Rates on Hold as Fed Bows to Wall Street and Washington

James A. Dorn

The biggest story coming out of the latest meeting of the Federal Open Market Committee is that Federal Reserve Chairwoman Janet Yellen does not want to take away the punch bowl, yet. The Fed continues to play to the tune of Wall Street and Washington by stoking asset bubbles, allocating credit, using monetary means to achieve fiscal ends, financing federal debt on the cheap, undermining the incentive to save and ultimately destroying capital.

Yellen is opposed to a congressionally mandated audit of the Fed and to any type of monetary rule. She favors pure discretion and worries that making monetary policy subject to greater congressional oversight would weaken the Fed’s independence and politicize monetary policy.

The truth is the Fed has gained substantial power since the 2008 financial crisis and used that power to politicize the allocation of credit. It has suppressed interest rates for more than six years and used quantitative easing to expand its balance sheet to more than US$ 4.5 trillion. Wall Street expects the Fed to support asset prices, and the Fed has complied; Washington expects low rates to persist, and the Fed has complied.

Capital is being destroyed because when the Federal Reserve has been asked to support asset prices and keep rates low, it has complied.”

In its March 18 statement, the Federal Open Market Committee noted that “even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Moreover, in her press conference, Yellen calmed investors by noting that “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient.” The U.S. stock markets cheered, as did government officials who recognize that any rise in interest rates could be catastrophic for public finances, from the federal to the municipal level.

Meanwhile, savers continue to suffer from negative real interest rates. The longer-term consequence is to reduce saving and investment, and thus slow economic growth. Negative rates also have a devastating impact on pension funds. Meanwhile, the federal government continues to secure cheap credit at the expense of more productive private investment.

The politicization of monetary policy has eroded the Fed’s independence. More important, Yellen’s opposition to a rules-based monetary regime, or even to an audit, ignores the fact that Congress has the constitutional authority to engage in fundamental monetary reform.

The Federal Reserve Accountability and Transparency Act of 2014, introduced during the 113th Congress to rein in the Fed, and to consider alternative rules to guide monetary policy such as the Taylor rule, is expected to be reintroduced in the 114th Congress.

Under the Taylor rule, the Fed would keep its longer-run target rate at about 4 percent, which is considered “normal.” In contrast, under current policy the Fed’s target of 0 to 0.25 percent is likely to persist until September or even early 2016. The pace of any rate increases thereafter will also be slow; the benchmark rate is now expected to be only 2 percent by the end of 2016.

U.S. economic growth is still sluggish, registering only 2.3 percent last year and expected to reach a mere 2.5 percent this year. That’s after three rounds of quantitative easing and more than six years of ultra-low interest rates. On this basis, the Fed’s unconventional monetary policy has failed.

Indeed, unsound monetary policy has crowded out market-liberal reforms that could have treated the causes of slow growth rather than the symptoms. Low U.S. productivity growth cannot be cured with financial morphine. Supply-side remedies like lower marginal tax rates on labor and capital, removing onerous regulations, and institutional reforms that limit the size and scope of government would do more to revitalize private markets than the Fed’s failed monetary experiments.

A rules-based monetary policy, whether aimed at stabilizing nominal income growth or the price level or some other policy target, would lend certainty to economic life. It would reduce the power of the central bank, add transparency to policy, and make those subject to the rule accountable. It would mean that Yellen could not tell the Senate Banking Committee, as she did on February 24: “I don’t want to set down any single criterion that’s necessary for (rate increases) to occur.”

While the Fed has held rates near zero and pumped up its balance sheet and the monetary base, it has also initiated paying interest on reserves and engaged in macro-prudential regulation. Those actions have sterilized the new base money and limited the effect of low rates on nominal income growth. They also have increased the reach for yield and increased the inequality of income distribution. The Fed’s monetary policy has turned into misdirected credit policy and allowed Washington to spend far beyond its means.

The lack of any monetary rule to anchor expectations about the future path of monetary policy and the purchasing power of the dollar unnnecessarily increase uncertainty and volatility in financial markets. “Forword guidance” without a rule is a misnomer. No one knows for sure when the Fed will increase rates, and the opportunity costs of Fed watching continue to mount.

Although the Fed touts the “wealth effect” of its unconventional policies, the reality is that any wealth effect of monetary manipulation is transitory, not permanent. In the long term, capital is destroyed, not created, by negative real interest rates. When rates rise, as they must, the pseudo wealth effect of Fed policy will become apparent as asset bubbles are deflated.

Real wealth is created by capital accumulation from saving and by choices informed by competitive market prices, not by suppressing interest rates. The sooner central banks learn that lesson, the better off we will be.

James A. Dorn is vice president for monetary studies and a senior fellow at the Cato Institute’s newly established Center for Monetary and Financial Alternatives.

Politico Presents …. Washington Lobbyists!

David Boaz

I noticed that my paper copies of Politico have been quite thick this week. Is there a lot of news? Well, yes. But newspapers usually run all the news the advertising will support. And Politico is just chock-full of ads in this budget season. As I wrote in my favorite chapter of The Libertarian Mind, “What Big Government Is All About,” there’s been a huge boom in the business of getting taxpayers’ money in the past few years:

Every business and interest group in society has an office in Washington devoted to getting some of the $4 trillion federal budget for itself: senior citizens, farmers, veterans, teachers, social workers, oil companies, labor unions, the military-industrial complex—you name it. The massive spending increases of the Bush-Obama years have created a lot of well-off people in Washington. Consulting and contracting exploded after 9/11. New regulatory burdens, notably from Obamacare and the Dodd-Frank financial regulation bill, are generating jobs in the lobbying and regulatory compliance business.

“Walk down K Street, the heart of Washington’s lobbying industry, and look at the directories in the office buildings. They’re full of lobbyists and associations that are in Washington, for one reason: because, as Willie Sutton said about why he robbed banks, “That’s where the money is.”…

“How much would you spend to get a $200 million subsidy from the federal government? About $199 million if you had to, I’ll bet.

So what does that have to do with the page counts in Politico? Well, check out this list of the full-page ads in Tuesday’s and Wednesday’s editions:

International Council of Shopping Centers (tax the internet)
National Multifamily Housing Council/National Apartment Association
My Plate, My Planet (federal food guidelines)
CA Technologies
American Medical Association (more Medicare money for doctors)
Innovation Alliance (patent law)
Alzheimer’s Assocation (federal research money)
United Launch Alliance (NASA contracts)
Navy League (military spending)
Beer Institute (beer taxes)
Society for Human Resource Management
United Technologies
Americans for the Arts (taxpayer funding)
Better Medicare Alliance (insurance companies and others, more Medicare funding)
Natural Products Association
Oil and Natural Gas Industry
Boeing/Textron (fund the V-22)
Application Developers Alliance (patent law)
American Bankers Association
Aerospace Industries Association (fund the Ex-Im Bank)
Aircraft Carrier Industrial Base Coalition (build more carriers)
Patient Access to Pharmacists’ Care Coalition (more Medicare money)
U.S. Travel Association (increase tax on air travelers)
NextEra Energy (recipient of $2 billion in federal subsidies)
Comcast (allow merger with TimeWarner Cable)

Some of these organizations ran full-page ads both days, or even two ads in the same edition. Some had a specific request, generally for taxpayers’ money. Others just ran image-enhancement ads, so Politico’s readers in Washington would look kindly on them.

Those with their eyes on the taxpayers’ money will know no rest by day or night.”

A century ago the Italian economist Vilfredo Pareto explained how the lobbying process works. Imagine, he said, there is a proposal to take one dollar from every citizen and give the total to 30 people. “Those who hope to gain a million a year will know no rest by day and night. They will win newspapers over to their interest by financial inducements and drum up support from all quarters. A discreet hand will warm the palms of needy legislators, even of ministers.” On the other hand, he said, those who were threatened with the loss of a dollar would likely never know of the scheme, and even if they did, wouldn’t find it worth taking the trouble to protest. Which is how you get to a $4 trillion federal budget funding everything from — well, from aircraft carriers to pharmacists.

Never underestimate the creativity of the lobbyists and their clients. I wrote recently in Reason about how General Dynamics, worried that military spending was no longer a boom area, “suddenly … managed to become the largest contractor to Medicare and Medicaid. ‘For traditional defense contractors,’ wrote Kaiser Health, ‘health care isn’t the new oil. It’s the new F-35 fighter.’” And now the Washington Post reports that Lockheed is finding “growth opportunities” in “a different threat to national security: climate change.” Those with their eyes on the taxpayers’ money will know no rest by day or night.

David Boaz is executive vice president of the Cato Institute and author of The Libertarian Mind, coming February 10 from Simon & Schuster.

How about Spending Cuts Instead of Sanders’s War Tax?

Daniel J. Mitchell

Sen. Bernie Sanders (I) of Vermont wants a new “war tax” on the rich to help pay for U.S. overseas military operations.

The idea has a certain perverse appeal to libertarians. We don’t like nation-building and we don’t like punitive tax policy, so perhaps mixing them together would encourage Republicans to think twice (or thrice) before trying to remake the world.

But since I’m not a foreign policy expert, let’s focus solely on the fiscal aspects of the senator’s plan.

Although that’s a challenge, since there’s nothing more than a generic press release on Sanders’s website, and it doesn’t specify how the money will be generated. Does the senator want a new top tax rate? Does he want to increase the double taxation of dividends and capital gains? A more onerous death tax? Or is he planning some indirect money grab, such as disallowing certain expenses for those with “excessive” compensation?

It’s not clear what will be accomplished by the senator’s class-warfare gambit other than a defeat on the floor.”

Regardless, it’s not clear what will be accomplished by the senator’s class-warfare gambit other than a defeat on the floor, perhaps combined with some low-level embarrassment for the hawkish wing of the GOP.

And even if the world turned upside down and he was able to add another soak-the-rich provision to the tax code, it wouldn’t have much effect. Notwithstanding the numbers generated by antiquated revenue-estimating methodology at the Joint Committee on Taxation, it’s very likely that the IRS wouldn’t collect much additional money. Simply stated, upper-income taxpayers have considerable control over the timing, level and composition of their income, so many of them would adjust their economic choices to avoid the brunt of any new tax.

That’s why lawmakers would be well served to instead look on the spending side of the budget. Wouldn’t it make more sense to hold taxpayers harmless and ask Washington — if it really wants a war — to finance it with restraint elsewhere in the budget?

This may seem like a foreign concept in today’s Washington, but it actually was standard procedure at times in our history.

This chart shows that domestic spending fell sharply as a share of gross domestic product (GDP) during World War II. Much of the change in that ratio was due to rising economic output, of course, but non-defense outlays were subjected to some real fiscal restraint during those years.


The same thing happened during the Korean War. As defense outlays expanded, lawmakers put non-military spending on a strict diet. As illustrated by the chart, there were substantial savings for taxpayers.


It wasn’t until the Vietnam War that this prudent approach was abandoned. President Johnson’s guns-and-butter approach meant more spending for all parts of the budget, which explains why LBJ ranks as the biggest spender of all post-World War II presidents.

There wasn’t a war during the Reagan years, though it is worth noting that his defense buildup was accompanied by reductions in the overall burden of domestic spending.

The same can’t be said of President George W. Bush. He increased military spending after 9-11, but he also presided over LBJ-style expansions in the burden of domestic spending.

Which means we have two odd collections of bedfellows, with Presidents Franklin Roosevelt, Truman and Reagan in one camp vs. LBJ and Bush in the other camp.

Sen. Sanders probably doesn’t belong in either camp since he’s not a fan of U.S. involvement in Iraq and Afghanistan, but his focus on tax increases rather than spending restraint suggests he’s philosophically aligned with Johnson and Bush.

Which is unfortunate, since America’s biggest long-run fiscal challenge is a rising burden of government spending. And it goes without saying that politicians who want the make government even bigger presumably won’t be part of the solution.

Daniel Mitchell iis a senior fellow at the Cato Institute.

FEMA Tells Oklahoma to Do the Impossible … Or Else

Patrick J. Michaels

Last fall, the Federal Emergency Management Agency issued a draft proposal that will require Oklahoma to do the impossible or face the loss of disaster relief funds. Specifically, state governments will be required to assess the risk of future disasters in a changing climate.

FEMA has solicited public comments and will, as per usual, ignore most if not all of them when it issues its final rulemaking later this year. So what can Oklahoma confidently expect global warming to do to its significant natural hazards?

Oklahoma’s peculiar geography makes it home to some of the most violent weather on Earth, in almost every flavor and hue. In fact, in the developed world, you’d be hard put to find a place with a combination of more tornadoes, droughts, deluges, and wild temperature swings — and these climatological facts are not going to change due to the slight changes in surface temperature that may be associated with human emissions of carbon dioxide.

State governments will be required to assess the risk of future disasters in a changing climate.”

Nonetheless, FEMA will require Oklahoma to “Provide a summary of the probability of future hazard events that includes projected changes in occurrence for each natural hazard in terms of location, extent, intensity, frequency, and/or duration. Probability must include … the effects of climate change on the identified hazards.”

Anything one can say about climate change and future hazards, such as tornados, has to be based upon some kind of forecast model, and there are a lot out there. For example, in its most recent compendium on climate change the United Nations uses 107 different versions, all of which predict slightly different futures and none of which have been correct about the climate of the past two decades.

In those last two decades, according to the global satellite-sensed temperature record environmentalists used to love, there has been no net global surface warming whatsoever. This is unfortunate because planners are often constrained to use their two scenarios for future guidance, even as evidence continues to mount that both have predicted considerably more warming than will occur this century.

Is it realistic to think we could use these same models to predict reliably how many tornados will hit Oklahoma in 2050? It simply can’t be done. Not only have these models failed to accurate predict global temperatures, but hurricanes are too small to be captured by them.

The relationship between tornadoes and global warming is also not very clear. While global warming is supposed to result in increasingly buoyant surface air (and hence, faster or bigger thunderstorm development), it also reduces the thermal contrast that powers the jet stream — which is what provides the spin required to form a destructive vortex.

Some Oklahoma tornadoes are whoppers — long-path Fujita 5 killers like the 1999 and 2013 Moore tornadoes. Moore’s experience reveals an important story; while it was plenty tragic, with 36 fatalities, If the 1999 storm had hit in an era without rapid communication and sophisticated weather technology, it would have killed many hundred, maybe even a thousand more, than it did.

The fact is people adapt to weather hazards, and not just tornadoes. Climate alarmists tell us as urban heat waves become more frequent and/or severe, many more will die. In fact, the numbers show the opposite — the more frequent they become, the fewer people die. And when they do die, as they tragically did in the 1995 Chicago heat wave disaster, the political process takes a licking and the public demands adaptive responses such as cooling centers and aggressive education campaigns. The next heatwave, three years later, killed far, far fewer people.

The adaptive responses — better technology and better communication — do orders of magnitude more good than the bad any speculative change in tornado frequency would visit upon Oklahoma.

FEMA expects Oklahoma to magically know which of these is right, and how climate change will effect the “intensity, frequency, and/or duration” of not just tornados, but only those tornados that visit their wrath upon the state, as well as monster tornadoes—or else they might withhold the tax dollars paid to them in case of emergency.

We can make one projection with confidence: as long as the most substantial barrier between the North Pole and Oklahoma City is a barbed wire fence, one thing is not going to change — the panoply of violent weather is the climate of Oklahoma.

Patrick J. Michaels is director of the Center for the Study of Science at the Cato Institute.

The SGR Fix Will Bust the Budget

Michael F. Cannon

The House is expected to vote today on a bill to eliminate the annual cuts in Medicare payments to doctors that Congress has been postponing for more than a decade — the so-called “sustainable growth rate” (SGR) cuts. (UPDATE: The bill passed the House by a 392–37 margin.) The bill would result in $145 billion in new federal spending, above current law. It would also require wealthier seniors to pay for more of their own Medicare coverage, and would restrict the ability of seniors to buy supplemental coverage that completely shields them from the cost of the medical care they consume. (Such comprehensive “Medicare supplemental” coverage tends to increase overall Medicare spending.)

A number of people have asked me what my take on this legislation is. Basically, it is this: If you’re going to be totally fiscally irresponsible, this is the way to do it.

Congress created the SGR to limit Medicare spending on physician services. The SGR uses a formula to cut Medicare payments to physicians automatically. The formula works too well: It mandates cuts so deep that Congress decides every year it cannot stand for them. That’s why Congress has postponed those cuts some 17 times since 2003. This legislation would eliminate the cuts permanently, which of course would increase federal spending — by the $145 billion mentioned above (over the next ten years).

If you’re going to be totally fiscally irresponsible, this is the way to do it.”

As a starting point, we should recognize that the ideal amount the federal government should pay doctors is $0.00. So right off the bat, we know this bill is moving in the wrong direction. The bill compounds this error by not paying for all of that new spending by cutting spending elsewhere or increasing revenues. As a result, it increases the federal debt — which is to say, it imposes a tax burden on future generations who cannot vote or have not even been born yet. So this bill is yet another example of the dessert-first-spinach-later approach to fiscal stewardship that is business as usual in Congress.

Ryan Ellis of Americans for Tax Reform disagrees. He is the most prominent conservative supporter of this bill’s approach. Ellis argues that if we assume Congress has already spent that $145 billion, then this bill is actually a $1 billion spending cut. Well, yes, but Congress has not already spent that $145 billion. If we assume that in fiscal year 2016, Congress will spend 100 percent of U.S. GDP, then President Obama’s proposed budget will be an even bigger spending cut. (The only difference is in the degree of reasonableness of those two assumptions.) That’s not how we do these things. Current law does not provide for that spending. So if you want Congress to spend that money, it counts as a spending increase.

Ellis’s strongest arguments are that the bill increases means-testing in Medicare, prohibits Medicare supplemental plans from providing first-dollar coverage, and — c’mon, folks — this is the best deal we are going to get given current political realities.

Sure, means-testing is extremely important. It forces wealthier Medicare enrollees to pay for more of their Medicare coverage. Even more important than its fiscal impact is the fact that, because means-testing exposes some Medicare enrollees to pay more of the cost of their coverage, it fractures the broad coalition that supports the current Medicare program, and instead builds a constituency for real Medicare reform, such as converting Medicare to a Social Security–like program that just gives seniors cash. If this bill paid for all its new spending, each year, by increasing the premiums that wealthier seniors have to pay for their Medicare coverage, I would say it was a fantastic deal. But it does not.

Prohibiting first-dollar coverage in Medicare supplemental plans may seem like a restriction on contractual freedom, but in fact it is really just a condition placed on a government subsidy. If you want to enroll in Medicare, you cannot also buy supplemental coverage that completely anesthetizes you to the cost of the care you consume (and the costs you are imposing on taxpayers). I have no problem with this restriction, but it does not do much to offset this bill’s new Medicare spending.

Is this the best that Medicare reformers can do, given political realities? I wonder. For all its faults, and despite the fact that it has become (in health-policy circles, anyway) a punch line, the SGR forces Congress to confront runaway Medicare spending year after year. If this bill passes, it will be easier for Congress to ignore runaway Medicare spending — and that spending will begin to run away even faster. Reformers might be better off leaving the SGR in place and preserving the leverage it creates until political realities have changed — that is, until there is a president who will support broader Medicare reform.

This bill does not pay for its new spending in the first year, or in the first decade, or even in the second decade. But it does at least increase means-testing in Medicare, which appears to be the most durable type of Medicare cuts. So, as I said at the outset, if Congress is going to be totally fiscally irresponsible, this is probably the way to do it.

Michael F. Cannon is the director of health-policy studies at the libertarian Cato Institute.

The Monetary Approach Reigns Supreme

Steve H. Hanke

We are still in the grip of the Great Recession. Economic growth remains anemic and below its trend rate in most parts of the world. And what’s more, this state of subdued economic activity has been with us for over seven years.In the U.S. (and elsewhere) the central bank created a classic aggregate demand bubble that became visible in 2004. The Fed’s actions also facilitated the creation of many market-specific bubbles in the housing, equity, and commodity markets. These bubbles all dramatically burst, with the bankruptcy of Lehman Brothers in September 2008.

The price changes that occurred in the second half of 2008 were truly breathtaking. The most important price in the world — the U.S. dollar-euro exchange rate — moved from 1.60 to 1.25. Yes, the greenback soared by 28% against the euro in three short months. During that period, gold plunged from $975/oz to $735/oz and crude oil fell from $139/bbl to $67/bbl.

What was most remarkable was the fantastic change in the inflation picture. In the U.S., for example, the year-over-year consumer price index (CPI) was increasing at an alarming 5.6% rate in July 2008. By February 2009, that rate had dropped into negative territory, and by July 2009, the CPI was contracting at a -2.1% rate. This blew a hole in a well-learned dogma: that changes in inflation follow changes in policy, with long and variable lags. Since the world adopted a flexible exchange-rate “non-system”, changes in inflation can strike like a lightning bolt.

The monetary approach offers a coherent theory of national income determination – one that stands up to the test of empirical verification.”

True to form, central bankers have steadfastly denied any culpability for creating the bubbles that so spectacularly burst during the Panic of 2008-09. What’s more, they have repeatedly told us that they have saved us from a Great Depression. For central bankers, the “name of the game” is to blame someone else for the world’s economic and financial troubles.

To understand why the Fed’s fantastic claims and denials are rarely subjected to the indignity of empirical verification, we have to look no further than Milton Friedman. In a 1975 book of essays in honor of Friedman, Capitalism and Freedom: Problems and Prospects, Gordon Tullock wrote:

…it should be pointed out that a very large part of the information available on most government issues originates within the government. On several occasions in my hearing (I don’t know whether it is in his writing or not but I have heard him say this a number of times) Milton Friedman has pointed out that one of the basic reasons for the good press the Federal Reserve Board has had for many years has been that the Federal Reserve Board is the source of 98 percent of all writing on the Federal Reserve Board. Most government agencies have this characteristic…

Friedman’s assertion has subsequently been supported by Larry White’s research. He found that, in 2002, 74% of the articles on monetary policy published by U.S. economists in U.S.-edited journals appeared in Fed-sponsored publications, or were authored (or co-authored) by Fed staff economists.

The explanations of the Great Recession have been all over the map and surprisingly incoherent. For example, Andrew Lo reviewed twenty-one books on the topic in the January 2012 issue of the Journal of Economic Literature. He found that the mainstream, post-crisis approach amounts to an ad hoc approach that lacks a unifying theory or theme. That said, the literature — from Alan Greenspan’s 2013 book The Map and The Territory to the 2009 tome Animal Spirits by George Akerlof and Robert Shiller — is punctuated with a great deal of conjecture about changes in investors’ animal spirits and how these wrecked havoc on the financial markets and the economy during the Panic of 2008-09 and the ensuing Great Recession. Much of this is borrowed from a recent fashion in economics: behavioral finance.

But, this line of argument goes back to earlier theories of the business cycle; theories that stress the importance of changes in business sentiment. For example, members of the Cambridge School of Economics, which was founded by Alfred Marshall, all concluded that fluctuations in business confidence are the essence of the business cycle. John Maynard Keynes put great stress on changes in confidence and how they affected consumption and investment patterns. Frederick Lavington, a Fellow of Emmanuel College and the most orthodox of the Cambridge economists, went even further in his 1922 book, The Trade Cycle. Lavington concluded that, without a “tendency for confidence to pass into errors of optimism or pessimism,” there would not be a business cycle.

So, the mainstream approach fails to offer much of a theory of national income determination. The monetary approach fills this void. Tim Congdon — a master of the high theory of monetary economics and all the knotty practical details of money and banking, too — has supplied us with a most satisfying and comprehensive treatment of the causes of business cycles and the current Great Recession. Three of Congdon’s most important books are listed in the references below.

The monetary approach posits that changes in the money supply, broadly determined, cause changes in nominal national income and the price level (as well as relative prices — like asset prices). Sure enough, the growth of broad money and nominal GDP are closely linked. Indeed, the data in the following chart speak loudly.


By observing the plunge in broad money, the contraction in the U.S. economy was, therefore, inevitable and in line with the monetary approach to national income determination (see the accompanying chart). But why has post-crisis growth remained so low? Well, because the growth in broad money has remained well below its trend rate. Indeed, Divisia M4 is only growing at a 2.7% year-over-year rate. Why? Since the crisis, the policies affecting bank regulation and supervision have been massively restrictive. By failing to appreciate the monetary consequences of tighter, pro-cyclical bank regulations, the political chattering classes and their advisers have blindly declared war on bank balance sheets. In consequence, bank money, which accounts for between 70% to 90% of broad money in most countries, has contracted or failed to grow very much since the crisis. Since bank money is an elephant in the room, even central bank quantitative easing has been unable to fully offset the tightness that has enveloped banks. Looking at the U.S., there is a ray of hope, however: credit to the private sector has finally started to grow above its trend rate.


The money and credit picture in the Eurozone has been much more dire than in the U.S. In fact, this has resulted because, until recently, the European Central Bank has refused to offset, with quantitative easing, the regulatory-induced tight monetary policies imposed on banks. That is now changing and credit to the private sector is about ready to become positive for the first time since 2012 (see the accompanying chart).


China, the last of the Big Three, has a monetary problem (as well as others). Broad money has been growing at below its trend rate since 2012, and it’s becoming weaker with each passing month (see the accompanying chart). In an attempt to pump up the growth rate in broad money, China’s central bank has cut interest rates twice since last November and lowered reserve requirements for banks. But so far, it has proven to be too little, too late. Not surprisingly, official forecasts for China’s 2015 GDP growth have been dialed back.


The monetary approach offers a coherent theory of national income determination — one that stands up to the test of empirical verification. It explains the Panic of 2008-09 and the ensuing Great Recession with ease. The monetary approach reigns supreme.


  • Congdon, Tim. Money and Asset Prices in Boom and Bust. London: Institute of Economic Affairs, 2005.
  • Congdon, Tim. Central Banking in a Free Society. London: Institute of Economic Affairs, 2009.
  • Congdon, Tim. Money in a Free Society Keynes, Friedman, and the New Crisis in Capitalism. New York: Encounter Books, 2011.

Steve H. Hanke is a professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C. You can follow him on Twitter: @Steve_Hanke

Ex-Im Bank Taxes Mississippi’s Manufacturers

Daniel J. Ikenson

If you count yourself among the majority of Americans fed up with the unsavory, business-as-usual, back-room dealing that continues to define Washington, take heart in the fact the charter of the scandal-prone U.S. Export-Import Bank is set to expire on June 30. If you are among the misinformed or privileged few who support the bank’s reauthorization, how do you justify the collateral damage Ex-Im inflicts on companies in Mississippi and across the country?

Ex-Im is a government-run export credit agency, which provides below market-rate financing and loan guarantees to facilitate sales between U.S. companies and foreign customers. In 2013 roughly 75 percent of Ex-Im’s subsidies were granted for the benefit of just 10 large companies — including Boeing, Bechtel and GE — that could easily have financed those transactions without taxpayer assistance.

It’s time for Mississippi’s business victims to speak up.”

Supporters characterize the bank as a pillar of the economy, undergirding U.S. export sales, which allegedly create more and higher-paying U.S. jobs. But a fatty sheath of willful ignorance has insulated the bank from the scrutiny it deserves. Like all Washington subsidy programs, Ex-Im gives to the few, but takes from the many.

When the government subsidizes your competitor’s sales but not yours, you are made worse off because your competitor can now offer lower prices or better sales terms than he otherwise could. Call these the “intra-industry” costs. Likewise, when the government subsidizes your suppliers’ sales to your competitor, you are made worse off because your competitor’s costs are artificially reduced, enabling him to charge lower prices or offer better sales terms than he could without the subsidy. Call these the “downstream” costs.

Ex-Im’s management and its Washington-savvy supporters have been running a shell game, dazzling Congress with the shiny new export sales it finances, while drawing policymakers’ attention away from the costs those activities impose on everyone else. Last year, Delta Airlines finally had enough and complained about Ex-Im loans to Air India, which were granted to enable the foreign carrier to purchase aircraft from Boeing. Delta officials demonstrated how those taxpayer subsidies, made for the benefit of Boeing’s bottom line, put Delta at a competitive disadvantage by reducing Air India’s capital costs, enabling it to lower fares and compete more effectively with Delta for international travelers. Why should taxpayer dollars be used to promote the interests of one U.S. company over another?

The problem isn’t limited to Delta. A recent Cato Institute study estimated the net costs imposed on firms in downstream industries on account of Ex-Im’s subsidies to firms in supplier industries to be $2.8 billion per year, and that firms in 80 percent (189 of 237) of U.S. manufacturing industries incur costs that exceed the total value of Ex-Im subsidies they may receive. In other words, the average firm in four of every five manufacturing industries is made worse off by the Export-Import Bank.

Mississippi is home to hundreds of companies in the industries that have been victimized in precisely the same manner as Delta. Mississippi’s manufacturers of aerospace products, automobile parts, computer network equipment, electrical products, machinery, semiconductors, telecommunications equipment, and more can be counted among the victims because their suppliers secured Ex-Im dollars to subsidize sales to foreign customers. Automobile parts producer, Remy Reman, in Taylorsville; Ayrshire Electronics of Mississippi, a Corinth-based semiconductor manufacturer; BR Smith Enterprises, a producer of HVAC equipment in Union; and, wood kitchen cabinets manufacturer, Kitchen Elegance of Gulfport are just a few examples of Mississippi businesses that bear the costs of Ex-Im’s subsidies. There are many more.

According to the Cato Institute study, the five broad manufacturing sectors incurring the largest downstream costs from Ex-Im’s subsidies account for 34 percent of Mississippi’s manufacturing economy. Included among the top 10 most heavily burdened manufacturing industries are Mississippi’s first, fourth, sixth and seventh most important manufacturing industries: chemicals; food, beverage, and tobacco; plastics and rubber products; and, furniture and related products, respectively.

The Export-Import Bank temporarily benefits some companies in a conspicuous manner. But it does so by quietly burdening often unwitting American companies in downstream industries. Delta and some others have cried foul. It’s time for Mississippi’s business victims to speak up as well.

Daniel J. Ikensonis director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies and author of the study: “The Export Import Bank and Its Victims: Which Industries and States Bear the Brunt?”

This Phone Hacking Device Is out of Control

Adam Bates

The New York Times published a troubling article on March 16 detailing the secrecy surrounding police use of Stingray cellular site simulators.

The technological capabilities of law enforcement are getting far ahead of our mechanisms for oversight and accountability.”

Essentially, these devices, which can be mounted on vehicles or carried by hand, mimic the signals of a cellphone tower to force cellphones in a given area to connect to the device. Both data on the phone (including numbers, texts, emails and any other data stored on the phone) and the phone’s physical location can then be accessed and recorded by police.

Additionally concerning is the extensive use of non-disclosure agreements by the Harris Corporation, which sells the devices, to prevent the public (and in some cases even judges, defense attorneys and prosecutors) from finding out how these devices are being used or even whether a given department owns any.

The preference for secrecy is so powerful that prosecutors have dropped serious criminal charges simply to avoid having the police use of Stingrays subjected to examination by defense attorneys or judges.

According to the Times,

The confidentiality has elevated the stakes in a longstanding debate about the public disclosure of government practices versus law enforcement’s desire to keep its methods confidential. While companies routinely require non-disclosure agreements for technical products, legal experts say these agreements raise questions and are unusual given the privacy and even constitutional issues at stake.

The stated reason for the secrecy is the common refrain that terrorists will circumvent the technology if they know what law enforcement is up to. However, a recent American Civil Liberties Union (ACLU) report was unable to uncover a single instance of these devices being used to bring domestic terrorists to justice in any jurisdiction surveyed.

The ACLU report estimates that Stingrays are in wide and rapidly increasing use in law enforcement agencies across America. However, there appears to be very little oversight structure for police departments, legislatures or courts governing the use of these devices. In some instances, it seems that courts have even been unwittingly authorizing their use without the judge’s full understanding.

For instance, a sampling of applications for court orders from Florida law enforcement agencies informs the judge that the order is for cellphone records but doesn’t mention anything about how they’re to be obtained. Police claim such vague orders authorize Stingray deployment, but some judges have been less than enthused upon finding out.

The problem is that the technological capabilities of law enforcement are getting far ahead of our mechanisms for oversight and accountability. From Edward Snowden’s National Security Agency revelations, to the Drug Enforcement Administration’s questionable use of automated license plate readers, to the use of automated social media trawlers to award citizens “threat scores,” to the use of cell site simulators that can access your phone without your permission, the government is plainly capable of mapping your every move and insinuating its eyes and ears into nearly every human interaction.

In the absence of Supreme Court involvement or robust 4th Amendment restoration efforts from legislatures, the burden falls on the public to demand increased transparency and accountability from local officials. Such efforts have met with success in the past, and must continue to do so if any sphere of American life is going to be spared the tentacles of the surveillance state.

Update: On March 17 a Supreme Court judge in New York ruled that the Erie County Sheriff’s Office’s use of Stingray technology is subject to disclosure under New York’s Freedom of Information Law (FOIL). The New York Civil Liberties Union sued to obtain records of Stingray use; Erie County refused the request, citing exemptions to FOIL as well as the non-disclosure agreement with the FBI.

The judge ruled that the non-disclosure agreement does not trump New York’s Freedom of Information Law, and additionally that the contents of the non-disclosure agreement itself are subject to disclosure. This is a big win for government transparency.

The ruling can be found here, and the NYCLU’s press release can be foundhere.

Adam Bates is a policy analyst with the Cato Institute’s Project on Criminal Justice.

Why Offensive Speech Is Valuable

Trevor Burrus

In the wake of a University of Oklahoma fraternity caught on camera singing an abhorrent song about African Americans, a predictable assortment of critics of free speech have argued that the First Amendment should not protect offensive and racist speech. They are wrong. Offensive speech should not only be protected by the First Amendment, it should be seen as a valuable part of a free society.

In the Atlantic, Boston College law professor Kent Greenfield offered a typical argument against protecting offensive speech: “If the First Amendment has become so bloated, so ham-fisted, that it cannot distinguish between such filth and earnest public debate about race, then it is time we rethink what it means.”

Greenfield disagrees with what he considers the main argument for protecting offensive speech: the problem of demarcation and the slippery slope. That is, “we cannot trust the government to make choices about content on our behalf,” and thus prohibiting offensive speech will lead “down the slippery slope to tyranny.”

That’s one argument against giving government the power to censor, but it is not the only one. It is difficult to define offensive speech, true, but this argument seems to imply that if such a line could be drawn then banning offensive speech would be okay.

Even if offensive speech could be easily defined, it should not be prohibited. In an ideal world, offensive speech would roam freely.

Coincidentally, today the Supreme Court is hearing oral arguments in a case about whether the government can prohibit speech on the theory that it “might be offensive to any member of the public.” That case concerns an application for a personalized license plate by the Texas Sons of Confederate Veterans. The proposed plate design would have included a Confederate flag. The Texas Department of Motor Vehicles Board voted not to issue the plate.

Just like drug laws, driving hate speech underground will do little to eliminate the habit, and could make the situation worse.”

The Court will first have to decide whether a license plate is government or private speech. In an amicus brief I co-authored in support of the Texas Sons of Confederate Veterans—joined by humorist P.J. O’Rourke, Martin Garbus (one of comedian Lenny Bruce’s lawyers), the Comic Book Legal Defense Fund, and prominent First Amendment scholars—we argue that, if a license plate is private speech, then the government should not be allowed to prohibit a design based on the belief that it “might be offensive to any member of the public.”

Offensive speech contributes to the marketplace of ideas by expanding its borders. If the marketplace of ideas is the area where “acceptable” ideas are freely exchanged, then outside is the “black” marketplace of ideas. There, people talk about things that are not allowed in the “official” marketplace. That sometimes includes conspiracy theories, racial hatemongering, and other pure lunacy, but it also includes things desperately needing a public airing.

For years, if not centuries, the field of sex research was hindered by taboo and puritanical censorship. Bigotry and prejudice towards homosexuality, divergent sexual desires of any sort, women’s sexual health, and sexual dysfunction caused researchers to be relegated to the black marketplace of ideas. In order to get out of the black market, they needed to offend.

By being offensive, comedians, authors, and artists helped bring sex research out of the darkness. By saying forbidden words in jokes and skits, by looking censors in the eyes and saying “cocksucker”—one of the words that famed comic Lenny Bruce was arrested for in 1961 in a San Francisco nightclub—the crass and the boorish opened up avenues of thought and discussion that were previously forbidden. Bruce said, “you break it down by talking about it.” Slowly, conversations about sex were freed from puritanical oversight, sex researchers illuminated a crucial part of human existence, and couples had more fun.

Those comics from the 60s who were “edgy” now seem quaint to our modern sensibilities. But there are always new innovators in the world of offensive speech, and no amount of government regulation will stop that.

People define themselves by being offensive. They express themselves through their willingness to stomp on prevailing sensitivities and, yes, even other’s feelings. Fostering self-expression and self-development is another important reason we have a strong and uncompromising First Amendment. As homosexuals who have “come out” know all too well, expressing something publicly is crucial to defining oneself.

Does this apply to those who hate other races, religions, and ethnicities? Yes. They have as much right to define themselves through speech as anyone. And those who abhor the hateful have a right to shun them, expose them, and call them out. Government prohibitions on hate speech drive the hateful underground, where they can proliferate freely and without pushback from those who dare not enter. Sunlight, not government, is the best disinfectant. I, for one, would like racists and bigots to speak freely. I want to know who not to invite to my parties.

Government is not as effective as civil society in properly squelching and shaming hateful speech. If the government defines the parameters of acceptable speech, then many people will break those boundaries just because the government told them not to do it. They will explore the hidden, underground world of hate speech just because it is a forbidden fruit. There they will find whole new ways to offend people because offensive people, like water, will always find a way.

In fact, there is no correlation between the strength of a country’s hate speech laws and the eradication of hateful views. Greece, for example, has passed laws that try to combat “certain forms and expressions of racism and xenophobia by means of criminal law.” Yet according to the Anti-Defamation League, 69 percent of Greeks hold anti-semitic views, compared to just 9 percent of Americans. Just like drug laws, driving hate speech underground will do little to eliminate the habit, and could make the situation worse.

So go forth and offend and be offended. Do it for Lenny Bruce.

Trevor Burrus is a Research Fellow in the Cato Institute’s Center for Constitutional Studies.

Hawks are Winning the Military Budget Wars

Benjamin H. Friedman

Running the congressional budget process for the first time since 2005, Republicans must navigate their divisions on military spending. The outcome thus far is militarism badly disguised as fiscal restraint.

On one side are the military hawks. Emblematic is Senator Lindsey Graham (R-SC). Graham is running for president and claims that his first act in that office would “literally” be to use the military to force Congress to give it more money (To be fair, he’s not especially serious about either). Graham recently denied the existence of tension between his fiscal prudence and advocacy of global U.S. military domination by arguing against “the idea that defense spending has anything at all to do with [debt].” This wing, especially its senatorial variety, is prone to work with hawkish Democrats to raise military spending, which, in practice means raising other domestic spending and taxes.

On the other side are budget hawks, who believe that military spending is spending. They are not anti-war, so much as anti-spending or anti-taxes, even when it comes to war. Sizeable portions of the budget committee members, especially in the House, fall in this group.

The fight kicked off when the House and Senate Budget Committees this week released budget resolutions, which set spending levels for appropriators. The House version would provide up to $94 billion for “Overseas Contingency Operations” (OCO), and non-war Pentagon spending of $499 billion for fiscal year 2016, which starts October 1. Another $24 billion of “defense” spending, most of it for nuclear weapons, falls outside the Pentagon. The Senate resolution provides the same amount for the base. After an amendment from Senators Graham and Kelly Ayotte (R-N.H.), it too provides $94 billion for OCO.

War is becoming the Pentagon’s budgetary salvation…”

In analyzing the budget resolutions, keep two facts in mind. First, they’re binding just next year. Their spending plans for subsequent years occur in a dreamy future where the opposition is weaker and hard choices easier. Those wishes shouldn’t distract us from the real choices proposed for 2016. Second, the resolutions cannot change laws, like the 2011 Budget Control Act, which caps next year’s defense spending at $523 billion (the Pentagon’s share of that is about $499 billion).

With both resolutions, budget hawks failed to hold the line against military hawks. For starters, both resolutions comply with that cap, defying hawks, including the chairmen of the Armed Services committees. Budgets under the cap avoid sequestration. Remember, with the exception of 2013, when the law required sequestration because Congress could not negotiate commensurate deficit reduction, those across-the-board, meat-axe reductions occur only if budgets exceed spending caps. Congress avoided sequestration the last two years by staying under caps, albeit after raising them, by about $20 billion in 2014 and slightly this year, via the Bipartisan Budget Act of 2013.

Both resolutions prepare for the possibility of a similar deal this year by creating “reserve funds.” These allow higher spending if offsets (cuts elsewhere or revenue equaling the increase) keep the result deficit-neutral. These only matter if legislation raises the caps.

The budget committees also tried to restrain OCO spending. Price, according to aides, hoped to create an enforceable definition for what can count as OCO, but was effectively blocked from doing so by leadership and Armed Services Committee Chair Mac Thornberry (R-Tex). The result was that OCO became the way around the defense cap.

The resolution essentially takes the difference between what the White House requested for the base ($534 billion) and what the cap allows, and puts it in OCO. So the appropriators get $94 billion for OCO instead of the $58 billion that the White House requested ($51 billion of it for the Defense Department), let alone the actual annual cost of the wars in Syria, Iraq, and Afghanistan. The original Senate resolution only provided what the White House requested for OCO. But the Graham-Ayotte amendment, which all Republican committee members backed, changed that.

There is nothing new about expanding the definition of what counts as war spending to escape caps. That has occurred annually since the BCA took effect. Already about half of the OCO budget belongs in the base. What’s different is the scale and brazenness of the shift.

Another attempt at restraint is the House resolution’s use of a deficit-neutral reserve fund for OCO, which kicks in at $73.5 billion. Appropriators can spend up to that amount in OCO on anything, but if they want to spend more (up to $94 billion) they need to cut something to pay for it. The rationale is to put fiscal skin in the game and spark debate.

This offset requirement was the major point of contention in the budget committee vote. Fiscal hawks refused to abandon it, despite leadership pressure. But Speaker Boehner seems to have achieved an end-run around them by promising to strip it in Paul Ryan’s (R-Wis) Rules Committee.

Thus far then, hawks are winning the GOP budget fight. Still, two caveats are in order. One is that resolutions remain far from being law. They still have to pass the full chambers. And while the resolutions do not require presidential approval, the budgets they shape will. Things may yet fall apart.

Second, both resolutions would provide the Pentagon in total with about $613 billion for FY2016, which is just about what it’s getting in FY 2015. A bicameral GOP push for holding defense spending flat is arguably a minor accomplishment for the budget hawks, given what the neoconservative wing wants.

Still the status quo is dangerous. The compromise the GOP can, maybe, stomach is a giant off-book, debt-funded war boost for the Pentagon. The problem with that isn’t just that military spending is too high. It is also that this method of paying creates perverse incentives. If OCO becomes an auxiliary Pentagon fund that exists to escape caps, war becomes the Pentagon’s budgetary salvation. Historically, the elements of defense establishment benefit from a public sense of insecurity, but not necessarily war. This new set-up could change that.

Benjamin H. Friedman is a Research Fellow in Defense and Homeland Security Studies at the Cato Institute.