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Common Core Supporters Can’t Demonstrate Its Effectiveness. Are They Counting on a Christmas Miracle?

Neal McCluskey

As any Christmas show will tell you, whether it’s the rejuvenation of Charlie Brown’s tree or the saving of George Bailey, ‘tis the season for miracles! Perhaps in that spirit, several high-profile advocates for the Common Core national curriculum standards are promising, essentially, an educational miracle. But while we can always count on a miracle on 34thStreet, the children who go to school there — or anywhere else — deserve real evidence the Core will work.

One prominent voice in this vain has been that of former Democratic Tennessee Congressman Harold Ford. In a June op-ed, Ford claimed that “Common Core adoption means better schools, smarter students and a stronger America.” He cited no research on the quality of the Core, or the effect of academic standards generally. He just proclaimed it.

Ford doubled down on that tack in an op-ed just a few weeks ago, and added that the recent elections proved that “parents want to continue with implementation of high standards and the results they promise.” But elections turn on much more than education, and one of the few Core supporters Ford referred to — New York Governor Andrew Cuomo — ran an ad highlighting a minimum five-year delay on putting Core scores on students’ permanent records. This despite being a virtual shoo-in for reelection.

Don’t let Core supporters’ rhetoric fool you.”

And public support is clearly lacking. A Gallup poll released in September indicated that 60 percent of the public opposed the Core, part of a clear trend of plummeting support.

Common Core has plenty of other notable advocates who’ve recently weighed in with words, if not evidence. University of Miami president and former Clinton administration official Donna Shalala penned an op-ed stating that the country needs Common Core to address “gender-based inequities” hurting female students. Not only did Shalala offer no evidence supporting the notion that the Core would fix inequities, when it comes to college- and career-readiness — what the Core is supposed to put on turbo boost — women are outperforming men, 57 percent of college students are female and only 43 percent male, and women far surpass men in taking rigorous Advanced Placement courses in high school.

Finally, there’s former U.S. Secretary of Education William Bennett, who twice since September has written pieces defending the Core. In the first, Bennett stated that “we can all agree” the country needs a core curriculum and he suggested that all kids should read such works as The Adventures of Huckleberry Finn and The Illiad. He then excoriated Core opponents for perpetuating the “myth…that Common Core involves a required reading list.” Why? Because the Common Core doesn’t actually have the literature nucleus Bennett thinks essential.

In December Bennett struck again, suggesting that since centralized standards and testing has so far failed (see No Child Left Behind), we should centralize even further. The illogic is almost self-evident, but more important is that he again failed to offer any actual evidence the Core would improve outcomes. Like Ford and Shalala, he just assumed it.

So why the evidentiary silence? Because there simply is no meaningful evidence for Core effectiveness.

The Core itself has never been tested. Indeed, in 2009 the federal government told states that to compete for Race to the Top funds they’d have to promise to adopt the Core before it was even fully written, much less tested.

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Stop Attacking Uber for Lax Safety Standards

Matthew Feeney

It’s been a bad few weeks for Uber, the San Francisco-based transportation technology company.

After a spate of bad coverage, the ride-sharing business is facing bans in Spainthe Netherlands, and Nevada, as well as a lawsuit in Californiascrutinizing its driver background checks. The service was banned in New Delhi, after an Uber driver was accused of rape by a passenger earlier this month.

Last month, senior vice president Emil Michaels was roundly criticized for suggesting that the company should dig up dirt on journalists critical of Uber. The company also recently disciplined a New York executive after he tracked a reporter’s location in an Uber car. Earlier this month, an Uber driver in New Delhi reportedly confessed to raping a passenger.

These reports are troubling, to be sure. But that doesn’t mean we should start regulating Uber more stringently, or ban it outright. The company boasts comparatively rigorous safety requirements, and provides a very real value to consumers.

Despite the spate of bad press, Uber is as safe as riding a taxi.”

For example, most American jurisdictions require a five-year gap between any felony convictions and a taxi driver’s application process. Uber mandates that its drivers not have DUIs, violent crimes, or sexual offenses on their record within seven years of their application. In addition, Uber requires seven years to pass before it considers applicants with gun-related violations or driving offenses such as hit and runs and reckless driving on their record.

Uber also lets passengers and drivers rate each other, adding another layer of accountability. At the end of a bad ride, an Uber passenger can provide details of a driver’s behavior on the Uber app. Unlike taxi drivers, Uber drivers know inappropriate behavior will be reported quickly. This is an excellent safety feature, and the fact that drivers also rate passengers provides both passengers and drivers with an incentive to behave well.

Critics, however, say it’s not enough.

Unlike many taxi driver applicants, Uber does not fingerprint its drivers. Hirease, the company used by Uber to carry out background checks, uses publicly available data to screen applicants. The data comes from sources such as federal and county courts, national sex offender registries, and a Multi State Criminal Databasel search, which includes information from state authorities . The courthouse records are checked in the jurisdictions where the applicant has lived in the last seven years.

True, fingerprinting can pull up information that isn’t caught by a traditional background check. For example, fingerprints pulled from a crime scene might match a potential driver, even if that driver was never apprehended or charged with a crime.

But these databases are flawed, and often include inaccurate or incomplete information. In July 2013, the National Employment Law Project released a study on the FBI’s employment background checks and found that “FBI records are routinely flawed.”

NELP’s study shows that while law enforcement agencies are diligent at reporting fingerprint information to the FBI, they are less diligent in keeping the data updated. This means someone can be fingerprinted after being arrested for a crime they’re eventually found innocent of.

If the fact that such a person is eventually cleared of any wrongdoing is not reported to the FBI, then that person’s FBI background check will not be an accurate.

Second, even if an arrested and fingerprinted person is found guilty, there is a good chance that he or she will have pleaded down to a lesser conviction. NELP’s study indicates that “of those initially charged with a felony offense and later convicted, nearly 30 percent were convicted of a different offense than the one for which they were originally charged, often a lesser misdemeanor conviction.” Such incomplete information means that an FBI check is not a panacea.

Uber is an entirely new kind of service and forcing it to adhere to the standards of ordinary taxi companies may not be the best way forward. Consumers should make an informed choice about Uber and balance the innovative services it provides with the potential pitfalls of new and uncharted territory.

There will always be bad apples in every pool of workers. Taxi drivers have been accused of assaulting passengers. That doesn’t mean the government should ban taxis. Uber has a strong incentive to provide a safe environment for its users. Its very business model depends on consumer trust.

Matthew Feeney is a policy analyst at the Cato Institute and author of a forthcoming Cato study Is Ridesharing Safe?

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The Link between the Ruble and Keynes

Steve H. Hanke

On March 3, 2014, the United States went to war with Russia. That’s when the U.S. first imposed sanctions. And, yes, sanctions are nothing more than war by non-military means. Then, on November 11 Russia committed a major misstep. It floated the ruble. Since then, the ruble hasn’t floated on a sea of tranquility. It has plunged in lockstep with oil — by about 25% and its volatility has soared to around 65%.

The ruble’s plunge means that Russian imports will be more expensive and exports more competitive. This combination will help keep Russia’s current account positive, which will offset some of Russia’s massive capital flight.

A currency board, rather than a floating ruble, would protect Russia from the specter of inflation.”

In addition, Russia’s fiscal accounts are denominated in depreciating rubles and its oil exports are invoiced in appreciating U.S. dollars. So, the fiscal blow from lower oil prices will be cushioned by a weak ruble.

But, there are limits to any temporary benefits from a ruble rout. When a currency takes a dive, the specter of inflation is always right around the corner. How can Russia avoid further damage and correct for its error of November 11?

Russia should abandon the floating exchange-rate regime, which it adopted on November 10. Oil and other commodities that Russia exports are priced and invoiced in U.S. dollars. By embracing a floating exchange-rate regime, Russia is inviting instability. The ruble’s nominal exchange rate will fluctuate with oil and other commodity prices. When the price of oil rises (falls) the ruble will appreciate (depreciate), and Russia will experience a roller-coaster ride distinguished by deflationary lows and inflationary highs. To avoid these wild rides, most of the big oil producers — Saudi Arabia, Kuwait, Qatar and the United Arab Emirates — link their currencies to the U.S. dollar. Russia should do the same.

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To get things right, Russia should lift a page from John Maynard Keynes’ Russian playbook and establish a currency board.

Under a currency board system a central bank issues notes and coins. These are convertible into a foreign reserve currency at a fixed rate and on demand. As reserves, the monetary authority holds high-quality, interest bearing securities denominated in the reserve currency. Its reserves are equal to 100 per cent, or slightly more, of its notes and coins in circulation, as set by law. A central bank operating under a currency board rules does not accept deposits and it generates income from the difference between the interest paid on the securities it holds and the expense of maintaining its note and coin in circulation. It has no discretionary monetary policy. Instead, market forces alone determine the money supply.

There is an historical precedent in Russia for a currency board. After the Bolshevik Revolution, when troops from Britain and other allied nations invaded northern Russia, the currency was in chaos. The Russian civil war had begun, and every party involved in the conflict was issuing its own near-worthless money. There were more than 2,000 separate issuers of fiat rubles.

To facilitate trade, the British established a National Emission Caisse for northern Russia in 1918. The Caisse issued “British ruble” notes. They were backed by pounds sterling and convertible into pounds at a fixed rate. Kurt Schuler and I discovered documents at the archives in the British Foreign Office which prove that the father of the British ruble was none other than John Maynard Keynes, who was a British Treasury official at the time.

Despite the civil war, the British ruble was a great success. The currency never deviated from its fixed exchange rate with the British pound. In contrast to other Russian rubles, the British ruble was a reliable store of value. Naturally, the British ruble drove other rubles out of circulation. Unfortunately, the British ruble’s life was brief: The National Emission Caisse ceased operation in 1920, after allied troops withdrew from Russia.

Yes, it is time for Putin to lift a page from Keynes and follow what most large non-U.S. oil producers already do: link the ruble to the greenback.

Steve H. Hanke, Professor of Applied Economics at Johns Hopkins University, is a Senior Fellow and Director of the Troubled Currencies Project at the Cato Institute.

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The Cuba Opening: American Foreign Policy Meets Reality

Ted Galen Carpenter

There is a flurry of news media accounts that the United States and Cuba are in talks to restore diplomatic relations. One hopes that such negotiations prove fruitful, thus ending a quarrel that has lasted some fifty-five years and benefited neither country. Restoring diplomatic ties would pave the way for ending the long-standing U.S. economic embargo against the island nation, and that move could be the catalyst for a commercial bonanza. Cuba would become a vacation destination for tens of thousands of American tourists, as it was in the decades before Fidel Castro’s communist revolution. The route between Miami and Havana could become a busy air corridor for commercial flights. Thousands of Cuban exiles and their families in the United States have a powerful incentive to travel back to the island for both business and personal reasons. Without the arbitrary interference resulting from the diplomatic feud and the accompanying U.S. embargo, the two countries are natural economic partners.

Cuba would be the principal beneficiary of normalizing relations. The opening of trade and investment with the vast U.S. economy would make it possible for Cuba to enter the twenty-first century. No longer would images of the island be those of a country stuck in a time warp, with the streets of Havana and other major cities currently being notable for the presence of automobiles from the 1940s and 1950s. Although economic mismanagement by Castro and his associates is the principal reason for that unhappy development, U.S. hostility and the vindictive policies it generated also have played a major role. Normalization of relations would enable Cuba finally to become something more than a large used car museum.

A willingness to restore diplomatic ties with Havana suggests that perhaps the suffocating Wilsonian approach to U.S. diplomacy may finally be weakening.”

But while Cuba would benefit greatly from the end of the bilateral cold war with Washington, the United States would also benefit. The economic gains to America, while relatively modest in the context of a $17 trillion-a-year economy, would be significant. More important, though, normalizing relations with Havana could be an important step in ending a counterproductive approach in overall U.S. foreign policy that has lasted for more than a century.

Until the administration of Woodrow Wilson, the United States generally had a practical, straight-forward approach to relations with foreign countries. Washington maintained diplomatic ties with numerous governments, most of which were something other than democratic republics. U.S. officials did not predicate the existence of diplomatic relations on approving the nature of specific foreign regimes.

Wilson and his ideological disciples added a new, and quite harmful, dimension to America’s diplomacy. From time to time, Washington implicitly insisted that other governments have an appropriate level of moral purity before the United States would officially recognize their existence and maintain diplomatic relations. That standard was never applied consistently, but when it was invoked, U.S. leaders clung to official policies that were often detached from any semblance of reality.

For example, the United States refused to have official dealings with Moscow for more than fourteen years following the Bolshevik revolution, until Franklin D. Roosevelt finally abandoned that approach. Washington reacted in the same stubborn fashion after the 1949 communist revolution in China. It was not until President Richard Nixon and his chief foreign-policy adviser, Henry Kissinger, mustered the courage to pursue a rapprochement with Beijing in the early 1970s that U.S. policy began to align with reality. And it was not until 1979, during Jimmy Carter’s administration, that Washington and Beijing finally established official diplomatic ties. Until the policy shift in the 1970s, a succession of U.S. administrations persisted in the fiction that Chiang Kai-shek’s Nationalist regime on Taiwan was the legitimate government of all China. In other words, U.S. officials insisted on the absurd fiction that an exile regime on an island of 20 million people spoke for a country of nearly one billion people.

That perverse diplomatic approach has occurred in other arenas. It took Washington more than two decades after the end of the Vietnam War to establish diplomatic relations with Hanoi. To this day, the United States refuses to recognize the government of North Korea, even though that communist regime has been in power since the late 1940s. And official relations between the United States and Iran—a crucial, midsize power in the Middle East—have been nonexistent since 1979.

A willingness to restore diplomatic ties with Havana, combined with the ongoing talks with Iran on that country’s nuclear program and an assortment of other regional issues, suggests that perhaps the suffocating Wilsonian approach to diplomacy may finally be weakening. One can only hope that is the case. Wilsonianism is akin to someone on a middle-school playground taking the stance: “I don’t like you, and I’m not going to play with you.” That approach generally doesn’t work well on the playground, and it definitely doesn’t work well in the international arena. Talks with Cuba indicate that perhaps the Obama administration has internalized that lesson.

Ted Galen Carpenter, a senior fellow at the Cato Institute and a contributing editor at The National Interest, is the author of nine books, the contributing editor of ten books, and the author of nearly 600 articles and policy studies on international affairs.

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The Court and Obamacare

Michael D. Tanner

Probably no later than next June, we can expect the Supreme Court to rule on whether the Obama administration can provide subsidies for Obamacarethrough federally run exchanges despite explicit language in the law that limits subsidies to “an exchange established by a State.”

There is no guarantee, of course, about how the Court will rule. The language of the statute is clear, and the ever-loquacious Jonathan Gruber has stated that the law was set up that way to entice states into establishing their own exchanges. And the fact that the Court reached down to take this case even before the legal process had fully played out in the lower courts suggests that several justices believe the challenge has merit.

But one never knows whether the justices will twist themselves into John Roberts–like pretzels in their desire to avoid upending a president’s signature legislative accomplishment.

Opponents of Obamacare should also realize that even if the Court upholds the challenge to Obamacare’s subsidies, it would not actually strike down the law. Obamacare’s insurance regulations, for example, would largely remain on the books. In fact, it could truthfully be said that what the Court would actually be doing is ordering Obamacare to be implemented exactly as written.

Among Obamacare opponents there will be satisfaction and a widespread feeling of vindication. But after the cheering dies down, what happens next?

If the Court upholds the challenge, some 5 million people in 32 states would lose their subsidies, meaning they would suddenly have to pay more, sometimes much more, for insurance. Not surprisingly, supporters of Obamacare have reacted to the possibility with near hysteria. The American Prospect warned of a “swath of human misery, stretching from horizon to horizon.” Salon concurs, arguing that “people will die.” Brian Beutler in The New Republic agrees that this decision is “a matter of life and death” and proclaims that the Supreme Court has become “a death panel.”

Republicans had better be prepared with something better than Obamacare Lite.”

Back in the real world, such drastic outcomes are unlikely. Of course, the predictions do raise the question of why, if liberals truly believe such things, the administration continues to enroll people in Obamacare without even warning them that their subsidies might be at risk.

Still, it is true that, if the Court does insist on the law as written, a great many Americans are going to be very unhappy once they see their new insurance premiums. That means there will be a lot of pressure on legislators in both parties to do something to fix the problem. And, with President Obama, congressional Democrats, and many in the media ready to blame Republicans for the outcome, the GOP had better be ready to respond.

The easiest response, and the one most likely to be pushed by Democrats, would be simply to rewrite the law to reinstate the subsidies. All it would take is a one-page bill declaring that a federal exchange should be considered “an exchange established by a State.” Perhaps Democrats will even try to tempt Republicans with minor concessions on issues like the medical-device tax or the employer mandate. Or Congress might do what it so often does and kick the can down the road, preserving the subsidies until after the 2016 election.

But Republicans should resist any such quick fix. Not only would they be agreeing to lock Obamacare into place for the foreseeable future, they would, in effect, be acquiescing to the Obama administration’s illegal taxes and the usurpation of legislative power.

A second option would be for those states with federal exchanges to try to set up state exchanges instead. Most of the states without their own exchanges are run by Republican governors, but that’s no guarantee against capitulation. Just look at the Medicaid expansion, where, in the last few months alone, Republican governors in South Dakota, Tennessee, Utah, and Wyoming have been unable to resist the lure of “free” federal money. (Those expansions have not yet been approved, however, by either their state legislatures, the Obama administration, or both).

Still, setting up an exchange is easier said than done. Indeed, the trend has actually been for states to abandon their state exchanges for the federal one. Oregon and Nevada, for example, have gone this route, while New Mexico, although it still technically has its own exchange, has decided to use the federal exchange’s enrollment portal for a second year.

But if Republicans at both the federal and state levels can hold their ground, they will be able to use this opportunity to force Congress to open Obamacare up to wholesale revision, possibly even repeal.

To accomplish that, however, Republicans will have to be ready with their own replacement option. So far, they have shown no sign that they can agree on such a policy. Worse, most of the plans talked about so far are little more than Obamacare Lite.

The good news, though, is that June is still six months away. There is still time for Republicans to offer a free-market alternative. Whether or not they can will be a major test of the incoming Congress. If they don’t, it’s an opportunity that may not come again.

Michael Tanner is a senior fellow at the Cato Institute and the author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

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Libertarian Internationalism

Simon Lester

One of the most dismissive terms thrown around in foreign policy circles is “isolationist.” If you are an isolationist, you clearly have not considered the issues carefully and rationally, and need not be taken seriously. Libertarian leaning politicians such as Ron and Rand Paul are frequent targets of this epithet.

There may or may not be a handful of actual libertarians who are isolationist, but the reality is that libertarianism is among the most internationally minded philosophies. Examining several key areas of international relations makes this clear: International trade, diplomacy and the military, and institutions.

The most obvious place where libertarians are internationalists is economic relations. True libertarians advocate the free flow of trade and investment, without government restrictions. This is about as international as you can get. For libertarians, the origin of a product or service is irrelevant. People around the world should be able to buy and sell from each other without government interference.

In the international arena, libertarians can and will have a strong voice and play an important role. That role should not be diminished by simplistic and inaccurate cries of isolationism.”

Unfortunately, in most countries today, there is a strong sentiment for favoring domestic economic actors over foreign ones. This feeling manifests itself in various forms, such as tariffs and Buy National procurement policies. Libertarians stand almost completely united against this nationalist feeling, believing that trade and other economic interaction with foreign actors benefits us all.

Diplomacy and the military is a more complicated policy area, involving a number of instances of potential relations between domestic and foreign. Here, though, there is a strong case that libertarians are more internationalist than most others. Of course, in part this depends on what one means by internationalism.

Libertarians are most frequently accused of isolationism when they object to military intervention in foreign territories. That libertarians usually object to these interventions is not in doubt. However, use of the military cannot always credibly be called internationalist. Colonialism and conquest, although they do require contact with foreigners, are not generally a positive form of international relations.

More controversially, libertarians may sometimes object to peaceful aid to foreigners as well. But this is not done out of anti-foreigner sentiment. Rather it is based on skepticism over the effectiveness of aid and its misuse as a foreign policy tool, and a general preference for markets over government support. Libertarians certainly believe in private outreach among civil society groups in one nation to the people of other nations. The objection is only to the mismanagement of governments when they get involved.

Thus, for libertarians, war and government aid do not reflect true internationalism. To some extent, they are really about government bullying and condescension towards foreigners, the idea that we are superior to them and can use our power to re-make them in our image. In contrast, libertarians believe in treating citizens of other countries with respect and acting with humility.

Finally, there is the issue of international institutions. This is the area where libertarians are most likely to reject what is conventionally thought of as the internationalist position, as they worry about the power of these institutions. In reality, libertarians are not rejecting the idea of international institutions, but rather the specific policies pursued by some of these institutions. For example, if the IMF advocates Keynesian fiscal policy, and libertarians object, it is the policy they object to, not the institution itself. If there were international institutions that supported balanced budgets (or protected property rights), for example, libertarians would likely be supportive. There is no fundamental libertarian objection to international cooperation through institutions; the only concern is on specific issues of substance.

At a more conceptual level, the idea of limited government inherently pushes us away from nationalism and towards internationalism. As things stand now, most power is in the hands of national governments, who often use this power in ways that conflict with the interests of other governments. In other words, putting power in the hands of nation-states leads naturally to national conflict. By contrast, devolving power to local governments more closely connected with the people reduces the role of national governments and nationalism. It makes power more disbursed, and allows communities to connect with each other, regardless of the nation in which they are located.

Many commentators believe that libertarians are isolationist, anti-foreigner, and skeptical of anything in the international arena. However, the truth is that the internationalism of the establishment is often international in name only. We need to look carefully beneath the surface of what people actually advocate in the name of internationalism. Foreign-policy bullying — as compared to simply letting others determine their own course — might increase our contact with people of other nations, but it may do so in ways that lead to greater international conflict and reduced prosperity.

In the international arena, libertarians can and will have a strong voice and play an important role. That role should not be diminished by simplistic and inaccurate cries of isolationism.

Simon Lester is a trade policy analyst at the Herbert A. Stiefel Center for Trade Policy Studies at Cato Institute

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Increasing Economic Growth Means Shrinking the Size and Scope of Government

James A. Dorn

There is a growing body of evidence that bigger government means slower growth of real GDP. Once the level of total government spending as a percentage of GDP reaches a tipping point, estimated to be from 15 percent to 25 percent of GDP, additional expansion crowds out private productive investment and slows economic growth. When government overreaches, economic freedom is diminished and private exchange opportunities are lost — that is, the range of choices open to individuals is restricted.

In a pioneering study of the link between the growth of government and the wealth of nations, which appeared in the fall 1998 issue of the Cato Journal, economists James Gwartney, Randall Holcombe, and Robert Lawson found that a 10 percentage point increase in government spending as a percentage of GDP decreases real GDP growth by 1 percentage point. Thus, if government spending went from 25 percent of GDP to 35 percent, real GDP growth would slow over the longer term by a full percentage point. They also found that a 10 percentage point increase in the government’s share of GDP lowered private investment by 1.6 percentage points.

One of the key findings of their study was that secure property rights — which includes a legal system that protects persons and property, enforces contracts, and  limits the power of government by a just rule of law — play an important role in promoting economic growth.

The positive relationship between property rights and economic growth was developed more fully by the late Bernhard Heitger, an economist at the Kiel Institute for World Economics, in his path-breaking article in the Cato Journal. In that article, Heitger distinguished between proximate and ultimate determinants of economic growth. The former are well known: additions to physical and human capital and technological progress (also known as total factor productivity). But Heitger was interested in the question of what drives capital accumulation and innovation. His answer: the structure of property rights and the associated incentives.

Conventional growth theory took private property rights and incentives as givens. Heitger rigorously showed that private property rights and the rule of law are the ultimate sources of economic growth and the wealth of nations. Well-defined private property rights improve efficiency and increase per capita income. In turn, as a nation grows richer, people demand stronger protection of their property rights — advancing institutional change.

To move up the freedom ladder, the United States needs to change the climate of ideas and recognize the importance of private property rights and the rule of law.”

Using data from an international cross-section of countries for the 1975–95 period, Heitger found that “a doubling of the property rights index more than doubles per capita income” and “that more secure property rights significantly raise the accumulation of physical and human capital.”

That outcome would not have surprised Peter Bauer, one of the pioneers of development economics. He was critical of the simplistic idea that physical capital accumulation is the key determinant of economic growth. As early as 1957, in his classic Economic Analysis and Policy in Underdeveloped Countries, Bauer noted: “It is misleading to think of investment as the only or the principal determinant of development. Other factors and influences, such as institutional and political forces, the qualities and attitudes of the population, and the supply of complementary resources, are often equally important or even more important.”

In the same book, Bauer also anticipated modern endogenous growth theory, stating: “It is more meaningful to say that capital is created in the process of development, rather than that development is a function of capital.” What mattered to Bauer, and other classical liberals, in the process of development was freedom — namely, the freedom to pursue one’s happiness without government interference except to protect life, liberty, and property. (See J. A. Dorn, “Economic Development and Freedom: The Legacy of Peter Bauer”)

In that sense, Bauer argued that “the principal objective and criterion of economic development” is “the extension of the range of choice, that is, an increase in the range of effective alternatives open to people.” Free markets — resting on effective private property rights — and free people are thus the ultimate determinants of economic growth. When government expands beyond its core functions, it undermines the primacy of property, diminishes the principle of freedom, and erodes the wealth of nations.

Today, the size and scope of government in the United States would be beyond the imagination of America’s Founding Fathers. For more than a century after the ratification of the Constitution and Bill of Rights, limits on government power were taken seriously. At the start of the 20th century, total government spending was less than 10 percent of GDP, with the majority of spending taking place at the state and local levels. In 1900, federal spending was a mere 2.8 percent of GDP compared to 21.1 percent in 2014. Meanwhile, state and local spending stood at 5 percent of GDP in 1900, but reached 11.5 percent in 2014. Overall government spending now stands at nearly 33 percent of GDP (see www.downsizinggovernment.org).

That tectonic shift is largely due to the growth of entitlements and the regulatory state. Nearly half of federal spending goes toward Social Security, Medicare, and Medicaid; huge regulatory costs are imposed on the private sector; and the higher taxes needed to finance big government erode economic incentives to work, save, and invest.

The loss of economic freedom in the United States is revealed in the annual Economic Freedom of the Word Report, published by the Fraser Institute along with the Cato Institute and a number of global think tanks. In 2000, the United States was the second most economically free country in the world, based on data from 1998. Today it is ranked 12th, based on 2012 data.

To move up the freedom ladder, the United States needs to change the climate of ideas and recognize the importance of private property rights and the rule of law. A legal framework that safeguards persons and property means incentivizing individuals to take responsibility for their actions and allowing people to learn from their mistakes. It means cutting back the size and scope of government and not bailing out businesses.

The nature of government is coercion; the nature of the market is consent. The “great constitutional charter” that George Washington referred to in his First Inaugural Address (April 30, 1789) was intended to bind Congress to the powers enumerated in Article 1, Section 8 of the Constitution. Thomas Jefferson reiterated Washington’s admonition by stating in his Frist Inaugural Address (March 4, 1801): “The sum of good government” is “a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.”

The challenge for the 114th Congress is to return to “a wise and frugal government.” A first step would be to understand the detrimental effects of expanding government power on economic liberties — especially on private property rights. If history has taught us anything, it is that the size and scope of government matters, both for freedom and prosperity.

James A. Dorn is vice president for monetary studies and a senior fellow at the Cato Institute in Washington, D.C.

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Federal Reserve Bank Policy Can’t Heal Economic Malaise

James A. Dorn

When Ben Bernanke was chairman of the Federal Reserve, he was fond of saying “monetary policy is not a panacea.” Yet when one looks at actual policy since the 2008 financial crisis, it is difficult not to think that people, especially market players, have come to believe that the Fed is a cure-all for economic malaise.

Indeed, the Fed has changed thinking on the use of unconventional monetary policy to stimulate economic growth. The use of quantitative easing (i.e., large-scale asset purchases, including mortgage-backed securities) and financial repression (i.e., holding benchmark rates near zero and allowing real rates to go negative) are now part of conventional wisdom of central banks trying to boost global growth.

The Fed has increased its balance sheet from less than $800 billion before the crisis to more than $4.5 trillion, and has dramatically increased the monetary base in the process. Member banks are now holding nearly $3 trillion of excess reserves at the Fed due, in part, to payment of interest on those reserves since October 2008, and also because of regulations and policy uncertainty.

It is a myth to think that monetary authorities by a stroke of a keyboard can create economic prosperity or that monetary policy can be fine-tuned with every twist and turn of the real economy.”

Those funds are not being lent out, and thus not entering the income stream. Thus, even though the Fed has been creating massive amounts of new base money, the growth rates of the monetary aggregates have not been inflationary. That situation, of course, could change as the economy heats up and confidence returns.

It is a myth to think that monetary authorities by a stroke of a keyboard can create economic prosperity or that monetary policy can be fine-tuned with every twist and turn of the real economy. Fed policy seems largely designed to prop up financial asset prices and to encourage risk-taking with the hope that newly acquired financial wealth will stimulate spending and ignite real economic growth rather than inflation.

Yet a long look at monetary history tells us that central banks cannot control real variables (e.g., employment, output, and real interest rates), except for short periods. When expectations are taken into account, and lags recognized, it becomes clear that “monetary stimulus” is not a substitute for the hard choices that need to be made to generate lasting economic growth.

Institutional changes that widen the scope of markets (private exchange) and limit the power of government to the protection of persons and property are the key to prosperity. Economic and personal freedom and responsibility under a genuine rule of law — not a powerful central bank that manipulates interest rates, politicizes the allocation of capital, and lacks any monetary rule to guide policy — are the fundamental conditions for expanding the range of choices open to individuals, which is the true measure of development.

When the Fed or other major central banks suppress interest rates, holding them below their natural market equilibrium levels, they distort capital markets and lead to mal-investments. Unlike other prices, the interest rate is an indicator of people’s preferences for present versus future consumption, and therefore reflects time preferences. Interest rates are also used to calculate asset prices, so when rates are distorted so are asset prices.

With artificially low interest rates, people have little incentive to save for the future; they would rather load up on cheap credit and consume today rather than save and invest in the future. Likewise, with low rates, government debt looks less burdensome — and there is an added inducement to expand the size and scope of government.

The Fed’s ultra-low interest-rate policy has imposed large costs on conservative investors who have stayed on the sidelines as the stock markets have boomed. They have suffered permanent losses because of the Fed’s failure to normalize monetary policy. Meanwhile, those who have taken on more risk have profited by Fed policy, but their smiles could turn to tears when asset prices adjust to higher rates and the bubbles burst.

Eventually rates must rise to their natural levels consistent with time preferences and the productivity of capital. The Fed cannot peg rates forever. When rates rise, asset prices will fall and the government will face mounting costs of financing its huge debt. Junk bond funds will go under and there will be tremendous political pressure to bail out financial institutions and others considered too big to fail.

Many Fed policymakers appear glued to the vision of a trade-off between inflation and unemployment, and to the idea that the Fed can create wealth by repressing interest rates “for a considerable time.” By basing monetary policy on forecasts of the real economy, the Fed creates great uncertainty.

There is no perfect model of the U.S. or global economy; the future is unknown and unknowable. That is why monetary policy cannot be a panacea, and why a rules-based regime is superior to pure discretion.

James A. Dorn is vice president for monetary studies and a senior fellow at the Cato Institute.

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The KGB’s Old Headquarters Lives On

Doug Bandow

Red Square is one of the world’s most iconic locales. Dominated by the Kremlin, St. Basil’s Cathedral, and GUM Department Store, the space looks little different from Soviet times. While Lenin’s mausoleum remains, any hint of menace is gone. Indeed, even during the worst of the USSR the square was more symbolic than threatening. For the most part no one went to the Kremlin to die.

Very different, however, is Lubyanka, just a short walk up Teatralny Proezd past the Bentley and Maserati dealerships.

In the late nineteenth century 15 insurance companies congregated on Great Lubyanka Street, prospering as the great czarist despotism entered the industrial age. The Rossia agency, one of Russia’s largest, completed an office building in 1900. Excess space was turned into apartments and leased out to assaulting retailers selling everything from books to beds.

The building was profitable, but 14 years later in his worst single decision the foolish czar led his country into the abyss of World War I. In 1917 he was ousted by a moderate revolution, which in turn was overthrown by the Bolsheviks, led by Vladimir Ilyich Ulyanov Lenin. They nationalized insurance companies along with much of the rest of the economy, and switched Russia’s capital from Petrograd to Moscow. As a result, the Rossia building at No. 2 Great Lubyanka Street became the new regime’s property. And the new secret police, known as the All-Russian Extraordinary Commission for Combating Counter-Revolution and Sabotage, or Cheka, evicted the rest of the tenants and settled in.

The building was renovated and merged with a new structure behind the original one. The most important “improvements” were made inside, however, such as increasing prison space. With further reconstruction and expansion the building took its present form. The KGB added two more buildings over the years. After all, the secret police had much to do: a dictatorship’s work is never done.

The Lubyanka continues to glower over Russia.”

The first Cheka head was Felix Dzerzhinsky, a Russian Pole born in 1877. He conducted the infamous “Red Terror,” what he called a “fight to the finish” against the Bolsheviks’ political opponents. As part of that campaign he personally approved the torture and murder of thousands. He wrote: “Kill without investigation, so that they will be afraid.” And the agency did so. Of course, not every prisoner was murdered, so the first concentration camps were established in 1918. In a testament to Dzerzhinsky’s effectiveness, the Nazis modeled their repressive security apparatus, most notably the Gestapo, after the Cheka.

After his death in 1926 Dzerzhinsky was buried between the Kremlin and Lenin’s mausoleum. Grand Lubyanka Street was renamed Dzerzhinsky Street. Observed J. Michael Waller: “So total was the KGB’s devotion to Dzerzhinsky that his iconography proliferated in the form of official sculptures, anniversaries, quotations, and poetry—even the annual celebration of the Cheka chief’s birthday, September 11.” A grand statue of Dzerzhinsky, weighing 15 tons, was erected in a circle in front of the Cheka headquarters. After all, the party owed its rule to repression, exemplified by the secret police. Even as other buildings were constructed to handle the burgeoning repression the director, including such brutal notables as Lavrenty Beria under Joseph Stalin and Yuri Andropov under Leonid Brezhnev, stayed in Lubyanka, occupying an office on the third floor overlooking the square and later Dzerzhinsky’s statue.

The agency’s name changed over the years. The Cheka became the GPU, OGPU, NKVD and later the KGB. After the latter was dissolved the building went to the Border Guard Service, later absorbed by the Federal Security Service (FSB), responsible for foreign intelligence. Today Lubyanka looks non-threatening, a yellowish color and architectural style less severe than the harshly grandiose Stalinist architecture seen throughout the city.

The KGB faced its greatest challenge in the Gorbachev era. Contra common expectations, the security services did not oppose reform—of a particular sort. Explained one-time deputy KGB head Filipp Bobkov, “Gorbachev’s policy met with understanding and support.” Glasnost and perestroika, officials hoped, would strengthen the USSR. Security personnel tended to be among Russia’s most knowledgeable people, worldly and practical. As such, they understood that the Soviet Union was well behind the West and only radical action could save the Soviet state. That, not creating a liberal society, was their objective.

The KGB understood that it had an image problem and began a PR campaign presenting the agency as a patriotic organization dedicated to serving the Soviet people. The secret police created a museum celebrating their efforts and offering guided tours of Lubyanka. The KGB even reached out to foreign reporters and established a Center of Public Relations. After being feted at Lubyanka, Jeff Trimble of U.S. News & World Report wrote of “an impression jarringly at odds with the building’s usual image as a warren of torture cells and basement killing chambers.”

However, even the most charming briefers and articulate press releases—as well as the (I am not making this up) crowning of a Miss KGB in 1990—could not hide the agency’s ugly history. As new media sources were created in the USSR demands for reform raced beyond Gorbachev’s and the KGB’s control. Even some former KGB officers detailed killings and other abusive practices. Noted Trimble: “Media reports detailed KGB abuse of psychiatry and the penal system, its brutal violations of religious and other human rights, and of course Stalin’s crimes, including mass killings by the NKVD. These attacks went far beyond the tame criticisms that had appeared in 1986 and 1987 under Gorbachev’s lap dog version of glasnost.” In 1990 the Solovetsky Stone, brought from the Solovetsky Islands, the site of the first camp for political prisoners, was dedicated near Lubyanka to commemorate victims of the camps. (A second stone monument was erected in St. Petersburg in 2002.)

The KGB’s patience finally gave out as the Soviet Union faced dissolution rather than revival. In August 1991, KGB head Vladimir Kryuchkov helped plan the coup against Gorbachev. By past standards his side, which contained representatives of the party, army, and secret police, should have won. But the public, led by Boris Yeltsin, former Politburo member and elected president of the Russian republic, defeated the plotters. After the coup’s collapse a crowd gathered in front of Lubyanka. Demonstrators painted a swastika on the commemorative Andropov plaque on the building and attempted to pull down the Dzerzhinsky monument. City officials brought in a crane to finish the job. The statue now rests in Moscow’s Fallen Monument Park, a graveyard for big Communist tchotchke.

Kryuchkov and several other KGB officials were imprisoned for their role in the coup. Many top officials were fired and Gorbachev appointed a reformer to run the agency. Like the Soviet Union , the agency was essentially friendless, leaderless, and defenseless. Journalist Yevgenia Albats wrote: “If either Gorbachev or Yeltsin had been bold enough to dismantle the KGB during the autumn of 1991, he would have met little resistance.”

However, these two reformers—most importantly Yeltsin, who effectively took over when the Soviet Union’s dissolution left Gorbachev without a job—botched their opportunity when they attempted to fix rather than eliminate the agency. Only the Fifth Chief Directorate, the political police, was abolished, and many of its employees were reassigned to investigate tax evaders. The first post-coup chairman, Vadim Bakatin, later acknowledged that his attempt to reorient career “Chekists” away from their philosophy and work was naïve. Investigative journalist and lawmaker Yuri Shchekochikhin reported that “the skeleton of the old secret services has remained inviolable.” Even Yeltsin acknowledged that reorganization attempts had been “superficial and cosmetic.”

Still, diehard communists did not take the KGB’s cosmetic demise well. Alexei Kondaurov, one of the KGB’s most senior officials left inside Lubyanka after the failure of the coup, watched the attack on Dzerzhinsky’s statue and, he related later, felt betrayed, thinking: “I will prove to you that your victory will be short-lived.” Among the half million KGB operatives who likely felt the same way was Vladimir Putin, who had resigned only the day before.

In 2000 Nikolai Kharitonov, a Communist-aligned member of the Duma, complained that without the statute “Lubyanka Square is defenseless and the agents of the KGB and FSB are defenseless.” Multiple proposals to replace the statue were rebuffed by Moscow’s Monument Art Commission lest doing so create “unnecessary tension.” But five years later, without fanfare, a bronze bust of Dzerzhinsky was returned to the courtyard of the Moscow police headquarters. An officer was quoted as being surprised, but “as you know, the decisions of the bosses are not discussed.” A plaster statue of Dzerzhinsky was erected in front of Lubyanka earlier this year as part of the commemoration of the 137th anniversary of his birth.

These were mere symbols, however. Kondaurov more practical hopes also were soon vindicated. The KGB effectively ended up taking over Russia. In contrast to countries such as Poland and Czechoslovakia, which barred from office the most culpable communists, the new Russia welcomed them. Wrote Waller, “the government of Boris Yeltsin preserved Chekist structures and co-opted them, relying on them instead of a political party as a core component of Yeltsin’s personal political machine, an anchor for the new oligarchy of rulers.” He named Chekists, or members of the “siloviki” (or power agents), to important government positions, most importantly Vladimir Putin, who headed the FSB and then became prime minister—and Yeltsin’s successor as president when the latter resigned.

In 1999 Vladimir Putin became prime minister under President Boris Yeltsin. The former then visited Lubyanka, on December 20, the anniversary of the founding of the Cheka. He unveiled a plaque for Yuri Andropov, KGB head from 1967 to 1982, under whom Putin served. As president Putin later had a plaque added to the apartment building where Andropov had lived in Moscow and a statue erected in St. Petersburg. Putin has hinted that Dzerzhinsky’s big statue might stage a comeback, though so far nothing more has happened. Communist Party Duma member Vladimir Rodin argued: “Today, when war is at the borders of our state, it is not a bad thing to remember [Dzerzhinsky].”

But statues matter far less than philosophies. In December 1999 then-Prime Minister Putin said: “Bodies of state security have always defended the national interests of Russia. They must not be separated from the state and turned into some kind of monster.” Yeltsin—perhaps under the influence at the time—declared “we nearly overdid it when we exposed the crimes committed by the security services, for there were not only dark periods, but also glorious episodes in their history, of which one may really be proud.”

Anne Applebaum, Washington Post columnist, argued that “Putin—and, more importantly, most of the people around him—is deeply steeped in the culture of Andropov’s KGB.” In her view they are modernizers but authoritarians, who “believe that the rulers of the state must exert careful control over the life of the nation.” Putin has said that “There is no such thing as a former Chekist.”

Shortly before becoming president Putin—perhaps joking, perhaps not—told his former agency colleagues: “A group of FSB operatives, dispatched under cover to work in the government of the Russian Federation, is successfully fulfilling its task.” After taking over Putin turned to his KGB network to run both the government and the economy. Chekists made up nearly half of his initial senior appointments; one of Putin’s closest allies, Viktor Cherkessov, had served in the Fifth Chief Directorate hunting down political dissidents. Today one-fourth of senior bureaucrats are members of the security forces; three-fourths of senior bureaucrats have some affiliation with the latter. The result, wrote UCLA’s Daniel Treisman, is a “silovarchy” in which “silovarchs” replaced the economic oligarchs who had emerged during the flawed transition from communism to capitalism under Boris Yeltsin.

Of course, Putin is not the first politician to concentrate power, rig elections, manage politics, suppress dissent, and intimidate opponents. Nor to turn to the security and military services to run the economy. Treisman argued that similar systems developed in South Korea, Indonesia, and Nigeria when ruled by generals. The result typically was a different sort of corruption and statism. Writing of the Chekists after the Soviet collapse, Waller explained: “The unchecked apparatus and the economic openings of the late 1980s and 1990s only increased the possibilities of the security organs serving as agents of corruption and organized crime.” In practice, Putin and his system are not just defending kleptocracy; they have merged with kleptocracy. Overall, explained the Economist: “Men from the FSB and its sister organizations control the Kremlin, the government, the media and large parts of the economy—as well as the military and security forces.”

Although the economic consequences of this system vary, the political impact uniformly is bad, reinforcing the worst temptations of power. Explained Treisman: “the temptation to use secret service tools and techniques predisposes such regimes toward authoritarian politics.” That certainly describes Putin today. Nevertheless, he retains the appearance of democratic politics and capitalist economics to improve his regime’s image.

This system offers a tragic detour for people who desperately need liberty. But despite the frenzied push in Washington for economic sanctions and military threats, the success of Putinism is well beyond America’s control. Even Applebaum admitted that there isn’t much outsiders can do to influence events within Russia. Washington should avoid pursuing policies that might offer emotional satisfaction but would provoke an even harsher nationalist response. Moreover, the U.S. should not promote military confrontation with nuclear-armed Moscow over an issue of much greater importance to Europe.

In fact, Putinism may face its strongest challenge on the economic front from declining energy prices, Western sanctions, and domestic distortions. The silovarchy still will work to enrich itself, but will not have sufficient resources to aid the broader Russian population that constitutes Putin’s political base. Prior to his seizure of Crimea Putin suffered through a popularity decline and sizable protests against his reelection. His poll ratings have since risen, but as the nationalistic fervor surrounding Crimea fades, the Russian people’s desire for prosperity may overcome the desire for order.

Finally, the system faces a natural limit: The siloviki will naturally die off. Noted Applebaum, “Sooner or later, the generation trained in the mindset of Andropov’s KGB will retire.” It’s hard to predict what will follow, but a new direction is likely. Putin has been able to manage the news, but not deny his citizens all access to information. The younger generation is more likely to demand a changing of the political guard, emphasize economic opportunity, and look to the West. That would benefit the Russian people and the rest of us.

When change comes, it will be critical for Russia’s new leaders to eliminate the Chekist mindset. In contrast, Lubyanka should be preserved, perhaps as museum about tyranny. We all know George Santayana’s famous saying that those who forget history are doomed to repeat it. No one should want to repeat the KGB experience.

Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).

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If Paul Krugman Gets the Higher Inflation He Wants, the U.S. Will Return to Recession

Alan Reynolds

U.S. inflation was 1.7% over the past year according to the consumer price index, or 1.4% as measured by personal consumption expenditures (PCE). That may sound like good news, yet we are being told it is actually very bad. “The Fed needs a clear strategy for getting the inflation rate higher,” warns a recent news report, “after falling short of its 2 percent target for 28 consecutive months.” Several eminent economists now argue that a 2% target is much too low, and the Fed must openly aim for 4% inflation to avoid “secular stagnation.”

But this wrongheaded advice is based on dubious theory. In fact, inflation does not cause economic booms and economic booms do not cause inflation.

The phrase, “secular stagnation,” which dates back to economist Alvin Hansen in 1938, was resurrected a year ago by Treasury Secretary Larry Summers at an International Monetary Fund event. According to the e-book Secular Stagnation, “A workable definition for secular stagnation is that negative real interest rates are needed to equate saving and investment with full employment.” Since the Fed has kept the federal funds rate at zero for six years, secular stagnationists say the only way to get the real, inflation-adjusted fed funds lower is to push inflation higher—to 4%.

You can’t simply induce sustainable economic growth by having central bankers fiddle with inflation.”

Paul Krugman’s explanation

New York Times columnist Paul Krugman explains that, “People have to believe in higher inflation, which produces an economic boom, which yields the promised inflation. A necessary … condition for this to work is that the promised inflation be high enough that it will indeed produce an economic boom if people believe the promise will be kept.”

Why does Krugman theorize that “high enough” inflation would produce an economic boom? “Investors expect inflation,” he explains, “which makes them willing to spend more, which pushes the economy to full employment, which then generates the inflation investors expected.”

This whole construction rests on flimsy foundations. For one thing, the pretense that central banks have the knowledge and skill to hit some precise inflation target is just academic hubris. Since the Fed can’t hit a 2% target with sufficient precision to please secular stagnationists, why assume the Fed could hit a 4% target?

Secular stagnationists also define real interest rates in ways that have no relevance to private incentives to borrow or save. Krugman defines real interest rates as the fed funds rate minus “core” inflation (excluding food and energy). Households and firms cannot borrow at the fed funds rate, and do not make decisions to save based on the fed funds rate.

Higher inflation has always increased the interest rates that really matter—long-term interest rates on mortgages and bonds. Even if the Fed could somehow persuade us to expect 4% inflation, would anyone really expect banks to still offer 4% mortgages and 3.5% prime loans?

Pushing real fed fund rates down wouldn’t produce an economic boom

Would pushing the real fed funds rate even lower produce an economic boom? On the contrary, periods of rapid real growth of real GDP are accompanied by comparably high real interest rates in the fed funds market. Growth of real GDP averaged 4.2% a year from 1983 to 1989 and the real fed funds rate (after subtracting core PCE inflation) averaged 4.4%. Growth of real GDP averaged 3.8% a year from 1995 to 2000 and the real fed funds rate averaged 4.0%. In reality, prolonged episodes of negative real interest rates have only been observed in stagnant or declining economies.

Would 4% inflation really produce an economic boom? On the contrary, inflation above 4% is more often associated with recessions. The last time PCE inflation hit 4% was in July 2008 when the 10-year U.S. bond yield was 4.1% and the economy was deep in recession. The previous time the U.S. experienced 4% inflation was from January 1990 to February 1991 when the 10-year bond yield was 8.5% and the economy also slipped into recession. By contrast, inflation averaged 1.7% from the fourth quarter of 1996 through the third quarter of 2000, when year-to-year growth of real GDP averaged 4.5% a year.

You can’t simply induce sustainable economic growth by having central bankers fiddle with inflation. Like endless excuses for inflation over the years, the newly revived secular stagnation hypothesis is impure snake oil.

Alan Reynolds is a senior fellow with the Cato Institute.