wider, richer, more opportunity-filled world for the common man.
The future will be in his debt for a long, long time.
John Steele Gordon has written several books on business and financial history, the latest of which is the revised edition of Hamilton's Blessing: The Extraordinary Life and Times of Our National Debt.
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