The Ethics of Economic Growth

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In this issue of Cato Unbound, Tyler Cowen begins the discussion by drawing on themes from his new book, Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals.Cowen argues for the ethical importance of long-term growth and civilizational stability.

Read the debate here…

From the liner notes of the book

Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals

by Tyler Cowen

Growth is good. Through history, economic growth, in particular, has alleviated human misery, improved human happiness and opportunity, and lengthened human lives. Wealthier societies are more stable, offer better living standards, produce better medicines, and ensure greater autonomy, greater fulfillment, and more sources of fun. If we want to continue on our trends of growth, and the overwhelmingly positive outcomes for societies that come with it, every individual must become more concerned with the welfare of those around us. So, how do we proceed?

Tyler Cowen, in a culmination of 20 years of thinking and research, provides a roadmap for moving forward. In this new book, Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals, Cowen argues that our reason and common sense can help free us of the faulty ideas that hold us back as people and as a society. Stubborn Attachments, at its heart, makes the contemporary moral case for economic growth and delivers a great dose of inspiration and optimism about our future possibilities.

"Tyler Cowen is one of the most intriguing and eclectic thinkers on the planet like many people, I read something by him every day. In Stubborn Attachments he combines economics and philosophy in a truly important achievement. His best, most ambitious and most personal work. -Tim Harford, author of The Undercover Economist

As a means of practicing the altruism that Stubborn Attachments argues for, Tyler Cowen is donating all earnings from this book to a man he met in Ethiopia earlier this year with aspirations to open his own travel business.

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Francois-Noel Babeuf: The Marxist Before Marx

image from fee.orgMen and women of conscience must be both vigilant and courageous in the face of these destroyers in our midst.

by Lawrence W. Reed

This article was originally published on FEE.org. Read the original article.

The French Revolution produced a parade of fascinating characters, many of them deranged by power and vampire-like in their quest for blood. One of the period’s lesser-known figures was Gracchus Babeuf, whose ideas were shelved with his death in 1797 only to reappear decades later in the writings of Karl Marx. Babeuf was, as the title of a biography attests, the world’s first revolutionary communist.

He was born Francois-Noel Babeuf in 1760 in northeastern France. He changed his first name twice in later life—first to “Camille” and later to “Gracchus.” The latter was in deference to the brothers Tiberius and Gaius Gracchus, who sought to redistribute land in the late Roman Republic. As a young adult in the 1780s, he made his living as an expert in feudal law, keeping records of what the peasants owed in rent and fees to the privileged nobility. The injustices of this medieval form of state-sanctioned oppression were, of course, endemic and profuse, and they upset Babeuf immensely.

Babeuf’s mental condition on the eve of the French Revolution is open to question. This is important because his political philosophy was beginning to take shape at this time. One disturbing indication that his seat back and tray table may not have been in their locked and upright positions involved the loss of his four-year-old daughter Sofie. She died in 1787, and her untimely death grieved him profoundly. Even Babeuf admirer and biographer Ian Birchall (The Specter of Babeuf) terms his reaction “bizarre”:

Babeuf apparently cut the heart out of the corpse, ate part of it, and wore the rest in a locket on his chest. It was an odd mixture of superstition and materialism, indicative of the way that Babeuf’s view of the world was developing. Without hope that his daughter’s soul might achieve immortality [he was rabidly atheist], he was seeking to preserve the object of his affections by fusing his body with the remnant of hers.

When the French Revolution began in the summer of 1789, Babeuf’s interest in politics soared. He played a bit part in the first five years, spending much of his time privately fleshing out and radicalizing his political philosophy. When the guillotine claimed the architect of the Reign of Terror, Maximilien Robespierre, in July 1794, Babeuf burst onto the scene with his newspaper, Tribun du Peuple.

He became a minor celebrity immediately. At first, he denounced Robespierre in vicious terms, a perspective that later changed to a fawning adoration of the departed Jacobin once the new government called the Directory consolidated its power.

Babeuf saw an opportunity. He would use it to call for a radical egalitarianism and ultimately, another revolution.

The economic conditions the Directory inherited in mid-1795 were desperate. Within a year, they were even worse. Hyperinflation roared as the new government pumped out billions of paper notes. War with Europe drastically reduced commerce. Food supplies dwindled. Starvation killed thousands. In that environment, Babeuf saw an opportunity. He would use it to call for a radical egalitarianism and ultimately, another revolution. His efforts toward those ends would be known in history as “The Conspiracy of the Equals.”

In Volume 2 of An Austrian Perspective on the History of Economic Thought (1995), excerpted here, economist Murray Rothbard summarized the views of this Marxist-before-Marx and his Conspiracy of the Equals.

The ultimate ideal of Babeuf and his Conspiracy was absolute equality. Nature, they claimed, calls for perfect equality; all inequality is injustice: therefore, community of property was to be established….In the ideal communist society sought by the Conspiracy, private property would be abolished, and all property would be communal and stored in communal storehouses. From these storehouses, the goods would be distributed “equitably” by the superiors—apparently, there was to be a cadre of “superiors” in this oh so “equal” world!

Of the half dozen books on Babeuf, most are hagiographies by adoring Marxists who offer one lame excuse after another for their subject’s eccentricities. The best and most objective treatment of Babeuf was also the first full-length biography of the man, Gracchus Babeuf: The First Revolutionary Communist. Written in 1978 by Professor R. B. Rose of the University of Tasmania, it’s worth the attention of anyone interested in Babeuf as a precursor to Karl Marx.

Separated by half a century, the similarities between the two communist theoreticians are striking. On many matters, it’s as if Marx simply pilfered the thoughts of Babeuf and then superimposed the complaints of his French predecessor onto capitalism instead of onto medievalist France.

Most of the big stuff you find in Marx, you can find in Babeuf: Workers are exploited; the value of their labor is expropriated by profiteers. Private property is the root of all evil. To create the communist utopia, there must first be a period of dictatorship marked by violence to expunge society of its bad ideas and behavior. Christianity is an opiate for the masses. Blah, blah, blah. Boilerplate babble—superficial, arrogant, and devoid of genuine economic analysis. To quote from Rothbard again:

An absolute leader, heading an all-powerful cadre, would, at the proper moment, give the signal to usher in a society of perfect equality. Revolution would be made to end all further revolutions; an all-powerful hierarchy would be necessary allegedly to put an end to hierarchy forever.

But of course, as we have seen, there was no real paradox here, no intention to eliminate hierarchy. The paeans to “equality” were a flimsy camouflage for the real objective, a permanently entrenched and absolute dictatorship, in Orwell's striking image, “a boot stamping on a human face—forever.”

Almost nothing in the manifestos, declarations, and proposals of Babeuf and his conspirators was original. They were echoes of earlier thieves, mountebanks, and crackpot philosophers. As even socialist and Babeuf sympathizer Ernest Belfort Bax admits in his biography, Gracchus Babeuf and the Conspiracy of Equals:

The only point that was new in the theory of the Equals…was the notion of the transformation of the entire French republic, by the seizure of political power, into one great communistic society….Babeuf was the first to conceive of Communism in any shape as a politically realizable ideal in the immediate or near future….

What distinguishes Babeuf from his revolutionary predecessors is his placing communism, involving the definite abolition of the institution of private property, in the forefront of his doctrine…and in his bold idea of its prompt realization by political means, through a committee of select persons placed in power by the people’s will as the issue of a popular insurrection….Gracchus Babeuf and his movement cannot fail to be for the modern socialist of deepest possible historical interest. Gracchus Babeuf was, in a sense, a pioneer and a hero of the modern international Socialist party.

Bax also offers this telling concession: “With all our admiration of Babeuf’s energy and heroism as a revolutionary figure, it is impossible to avoid the conclusion that he was intellectually unstable.” How about just plain nuts?

Babeuf’s newspaper, Tribun, became the official mouthpiece of his new movement. Nightly meetings were held at which articles and commentary from Tribun were read and discussed by the faithful.

Once Babeuf determined that a violent overthrow of the government of the Directory was necessary and desirable, to be followed by a new communist regime, his secret Insurrectionary Committee belched out one screed after another. It ordered the “extermination” of all opponents, including any foreigners found on the streets. Slogans were adopted for banners proclaiming “the people’s” this or “the people’s” that.

One document that Babeuf likely wrote himself, humbly entitled Analysis of the Doctrine of Babeuf, Tribune of the People, included these statements within its fifteen paragraphs:

"Nature has given to every man an equal right to the enjoyment of all goods."

"In a true society there ought to be neither rich nor poor."

"The object of a revolution is to destroy any inequality, and to establish the well-being of all."

This rabid thrust for equality in all things in economic life always was, and remains today, a destructive and futile assault on human nature. Not even identical twins are truly identical; each of us is a unique assortment of millions of traits and thoughts.

Equality before the law is one thing, and a noble goal, but expecting people to generate identical incomes regardless of their contributions to the marketplace is pure baloney. As I wrote in a chapter on the subject in Excuse Me, Professor: Challenging the Myths of Progressivism:

To produce even a rough measure of economic equality, governments must issue the following orders and back them up with firing squads and prisons: “Don’t excel or work harder than the next guy, don’t come up with any new ideas, don’t take any risks, and don’t do anything differently from what you did yesterday.” In other words, don’t be human.

Another of the Babeuf committee’s decrees, bearing the title Equality, Liberty, Universal Well-being, contained a litany of pipe-dreams and the coercion necessary to put them into effect. I excerpt from it liberally here:

"A great national community of goods shall be established by the republic."

"The right of inheritance is abolished; all property at present belonging to private persons on their death falls to the national community of goods."

"Every French citizen, without distinction of sex, who shall surrender all his possessions in the country, and who devotes his person and work of which he is capable in the country, is a member of the great national community."

"The property belonging to the national community shall be exploited in common by all its healthy members."

"The transfers of workers from one community to another will be carried out by the central authority, on the basis of its knowledge of the capacities and needs of the community."

"The central community shall hold…those persons, of either sex, to compulsory labor whose deficient sense of citizenship, or whose laziness, luxury, and laxity of conduct, may have afforded injurious example; their fortunes shall accrue to the national community of goods."

"No member of the community may claim more for himself than the law, through the intermediary of the authorities, allows him."

"In every commune, public meals should be held at stated times, which members of the community shall be required to attend."

"Every member of the national community who accepts payment or treasures up money shall be punished."

"All private trade with foreign countries is forbidden; commodities entering the country in this way will be confiscated for the benefit of the national community; those acting to the contrary will be punished."

"The republic coins no more money."

"Every individual who is convicted of having offered money to one of its (the national community’s) members shall be severely punished."

"Neither gold nor silver shall be imported into the republic."

In its essence, the utopian communism promulgated by Babeuf and his friends would have made Robespierre’s Reign of Terror seem like a frolic in the doggie park. It would compel men and women back to the Stone Age.

Under orders from the Directory, none other than General and future-Emperor Napoleon Bonaparte forcibly dissolved Babeuf’s organization and arrested much of its membership in February 1797. Babeuf went to prison, and his newspaper was permanently shuttered. His short-lived political career lasted less than three years.

Given Babeuf’s role as the ideological and tactical ringleader of the 1796-97 revolt, the verdict in his trial was a foregone conclusion.

At his trial for attempted insurrection, Babeuf chattered like a drunken cockatiel. Using the occasion to spew his communist ideals before judge and jury and as much of the public as might be reached, the atheist Babeuf even allied himself with Jesus Christ, whom he praised for his alleged “hatred of the rich” and his supposed socialist teachings. Of course, Babeuf possessed no better understanding of Jesus’s words than he did of either human nature or basic economics. As I’ve written here, Jesus was neither a hater nor a socialist.

Given Babeuf’s role as the ideological and tactical ringleader of the 1796-97 revolt, the verdict in his trial was a foregone conclusion.

“We demand real equality or death…And we shall have it, this real equality; it matters not at what price!” proclaimed a manifesto Babeuf’s associates had issued in 1795. On May 27, 1797, both were delivered to the 37-year-old Babeuf himself by way of the guillotine.

In death, Gracchus Babeuf finally achieved his dream of absolute equality—equality with dead people, which is as equal as it gets and which is precisely the point. The equality Babeuf was committed to foisting on others is both unfit and impossible for the living and achievable only when you’re six feet under.

The truly sad part of the story is that Babeuf’s communist/socialist gibberish was born again with Karl Marx 50 years later.

Men and women of conscience must be both vigilant and courageous in the face of these destroyers in our midst.

Animated by the evil scribblings of Babeuf and Marx, power-hungry demagogues would seize power in diverse places, killing and enslaving millions. They include Lenin and Stalin in the Soviet Union, the Maoists in China, the Khmer Rouge in Cambodia, and fellow travelers in nations from North Korea to Cuba to Venezuela. All are intellectual heirs and disciples of Babeuf and Marx.

Will the world ever put behind it the rantings of these murderous ideologues? Not so long as evil is a force afoot amongst mankind, I fear. So men and women of conscience must be both vigilant and courageous in the face of these destroyers in our midst.

Lawrence W. Reed
Lawrence W. Reed is President Emeritus and Humphreys Family Senior Fellow at the Foundation for Economic Education and author of Real Heroes: Incredible True Stories of Courage, Character, and Conviction and Excuse Me, Professor: Challenging the Myths of ProgressivismFollow on Twitter and Like on Facebook.

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Titan Funds – “Sebas happy playing to contented customers”

Titan

Sebas Bastian of Titan Funds

by Richard Coulson

When I visited the East Bay Street head office of Investar Securities at 10 AM Monday June 3rd, a dozen citizens were already there waiting to subscribe to either of the two Titan Mutual Funds being launched. They had been attracted by the intensive publicity campaign that started ten days earlier when over two thousand people gathered at the BahaMar Convention Centre to hear Sebas Bastian and his team tell Bahamians why to consider investing in the Funds, followed by a second-by-second countdown clock shown on print and digital media leading up to Monday’s 9 AM kick-off moment.

This marketing effort had its gestation years ago, when in 2009 Imaginative young entrepreneur Sebastian Bastian founded the Island Luck gaming venture (or “web shop”), which in 2014 became a legally recognized operation regulated by the Bahama Gaming Board. Government granted licenses for eight gaming houses, with premises throughout the country. Barred from our hotel casinos, Bahamians could now satisfy their itch to “play the numbers” on hundreds of screens showing on-line results of U.S. state lotteries. Island Luck (under its corporate name Playtech Systems Limited) soon became the dominant web shop, recruiting and training good managers and technicians to handle the largest number of players—and naturally collecting the highest fee revenues from punters risking their cash against the odds of a pay-off.

The current Fund offering is a classic example of “cross-selling”, practiced by any sales organization: if one product sells well, that creates a captive market of contented customers willing to try another product. The 40,000 account holders of Island Luck have found that its easy-to-play games give them fair odds, win or lose. Naturally, they are favorably inclined to consider an investment product offered by Mr. Bastian.

Island Luck’s success has enabled him to create other ventures, in mortgage finance, property and construction development, and television production, and to found charities. It is in good standing with the Treasury, having resolved financial issues after last year’s increase in taxation rates for gaming companies, with all assessments duly paid.

A sound underlying structure was created for the Titan Funds, which were approved after close scrutiny by the Bahamas Securities Commission. Over-all management responsibility lies with their Boards of Directors and with the sponsoring firm Investar, a licensed securities dealer. Its principals in addition to Mr. Bastian, include such stalwarts as Hillary Deveaux, former Executive Director of the Commission, Lowell Mortimer, attorney and shipping executive, and Felix Stubbs, long-time head of IBM Bahamas. The task of implementing the Funds’ objectives by selecting specific investments has been contracted to Leno Corporate Services, another licensed securities dealer and member of BISX.

The crucial position of Evaluation Agent has been assigned to the BDO international accounting firm, whose local unit is headed by senior practitioner Clifford Culmer. The Evaluation Agent will determine the continuing Net Asset Value (NAV) of the Funds and their underlying holdings, thus setting the price for monthly buying and redeeming of Fund shares. Although this appointment was not named in the initial offering documents, in my interview with Mr. Bastian he assured me it would be confirmed to Fund shareholders
It’s too early to predict total Fund subscriptions during the initial month-long offering period, or how they will be split between the two Funds. There will probably be no shortage of investors attracted to this offering; the challenge will be to quickly turn their cash into appropriate investments. The Fixed Income Fund, with a minimum $1,000 subscription, authorized for Government Bonds and other interest-bearing securities, may initially grow more rapidly, given Bahamians’ traditional preference for current yield over capital gain.

However, the Balanced Fund, available for only $500, has special features that will appeal to more adventurous investors. It can invest up to 50% of its portfolio in equities and special situations, including 35% in Playtech Systems (Island Luck). This investment cannot exceed 5% of Playtech’s issued shares, subject to increase approved by the Gaming Board. Although no financial statements are available, Island Luck is generally assumed to be very profitable, and its fair value in the Fund will be determined by the Valuation Agent.

While our two established investment banks, Royal Fidelity and CFAL, already continuously offer an assortment of well-structured bond and equity mutual funds to Bahamian investors, the special features of the Titan Funds and the more aggressive marketing to smaller investors and Family Island residents may result in a substantial increase in the quantity of mutual funds outstanding. This will be a welcome development, since we sorely need more “economic democracy” evidenced by wider ownership of growth-oriented investment securities rather than bank deposits.

The success of the Titan Funds will be grounded on the reputation of Mr. Bastian and the Bahamas gaming industry, which are now beyond doubt. While there will always be citizens and religious groups who object to monetary games of chance on moral or spiritual grounds—that is their privilege—it’s clear that our economy benefits from the financial contributions and educated employment opportunities. The gaming industry is here to stay.


The views expressed are those of the author, and not necessarily those of WeblogBahamas.com (which has no corporate view) or its Authors.

First published in The Tribune and posted here with the kind permission of the author.

Mr. Coulson has had a long career in law, investment banking and private banking in New York, London, and Nassau, and now serves as director of several financial concerns and as a corporate financial consultant. He has recently released his autobiography, A Corkscrew Life: Adventures of a Travelling Financier.

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What’s with the national awards?

image from www.weblogbahamas.comby Dr. Donald M. McCartney, D.M.
 
As a nation and as a people we still do not respect and elevate education and those who have struggled to obtain it.
 
By education, I do not just mean book learning. The truly educated are those who have the wisdom to use the tools that they have gained through education. Indeed, the truly educated are those who use their education and wisdom to uplift humankind and not obfuscate their efforts to achieve as the have achieved.
 
One only has to look at the list of honourees in the Local and Queen's honours list. You can count on your fingers and still have some left over when you attempt to find the truly educated among us who have been honoured. It is a national disgrace how the truly educated in the Bahamian society is and has been ignored. We make and give the dishonourable honourable.
 
We have elevated those who are not deserving of elevation. We have made dishonourable men and women honourable.
 
Yet,  we decry the behaviour and morays of our young people. Yes, indeed,  we expect our young people to excel despite the fact that  they can see those who are undeserving being elevated to the status of national heroes.
 
Yes, they can see  the status of honourable being given to   those who  do not deserve it because they  have not performed a truly  honourable act in their lives.
 
Indeed, we pretend that we honour those who have achieved high honours in education, but because of our national guilty consciences we merely pay lip service to honour them.
 
Have you ever heard of an educator who has made exceptional contributions to education being referred to as honourable or addressed as excellency. It has never occurred in my life time.
 
Oh, yes, we have named a few schools after them, BUT so have some politicians had schools named in their honour.
 
It is so very unfortunate that everything in The Bahamas is based on politics and for those who have for the most part  "sucked up"" to the political class so as to be honoured!
 
On the other hand, there are those people who have been honored who are honorable and deserving,  but the "honors game," unfortunately,  is NOT honorable!
 
Believe it or not, many of those persons who are really honorable, perhaps never look or hoped to be honored;  they do what God wants them to do and are blessed by doing His will!

The views expressed are those of the author, and not necessarily those of Weblog Bahamas (which has no corporate view).

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The Wonder of the market

Economic-sophisms-coverjpg8Bastiat (1801-1850) was masterful:

"On coming to Paris for a visit, I said to myself: Here are a million human beings who would all die in a few days if supplies of all sorts did not flow into this great metropolis. It staggers the imagination to try to comprehend the vast multiplicity of objects that must pass through its gates tomorrow, if its inhabitants are to be preserved from the horrors of famine, insurrection, and pillage. And yet all are sleeping peacefully at this moment, without being disturbed for a single instant by the idea of so frightful a prospect. On the other hand, eighty departments have worked today, without co-operative planning or mutual arrangements, to keep Paris supplied. How does each succeeding day manage to bring to this gigantic market just what is necessary–neither too much nor too little? What, then, is the resourceful and secret power that governs the amazing regularity of such complicated movements, a regularity in which everyone has such implicit faith, although his prosperity and his very life depend upon it? That power is an absolute principle, the principle of free exchange. We put our faith in that inner fight which Providence has placed in the hearts of all men, and to which has been entrusted the preservation and the unlimited improvement of our species, a light we term selfinterest, which is so illuminating, so constant, and so penetrating, when it is left free of every hindrance. Where would you be, inhabitants of Paris, if some cabinet minister decided to substitute for that power contrivances of his own invention, however superior we might suppose them to be; if he proposed to subject this prodigious mechanism to his supreme direction, to take control of all of it into his own hands, to determine by whom, where, how, and under what conditions everything should be produced, transported, exchanged, and consumed? Although there may be much suffering within your walls, although misery, despair, and perhaps starvation, cause more tears to flow than your warm-hearted charity can wipe away, it is probable, I dare say it is certain, that the arbitrary intervention of the government would infinitely multiply this suffering and spread among all of you the ills that now affect only a small number of your fellow citizens."

Download and read EconomicSophisms (pdf) here…

Find our more about Bastiat online here…

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Sir Roger Scruton on What The Socialist way Of Thinking Did To British Education

ScrutonIn this very interesting discussion on 'Why the Left is winning, and why it shouldn’t' at the Oxford Union from Dec 17, Sir Roger lays out a very plausible explanation as to how/why our educational system was weakened by closing the traditional Government High School in this extract.

He puts it a little more bluntly in this article entitled 'What's The Point of Education' from November 2016:

"Critics tell us that selection divides children into successes and failures, and that the failures are ‘marked for life’. I see no reason to believe that. Future generations need knowledge; but they also need skills, strengths and technical know-how. Schools that provide those benefits — like the German Technische Hochschulen — are as important as grammar schools: and if children have the possibility of freely passing between schools in the process of discovering their aptitude, then selection need in any case never be final.

"In the world of education those thoughts are heresies. After years of ‘child-centred’ indoctrination the educational establishment has become lost in a kind of fairyland, believing that education is really a form of social engineering, and that its primary purpose is to boost the pupil’s ‘self-esteem’. Once we see that the primary purpose of education is to safeguard knowledge, all the fairy castles of the educationists tumble in ruins. Hence they are up in arms, and, as so often, in arms against the truth."

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Chester Cooper: Import tax reductions = benefit to special interest groups

Cooper"Predictably describing the budget as “a failure”, he said: “It is painfully clear that there was heavy lobbying for and on behalf of special interests, and their negotiators won. So, I ask, who negotiated for the people? Because clearly the special interests got tax breaks, and the poor and middle class got shafted once again." Tribune Business More…

The Tribune is quoting Mr. Chester Cooper, PLP MP.

In order to gain political brownie points Mr. Cooper is offering confused logic as the "tax breaks" he refers to are reductions in import taxes. These convert to a direct benefit for the consumer. Consumers are also the poor and middle class he claims to represent.

New car prices have dropped in price as much as $10,000. A significant benefit to the poor and middle class and any other consumer who ultimately pay the import tax.

Businesses are government's largest tax collector, and businesses, large, medium and small are important for economic growth. And economic growth is crucial to the economy and each and every Bahamian and taxpayer.

As a former President of The Bahamas Chamber of Commerce, Mr. Cooper knows this as well as anyone else.

So where are all the ideas for fiscal and economic improvement coming from Mr. Cooper and the Official the Opposition?

Oh wait a minute, there doesn't appear to be any.

I remain disappointed as Mr. Cooper has so much more to offer than political rhetoric.

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Paul Krugman’s Predictions about “Austerity” Aren’t Aging Well

KrugmanPaul Krugman’s arguments do not fare well against evidence in a new book written by economists Alberto Alesina, Carlo Favero, and Francesco Giavazzi titled, "Austerity: When It Works and When It Doesn’t."

by John Phelan

This article was originally published on FEE.org. Read the original article.

In August 2008, economist Olivier J. Blanchard published a paper titled “The State of Macro.” In it, he wrote that

For a long while after the explosion of macroeconomics in the 1970s, the field looked like a battlefield. Over time however, largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged.

According to The National Bureau of Economic Research (NBER), which published Blanchard’s paper, the US economy was, at that time, already nine months into a recession that would last another nine months, until June 2009. The same happened elsewhere as Britain and much of the eurozone also fell into deep and prolonged recessions. As economies shrank, budget deficits soared and government debt skyrocketed. And, when recovery came, it was the slowest on record.

Blanchard’s consensus shattered in the face of these events. Economists began shouting at each other in bitter terms. Some advocated for more government spending to boost aggregate demand, saying deficits and debt were problems for another day. Others argued that these explosions of red ink were a threat to the economy, not a cure.

Krugman was scathing about the “Austerians,” those who argued that rapidly rising government debt posed a clear and present danger to the economy.

Perhaps the most vocal proponent of the first view was Paul Krugman. In his 2012 book End This Depression Now!, he argued that “we don’t need to be suffering so much pain and destroying so many lives. Moreover, we could end this depression both more easily and more quickly than any imagines.” All we had to do, Krugman argued, was ramp up government spending. “A burst of federal spending is what ended the Great Depression,” he wrote, “and we desperately need something similar today.”

Krugman was scathing about the “Austerians,” those who argued that rapidly rising government debt posed a clear and present danger to the economy. Of the British government, which enacted “austerity” to get its deficit under control after the conservative takeover in 2010, he wrote:

The result is an economy that remains deeply depressed. As the National Institute for Economic and Social Research, a British think tank, pointed out in a startling calculation, there is a real sense in which Britain is doing worse in this slump than it did in the Great Depression: by the fourth year after the Depression began, British GDP had regained its previous peak, but this time around its still well below its level in early 2008.

And at the time of this writing, Britain seemed to be entering a new recession.

One could hardly have imagined a stronger demonstration that the Austerians had it wrong.

But economists on the other side of the battlefield kept working. A new book titled Austerity: When It Works and When It Doesn’t by economists Alberto Alesina, Carlo Favero, and Francesco Giavazzi both summarizes the subsequent research and makes new contributions of its own. Krugman’s argument does not fare well against this new evidence.

Krugman’s argument in favor of higher government spending to boost aggregate demand was based on the theory that fiscal multipliers were large. If a spending multiplier is greater than 1, an increase in government spending increases private expenditure so that total output rises by more than the increase in government spending. If a multiplier is smaller than 1, however, then increases in government spending are accompanied by decreases in private expenditure so that total output rises by less than the increase in government spending.

Krugman cited research on the impacts of military spending, particularly in wartime, to argue for large multipliers. The idea that spending cuts would signal that better times lay ahead was, Krugman claimed, like believing in “the confidence fairy.”The authors of Austerity examine a much broader range of estimates and note that in “a synopsis of studies estimating multipliers for government purchases…Most of the values range between 0.6 and 1.5.”

In other words: not much GDP bang for the deficit buck.

The argument that austerity could be expansionary—that government spending cuts could be followed by increased GDP growth—was pilloried by Krugman. “[E]xpansionary austerity was highly implausible in general, and especially given the state of the world as it was in 2010 and remains two years later,” he wrote. The belief that spending cuts would signal to individuals and businesses that better, more fiscally prudent times lay ahead was, Krugman claimed, like believing in “the confidence fairy.”

But as Austerity’s authors show, in some cases austerity was expansionary. And, in large part, it happened for exactly the reason Krugman denigrated. Where austerity is based on spending cuts rather than tax increases, “private investment rises within 2 years,” and by the third year is above the previous level. Contra Krugman, Alesina, Favero, and Giavazzi attribute this to increased business confidence.

So, if spending is less effective and deficits and debts more onerous than Krugman argued and austerity can, in some circumstances, be expansionary, should it be based on tax increases or spending cuts?

The authors of Austerity are clear on this point.

Tax-based plans lead to deep and prolonged recessions, lasting several years. Expenditure-based plans on average exhaust their very mild recessionary effect within two years after a plan is introduced…

The component of aggregate demand that mostly drives the heterogeneity between tax-based and expenditure-based austerity is private investment

That “confidence fairy,” in other words. Investment responds positively to spending cuts and wilts in the face of tax hikes.

Britain, Krugman’s “demonstration that the Austerians had it wrong,” has, in fact, shown the opposite.

The Conservative government implemented a program of budget cuts. Over a 5-year period exogenous fixed measures amounted to almost three percent of GDP, two-thirds expenditure cuts, and one-third tax hikes. It was harshly criticized by the IMF, which predicted a major recession. The latter did not materialize and the IMF later publicly apologized. The UK grew at respectable rates.

Austerity is less reader-friendly than End This Depression Now! and is unlikely ever to have “New York Times Bestseller” emblazoned across its cover. This is a shame because it is a far more meticulous bit of work. It is, simply, the best and most in-depth book on this subject.

Over time, the main subject of economic debate shifts here and there. In the early 2000s, people worried about globalization. Then it was the crash and slow recovery. Now, the focus has moved on to income and wealth inequality. But the topics covered in Austerity will be back. They were, indeed, largely retreads of the debates between Keynes and Hayek in the 1930s and between Malthus and Say a century before that. And when the subject does return to austerity, we will be able to thank Alesina, Favero, and Giavazzi for such a thorough treatment.

John Phelan
John Phelan  is an economist at the Center of the American Experiment and fellow of The Cobden Centre.

 

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Lack of diplomacy

DiplomacyDear Mr. Editor,

On seeing and hearing the President of the United States interfering in the internal politics of an independent nation and major ally is one thing, but to then have the temerity to call the Lord Mayor of London, Mr. Sadiq Khan and one of the hosts, “a stone-cold loser,” is beyond the pale.

Of course Mr. Khan’s response should be – surely it is infinitely more honourable to be called a stone-cold loser than to be branded a pathological liar!

George Francis


The views expressed are those of the author, and not necessarily those of WeblogBahamas.com (which has no corporate view) or its Authors.

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The Say School of Business Coming Soon

Say School

Posted in Blogs by Rick Lowe, Current Affairs, Education, International, Society, Web/Tech/TV, Weblogs | Leave a comment