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Wednesday, May 14, 2008

Social Order

Culture matters, sometimes in a big way. See here:
Compared with students from developed Western nations, students from less democratic countries like Saudi Arabia, Oman and Belarus tended to punish not only free-loaders, but also cooperative players, with the result that cooperation in their groups plummeted.

When players had the option to punish, the groups tended to display more cooperation, which is consistent with past research showing that the ability to punish can help foster cooperative behaviour. However, in some countries, 'selfish' players also punished cooperative players, perhaps as a means of revenge for punishments they had suffered, or maybe as a way of punishing do-gooders for showing them up. The researchers called this 'anti-social punishment', and the groups where this occurred tended to cooperate less.

Anti-social punishment occurred more in those countries, including Belarus and Saudi Arabia, shown by surveys to have less faith in the rule of law and less belief in civic cooperation. In a commentary on the findings, published in the same journal, Herbert Gintis of the Sante Fe Institute, said the results challenge the way people have tended to view capitalist democracies. "The success of democratic market societies may depend critically upon moral virtues as well as material interests, so the depiction of civil society as the sphere of 'naked self-interest' is radically incorrect," he wrote.
Man existed as a social and political creature long before there was anything like a modern economy. Cultures in which the individual learns to compete and cooperate while possessing a moral compass based upon something like the golden rule are at a distinct advantage. They can gain from more of the positives and fewer of the negatives in a free market system compared with other cultures. Institutions are a reflection and reinforcement of a societys' culture and beliefs. That this matters and that a free a moral people will fare better than people in a culture of envy or a collectivist society is my idea of social justice.

Tuesday, May 06, 2008

Lawrence Reed on The Great Depression

see Great Depression Myths (extended excerpts) and full article:
The Great Depression was not the country’s first depression, though it proved to be the longest. Several others preceded it. The calamity that began in 1929 lasted at least three times longer than any of the country’s previous depressions because the government compounded its initial errors with a series of additional and harmful interventions.

The central bank took further deflationary action by aggressively selling government securities for months after the stock market crashed. For the next three years, the money supply shrank by 30 percent. As prices then tumbled throughout the economy, the Fed’s higher interest rate policy boosted real (inflation-adjusted) rates dra­matically.

Though modern myth claims that the free market “self-destructed' in 1929, government policy was the debacle’s principal culprit. If this crash had been like previous ones, the hard times would have ended in two or three years at the most, and likely sooner than that. But unprecedented political bungling instead prolonged the misery for over 10 years.

Smoot-Hawley by itself should lay to rest the myth that Hoover was a free market practitioner, but there is even more to the story of his administration’s interventionist mistakes. Within a month of the stock market crash, he convened conferences of business leaders for the purpose of jawboning them into keeping wages artificially high even though both profits and prices were falling. As economist Richard Ebeling notes, “The ‘high‑wage 'policy of the Hoover administration and the trade unions ... succeeded only in pricing workers out of the labor market, generating an increasing circle of unemploy­ment.”

Commenting decades later on Hoover’s admin­istration, Rexford Guy Tugwell, one of the architects of Franklin Roosevelt’s policies of the 1930s, explained, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”

Though Hoover at first did lower taxes for the poorest of Americans, Larry Schweikart and Michael Allen in their sweeping A Patriot’s History of the United States: From Columbus’s Great Discovery to the War on Terror stress that he “of­fered no incentives to the wealthy to invest in new plants to stimulate hiring.” He even taxed bank checks, “which accelerated the decline in the availability of money by penalizing people for writing checks."

Compounding the error of high tariffs, huge subsidies, and defla­tionary monetary policy, Congress then passed and Hoover signed the Revenue Act of 1932. The largest tax increase in peacetime history, it doubled the income tax. The top bracket actually more than doubled, soaring from 24 percent to 63 percent.

Can any serious scholar observe the Hoover administration’s mas­sive economic intervention and, with a straight face, pronounce the inevitably deleterious effects as the fault of free markets?

Economist Jim Powell ... points out that “Almost all the failed banks were in states with unit bank­ing laws” — laws that prohibited banks from opening branches and thereby diversifying their portfo­lios and reducing their risks. Pow­ell writes: “Although the United States, with its unit banking laws, had thousands of bank failures, Canada, which permitted branch banking, didn’t have a single failure ...” Strangely, critics of capitalism who love to blame the market for the Depression never mention that fact.

Roosevelt secured passage of the Agricultural Adjustment Act, which levied a new tax on agri­cultural processors and used the revenue to supervise the wholesale destruction of valuable crops and cattle. Federal agents oversaw the ugly spectacle of perfectly good fields of cotton, wheat, and corn be­ing plowed under (the mules had to be convinced to trample the crops; they had been trained, of course, to walk between the rows). Healthy cattle, sheep, and pigs were slaugh­tered and buried in mass graves. Secretary of Agriculture Henry Wallace personally gave the order to slaughter six million baby pigs before they grew to full size. The administration also paid farmers for the first time for not working at all.

Benjamin M. Anderson writes, “NRA was not a revival measure. It was an antirevival measure. ... Through the whole of the NRA pe­riod industrial production did not rise as high as it had been in July 1933, before NRA came in.”

Roosevelt next signed into law steep income tax increases on the higher brackets and introduced a five-percent withholding tax on corporate dividends. He secured another tax increase in 1934. In fact, tax hikes became a favorite policy of Roosevelt for the next ten years, culminating in a top income tax rate of 90 percent. Senator Ar­thur Vandenberg of Michigan, who opposed much of the New Deal, lambasted Roosevelt’s massive tax increases. A sound economy would not be restored, he said, by following the socialist notion that America could “lift the lower one-third up” by pulling “the upper two-thirds down.”

Columnist Walter Lippmann wrote in March 1938 that “with almost no important exception every measure he [Roosevelt] has been interested in for the past five months has been to reduce or discourage the production of wealth.”

As pointed out earlier in this essay, Herbert Hoover’s own version of a “New Deal” had hiked the top mar­ginal income tax rate from 24 to 63 percent in 1932. But he was a piker compared to his tax-happy succes­sor. Under Roosevelt, the top rate was raised at first to 79 percent and then later to 90 percent. Economic historian Burton Folsom notes that in 1941 Roosevelt even proposed a whopping 99.5-percent marginal rate on all incomes over $100,000. “Why not?” he said when an advi­sor questioned the idea.

After that confiscatory proposal failed, Roosevelt issued an executive order to tax all income over $25,000 at the astonishing rate of 100 percent. He also promoted the lowering of the personal exemption to only $600, a tactic that pushed most American families into pay­ing at least some income tax for the first time. Shortly thereafter, Con­gress rescinded the executive order but went along with the reduction of the personal exemption.

The relent­less assaults of the Roosevelt ad­ministration — in both word and deed — against business, property, and free enterprise guaranteed that the capital needed to jump-start the economy was either taxed away or forced into hiding. Not until both Roosevelt and the war were gone did investors feel confident enough to “set in motion the postwar investment boom that powered the economy’s return to sustained prosperity.”

Those who can survey the events of the 1920s and 1930s and blame free-market capitalism for the economic calamity have their eyes, ears, and minds firmly closed to the facts. Changing the wrong-headed thinking that constitutes much of today’s conventional wisdom about this sordid historical episode is vital to reviving faith in free markets and preserving our liberties.

Note: If you read the full article, I disagree with the authors' characterization of the state of social security. A minor adjustment to retirement age buys substantial time to complete a fix.

Thursday, May 01, 2008

Gene Smiley on The Great Depression

A review of the Gene Smiley book is here:
...the 1920s had been a period of dramatic economic growth and technological innovation that was lowering the costs of manufacturing and increasing the supplies of a wide variety of goods and services supplied to the consuming public.

Only agriculture remained to a great degree in the doldrums. With the end of the First World War, the global demand for American farm products had declined and the farming community had failed to adjust to the new international market situation. Once the Great Depression began, unemployment kept rising until it reached about 25 percent of the work force in late 1932. Both manufacturing output and construction decreased significantly, and international trade experienced a major decline.

He sees a primary source of the problem in the return to the gold standard by countries such as Great Britain at a rate of exchange that was too high relative to the domestic level of prices and wages that had been created by the wartime inflation. The problem was that the British trade unions had become too strong and wouldn’t accept cuts in money wages, and the British government was not willing to devalue the pound. Hence, Britain went into the Great Depression already in a severe recession. 1927 and 1928 the Federal Reserve had increased the money supply to keep the stock market and construction booms going. Then the Fed brought the monetary expansion to a halt in late 1928 and 1929. That set the stage for the stock-market crash.

The economic policies of the Hoover administration were an unmitigated disaster. Taxes were raised and the government set up subsidy programs to prop up both unprofitable industries and wasteful agricultural production. Congress passed the Hawley-Smoot tariff that raised import taxes to a historical high, which set off an international trade war that ruined import and export markets around the world.

Anti-competitive price and wage rigidities were the primary reason the Depression grew in intensity as the early 1930s progressed, Smiley emphasizes.

The growing circle of unprofitable businesses in the face of these price and wage rigidities undermined the banking system, as an increasing number of enterprises could not pay off their loans. Bank-depositor panics broke out that led to bank runs. The financial sector of the American economy, as a result, went into a tailspin. The banking crisis was at its worst in the period between the November presidential election of 1932 and Franklin D. Roosevelt’s inauguration in March 1933.

Smiley persuasively shows with a thorough and detailed analysis of the facts that, contrary to many popular impressions, Roosevelt’s New Deal did not end the Great Depression. Instead, it prolonged the imbalances and distortions and indeed in many cases made them worse.

Economic improvement began only after the U.S. Supreme Court declared most of the New Deal systems of planning and controls to be unconstitutional in 1935 and 1936. To the extent that the private sector was freed from the heavy hand of direct government supervision, industries slowly began to adjust and expand output and add to their labor forces. But Smiley explains that Roosevelt undermined this recovery in 1936 and 1937. Angry that the Supreme Court had thrown out most of the central features of his New Deal, he went on an anti-business crusade that weakened business confidence in the political and economic future.

Then, in 1937-38, the American economy experienced a new depression within the Great Depression, owing to the Federal Reserve’s raising reserve requirements on commercial banks, which induced a monetary contraction and a decline in investment lending. Durable-goods manufacturing fell by 67 percent between May 1937 and May 1938.

Smiley calculates that during both the 1930s and the war years of the 1940s, the American economy experienced periods of capital consumption, when capital equipment and other durable production assets were not replaced as they were worn out.

The enduring legacy of the Great Depression, Smiley concludes, has been a total misunderstanding of this period: it was government mismanagement and intervention that created this economic crisis. And furthermore, what the government did during the decade of the 1930s left us with the institutional burden of the regulated economy and the welfare state. “What failed in the 1930s were governments, in their eagerness to direct activity to achieve political ends,” Smiley says at the end of this insightful and valuable work. “It has taken us a long time to begin to understand these costly lessons of the 1930s.”