Bernanke should read Silber’s biography of Volcker

Richard L. Silber has written a detailed new biography of Paul Volcker, the former chairman of the Federal Reserve who successfully eliminated the stagflation of the late 1970’s in the United States.  Appropriately, his biography is entitled, Volcker: The Triumph of Persistence.

In response to questions posed by Neil Irwin of The Washington Post (September 30, 2012),  Silber draws important insights for current Fed policy from his in-depth analysis of Paul Volcker’s lasting contribution to price stability in the United States.

“Bernanke gets an A for what he did in 2008.  He did exactly what a central banker, knowing the history of the Great Depression, should have done when confronted with the potential for panic. Open up the floodgates and lend.  But now he should worry about the fallout from remaining too easy for too long, which Volcker maintains is the reason we lost the battle against inflation before.” Neil Irwin, ‘Volcker biographer: Bernanke needs to embrace lessons of  ’70s’, The Washington Post, September 30, 2012

In his response to Irwin’s questions, Silber identifies two major lessons that must be learned from the 1970s:

“The 1970s delivered two important messages.  First, we can’t get a permanent reduction in unemployment by inflating. It doesn’t work.  And second, we’ve got to worry about inflation, even with unemployed resources. Waiting until we see a clear and present danger is too late.” ibid.

Why is inflation such a serious problem?

“He (Volcker) believes that the main problem with inflation is that it undermines trust in government.  We, as citizens, give the government the right to print money, not to abuse that right by inflating. When the government inflates, it breaks its pledge and undermines our trust.  Right now, we need trust in government more than anything else.” ibid.

Is inflation currently a realistic impending problem?

“The big difference today versus the problem Volcker confronted in 1979 is that inflationary expectations were already out of hand back then.  Today, they are still under control, but no one knows how fragile they are.  More importantly, it will be difficult for Ben Bernanke, or whoever follows him, to maintain low expectations of inflation by raising real interest rates – the way Volcker did – when that’s needed.  We have had five years of unemployment, and the American public may not tolerate a central bank that acts preemptively, as it must, to prevent inflation.  The Fed is independent, but it cannot do whatever it wants.” ibid.

I offer these words of distilled wisdom for your consideration.  Unusually, they arrive as a useful warning before, and not after, the impending crisis has  emerged.  As such they are to be treasured.

Insights into the libertarian mind

A strand of psychological research identified with Jonathan Haidt  in his recent book, The Righteous Mind,  suggests that personality shapes an individual’s political ideology at least as much as circumstance, background and influence.

On the basis of such research, Dr. Haidt makes a case that conservatives are motivated by morality, just as are liberals, but that their sense of morality includes loyalty, authority and sanctity in addition to the  liberal tastes for compassion and fairness.  Conservatives are less tolerant of change. Liberals are more open to new experience.

However, ideology does not have to be bipolar.  It need not flow on a straight line from conservative to liberal .  Indeed in a co-authored paper with Dr. Ravi Iyer, discussed in his book, Dr. Haidt dissects the personalities of those who describe themselves as libertarians.

Libertarians are individuals who call themselves economically conservative but socially liberal.  They like free societies as well as free markets and they want the government to exit the bedroom as well as the boardroom.

The study collates the results of 16 personality surveys and experiments completed by some 12,000 self-identified libertarians. The researchers compared libertarians with tens of thousands of self-identified liberals and conservatives.

Libertarians value liberty – negative liberty of freedom from interference by others – more highly than do liberals and conservatives.  They are also more individualistic, stressing the right and need for individuals to stand on their own two feet rather than the duty of others to care for people.  Those results are to be expected from the definitions of the three categories deployed in the study.

More intriguing is the reaction of libertarians to moral dilemmas. They displayed less emotion, less empathy and less disgust than either conservatives or liberals.  Instead, they deployed cold calculation to reach utilitarian conclusions about whether, for example, to save many lives by sacrificing fewer lives.  They reached correct rather than intuitive answers  to problems in mathematics and logic.  They enjoyed  thoughtful cognitive tasks more than conservatives and liberals.

The researchers conclude that libertarians are characterized by the most masculine psychological profile, while liberals are characterized by the most feminine.  These results held even when each gender was separately evaluated.

I am not trained in psychology and, therefore, do not pass judgment on this research.  However, this column sets out the results for readers to contemplate and to discuss.

Hat Tip: Matt Ridley,  ‘Inside the Cold, Calculating Libertarian Mind’, The Wall Street Journal,  September 29, 2012

China’s dictators finally take down Bo Xilai

The Standing Committee of Nine – the winning coalition that rules the People’s Republic of China – is cautiously preparing the canvas for a relatively bloodless transition of power from supreme leader Hu Jintao  to supreme leader  Xi Jinping.  It is doing so under close international and internal scrutiny following the challenge launched from within its ranks by Bo Xilai, son of one of the ‘Immortals’ who worked with Mao Zedong to mastermind the Red Revolution.

Because of his popularity among the people, and his manipulation of Maoism as a challenge to the wealth-seeking members of the Standing Committee of Nine, China’s dictators have moved with great care to undermine his position before taking Bo Xilai down.

Bo’s wife, Gu has been ‘tried’ and found guilty of pre-meditated murder. The court handed down a suspended death sentence – suspended no doubt in order to extract incriminating information from her about Bo’s transgressions of the law.  Bo’s  former chief-of -police , Wang Lijun, has been ‘tried’ and found guilty of helping to cover up the murder and of fleeing to a U.S. consulate in a vain attempt to seek political asylum. A relatively light penalty of 15 years was handed down, undoubtedly because Wang ratted out Bo in return for clemency. In both instances, the trials were show cases, staged for political purposes and devoid of any hint of due process. Such is the way of  dictators.

Now the stage is set for the culminating show trial prior to the transition of power. Bo Xilai, it was announced today, is to be thrown out of the Communist Party, stripped of public office, and will face multiple criminal charges that include massive bribe-taking, inappropriate sexual relations, murder cover-up and abuse of power. The news was released immediately prior to the Moon Festival of September 30, which is celebrated with a week-long national holiday.

Conviction on those charges will effectively end Bo  Xilai’s political career – in the absence of a successful coup d’etat  by  powerful security forces closer to Bo than to the Standing Committee. In the absence of such a coup, Bo’s life may be spared in return for silence about the extensive corruption that engulfs all of China’s leading dictators. No doubt he will see out his remaining days under house-imprisonment or worse.

The Standing Committee of Nine has announced that the 18th National Congress of the Communist Party will start on November 8, 2012.  The meeting has been delayed by several weeks to allow time for the dictators to take down Bo Xilai without, hopefully, provoking a major coup.

My own expectation is that the new supreme leader, Xi Jinping, will not serve out his full ten years in office. The Communist Party of China and its stooges on the Standing Committee – most likely henceforth of seven rather than nine – will be taken down by a successful coup if not by a popular bamboo revolution, well before 2022.

Fed easy money punishes middle class Americans

John Maynard Keynes first noted that labor market equilibrium may be impacted by price inflation.  He noted workers’ strong preference for a 2 per cent wage increase in a 4 per cent inflation environment over a 2 per cent decrease in nominal wages during a period of constant prices. For many years politicians attempted to exploit this illusion by hiking up inflation rates.  Ultimately, the entire process collapsed in 1970’s stagflation, as the Phillips curve became upward sloping in price inflation/rate of unemployment space.

Money illusion has not disappeared, however, from the box of tools of the Federal Reserve. Indeed it is alive and well in the easy money policies emanating from the Fed since September 2008. Indeed, the Fed, under the chairmanship of Ben Bernanke, has becoming increasingly bold in exploiting money illusion. With inflationary expectations not yet rattled by the Fed’s $2 trillion balance-sheet expansion, Bernanke has now committed the Fed to an open-ended round of quantitative easing in the expectation of trading a little extra inflation for a little short-term employment.

These actions hurt the middle class – the group for which the policy is designed – as low interest rates sap their investment returns and as creeping inflation erodes their perceived real living standards.

“The more than five-fold increase in the median income of the American household since 1971, to $50,000 from $9,000, certainly provides the clear appearance of progress.  But after the dollar’s 82% loss of purchasing power over the same period is factored in, the median household income rose just 12%.  This much more modest increase is largely the result of the growing prevalence of two-income households.  The median real income for working men over the same 40-year period rose just 8%.  And thaat improvement only accrued to the ever-shrinking percentage of men fortunate enough to still have full-time jobs – just 67% according to the latest data from the Bureau of labor Statistics, within a percentage point of the lowest level on record since the figure was first recorded in 1948.”  Sean Fieler,  ‘Easy Money Is Punishing the Middle Class’, The Wall Street Journal,  September 27, 2012

As price inflation creeps upwards, from 2 per cent per annum to 4 per cent per annum, the price signals necessary for American workers to compete in the global market-place are dulled and incentives to re-educate and re-adjust are dimmed.  The end result is serious structural unemployment of the kind that now seriously hinders economic recovery in the United States. Ben Bernanke is the worst enemy that working Americans could ever wish to avoid. For he is working on their perceived cognitive deficiencies to gain short-term advantage for his Wall Street friends and cronies.

 

Presidential election polls are suspect

The U.S. economy suffers from low growth and high and stable unemployment. The debt crisis is the worst in the history of the Republic.  ‘Bumps along the road’ signal that U.S. foreign policy is in a shambles. Any incumbent president should be trailing by several points under such indicators of an unacceptable first-term achievement.

Yet recent polls suggest that President Obama will win re-election on November 6, 2012 in a landslide reminiscent of FDR in 1936.  Several recent polls indicate  that 60 per cent of the electorate believes that Obama will win the race.  The Intrade prediction places the odds for a second term in excess of 70 per cent.

Now these poll statistics may be accurate predictors of the election outcome. We shall know for sure if Obama picks up 45 or more states and a huge majority in the Electoral College. With coat-tails, that would imply the House moving under Democratic Party control and the Senate close to a filibuster-proof  Democratic majority.

Alternatively, there may be serious problems with the polls, in which case a Romney victory may be enhanced by complacent stay-at-home Democrats, who become over-confident of victory.  It would not be the first time that the pollsters got it wrong.  The  clear-cut, but unanticipated  1980 victory of Ronald Reagan over Jimmy Carter stands as a warning against over-reliance on poll statistics.

A significant weakness in 2012 polling has been over-sampling of pro-Obama constituencies.  Many polls include more responses from Democrats than Republicans, based on turnout in the unrepresentative 2008 election.  Such bias in the sample significantly and inaccurately inflates Obama’s final score.

Another potential weakness in 2012 polling, especially those conducted by telephone, is the perceived unwillingness of many Americans to expose themselves to criticism by openly disfavoring a non-white candidate.  What they say over the telephone may well not be how they vote in the privacy of a booth.

A third potential weakness in 2012 polling may be the result of bias in the framing of questions. The large majority of the media is strongly pro-Obama and it is easy to coax desired responses by the rhetorical phrasing of questions.

In any event, the conservative QStarNEWS has set up a website called  ‘Unskewed Polls’ which recalculates major poll results on numbers reflecting the current more balanced partisan breakdown.  The site shows Republican contender Mitt Romney leading in re-weighted polls by 5 per cent or more. The latest QStarNews Daily tracking Poll has Romney ahead of Obama by 53 per cent to 45 per cent.

Of course, the re-weighting itself may demonstrate Republican bias. Once again, November 6 will tell us everything that we need to know.

In the meantime, be wary of swallowing poll results and writing off Mitt Romney at this stage in the race.  Remember that there are lies, damned lies and statistics!

Hat Tip: Editorial, ‘Rigging the polls’, The Washington Times, September 26, 2012

China’s show trials mock the rule of law

The People’s Republic of China has recently concluded two closely-watched trials of well-known citizens.  Gu Kailai,  the so-called ‘red queen’ and wife of  Bo Xilai, was given a suspended death sentence for the premeditated murder of British businessman, Neil Heywood. Wang Lijun, former Chongqing chief-of-police, and principal enforcer for Bo Xilai’s repressive policies, was sentenced to 15 years in prison for covering up the murder of Neil Heywood, and for later fleeing Chongqing and seeking political asylum in the United States.

Whether or not the pronounced sentences are just is impossible to assess. For the courts involved participated in political show trials that mocked any notion of the rule of law. Although the government announced that at least parts of both trials would be open to the public, only a small number of hand-picked  observers were allowed inside either courtroom.  The trials provided no clear explanation as to why Gu decided to murder Neil Heywood or why Wang initially helped her to cover up the murder and then later decided to flee to the U.S. consulate in fear of his life.  Neither court heard any reference as to the role played by Bo Xilai with respect to the murder or the cover-up. The 800 pound gorilla that over-shadowed both cases, was simply ignored as non-existent.

“To most Chinese legal analysts, the circumstances and sentences in the Gu and Wang trials make clear that the entire process is part of a political show that will culminate in the carefully scripted eventual sentencing of Mr. Bo himself.  ‘The leadership is in the midst of a political faction fight.  The entire legitimacy of the system is crumbling’, say Pu Zhiqiang, a high-profile legal activist who regularly defends political prisoners in China. ‘I would call these trials a cover-up of the truth, rather than trials based on the facts.'” Jamil Anderlini, ‘Wang and Gu trials dash hopes for legal reform’, Financial Times, September 25, 2012

Obama’s economic lies on the 2008 campaign trail

As a candidate running for the presidency in 2008, Barack Obama claimed that one cause of the economic crisis was the large federal deficits jointly run by President Bush and the Congress. He promised that he would fix that weakness by cutting government spending.

In the second presidential debate, Obama made the following statement:

“When George Bush came into office, we had surpluses.  And now we have a half-a-trillion-dollar deficit annually… And what I’ve proposed, you’ll hear Senator McCain say, well, he’s proposing a whole bunch of new spending, but actually, I’m cutting more than I’m spending so that it will be a net spending cut.”

In the third presidential debate, less than three weeks before the election Obama responded to a question by Bob Schiefer as follows:

“there is no doubt that we’eve been living beyond our means and we’re going to have to make some adjustments.  Now what I’ve done throughout this campaign is to propose a net spending cut.”

So what happened? In his first year in office, Obama and the Democratically-controlled Congress increased government spending by almost as much as Republicans had done in the four fiscal years 2004-2007 ($535 billion as compared with $569 billion).  The deficit during  Obama’s first  year in office was bigger than for those four fiscal years combined ($1.4 trillion versus $1.1 trillion.

So much for promises.  Obama has racked up the largest inflation-adjusted increases in government spending and the largest deficits in the history of the Republic.

Those who tune in to the 2012 presidential debates would do well to take any of Obama’s economic promises with a huge pinch of salt!

Hat Tip: Grover G. Norquist and John R. Lott, ‘Debacle‘  John Wiley 2012

AARP shafts its members to access rents

AARP is a rent-seeking institution. Membership dues account for only 17 per cent of its total revenue.  Insurance business accounts for 60 per cent. So guess which avenue it will pursue when there is a conflict?

Well, there was a direct conflict of interest within AARP with respect to the passage into law of Obamacare.  And AARP shafted its own members in pursuit of lucrative insurance revenues.

AARP members opposed the passage of Obamacare. A Kaiser Family Foundation poll in November 2009 found seniors opposed the bill by 61 to 21 per cent with 18 per cent undecided.  In internal emails – unearthed by the House Energy and Commerce Committee – AARP reported that calls were running 14-1 against the Obama proposal.  Thousands cancelled their memberships because of AARP’s support for the bill. In July 2012, a CNN poll determined that seniors still favor repeal of Obamacare by 54 to 41 percent.  They correctly recognize that the gutting of Medicare will impact adversely on their quality of care within the program.

The conflict arose because Obamacare  diverts $716 billion from Medicare to pay for itself.  The cut is targeted at Medicare Advantage plans popular among AARP members.  As a consequence of these cuts, Obamacare is expected to expand significantly the number of seniors who will purchase  ‘Medigap’ supplemental insurance plans.

AARP controls 34 per cent of the market for Medigap plans.  According to a 2011 House Ways and Means Committee report, AARP stands to make between $55 million and $166 million from Obamacare in 2014 alone. In consequence, as the unearthed emails clearly establish, the supposedly neutral, non-partisan AARP coordinated with the White House on media strategy and in lobbying reluctant lawmakers.

President Obama addressed the September 2012 annual conference of AARP by satellite to tout his health care law:

‘No American should ever spend their golden years at the mercy of insurance companies,’ he said.

What a hypocrite!  The President is personally responsible for placing seniors at the mercy of those insurance companies. and his words were addressed to the most merciless of all those companies. For AARP has ruthlessly sold its own members down the river in pursuit of Obamacare-manufactured Medigap insurance rents.

Hat Tip: Editorial, ‘Obamacare: AARP’s get-rich-quick scheme’, Sunday Examiner, September 23, 2012

Recep Tayyip Erdogan leads Turks down the road to serfdom

In January 2004,  Turkey’s Justice and Development Party (AKP), under the leadership of   Prime Minister Recep  Erdogan, hosted a major conference in Istanbul on the theme Conservatism and Democracy.  AKP, through its leader, expressed a desire to pursue a conservative policy platform and to shift Turkey into a conservative democracy. So interested was Recep Erdogan  in opening up  such a new direction for Turkey, that he brought his entire cabinet to this two- day conference.  I was one of three keynote speakers at that conference. My presentation on conservative economics* was very well-received.

Now, almost nine years on, it is sad to note just how deeply power has corrupted this once-honorable man and his one-time forward-looking administration. Little did I then realize that for much of the decade following that conference, Prime Minister Erdogan and the AKP would become pre-occupied not with the pursuit of conservative policies, but with a statist program of incarcerating critics of his administration on the basis of trumped up charges and forged documents.

On September 12, 2012, after a patently sham trial, a corrupt (AKP-controlled)  Turkish court handed down lengthy jail sentences to 300 military officers convicted of planning a coup d’etat code-named Sledgehammer, in 2003  (well before the Istanbul conference had been organized).  Prosecutors allege that the plotters  planned to bomb mosques, down a Turkish fighter jet, take over hospitals and pharmacies, close non-governmental organizations, arrest journalists and politicians, and ultimately appoint a hand-picked cabinet.

All the documents used to prosecute the plotters are forged. Independent forensic analysts from Germany, the United States and Turkey have unanimously attested to this fact.  Prosecutors have used unsigned documents on compact discs as evidence of coup planning.  These documents are supposed to have been created in 2002-2003. Yet, they contain references to fonts and other attributes first introduced by Microsoft Office 2007!

The evidence presented to the court indicates that the alleged coup was fabricated by AKP.  In response to the mass arrests of their colleagues, the chief of Turkey’s armed forces and the heads of Turkey’s army, navy and air force, resigned together on one day during the summer of 2011. The case is widely viewed as the means by which the Prime Minister has decapitated the military, a powerful institution that has long opposed Islamist forces in Turkish society.

More ominous still, is the evident complicity of the Turkish court with the forgeries. In violation of both Turkish and international law, the court rejected all defense requests for independent authentication of the evidence.  Additionally, the court lodged criminal complaints against defendants and their lawyers for statements made during the trial.

“The prime minister has been criticized for jailing more journalists than China and Iran, silencing the media and using the courts to go after the opposition, even while he has been hailed for expanding civil rights as part of Turkey’s effort to join the European Union.” Emre Peker, ‘Hundreds Convicted in Turkish Coup Trial’, The Wall Street Journal, September 22, 2012

This is not at all something that I anticipated in January 2004.

* Charles K. Rowley, ‘Conservatism and economics: a sweet Turkish delight’, Public Choice April 2004, Volume 119, Nos. 1-2, pp. 1-12

The Messiah fails to win Middle Eastern hearts

This is not a Jimmy Carter moment – a U.S. Embassy and its staff seized and held hostage for 444 days, America’s enemies taking stock of its weakness, its allies running for cover.  But the anti-American protests that broke upon 20 nations this past week must be reckoned a grand personal failure for Barack Obama, and a case of hubris undone.” Fouad Ajami,  ‘Muslim Rage and the Obama Retreat’,  The Wall Street Journal, September 21, 2012

No American president prior to Obama had proclaimed such intimacy with the Muslim world, using his name and his personal biography as a bridge to aggrieved nations and as a promise of a new accommodation to their needs.  In June 2009, Obama descended on Cairo to apologize for past American transgressions and to promise a new beginning.  Carelessly, the President breached a time-honored maxim of international diplomacy:

“Never speak ill of your own people when in the company of strangers.  There was too little recognition of the malignant trilogy – anti-Americanism, anti-Semitism and anti-modernism – that had poisoned the life of  Egypt and much of the region.” Fouad Ajami, ibid.

Very quickly, the new President was challenged by events in the Middle East and was found wanting.  In the summer of 2009, Iran erupted in rebellion against its theocratic rulers.  President Obama sat on his hands and allowed the dictators to crush the rebellion. The Muslim world thus was educated into the reality that President Obama was a paper tiger in the fight for freedom in the Middle East.

“The grand expectations that Mr. Obama had for Afghanistan have largely been forgotten.  The Taliban are content to wait us out, secure in the knowledge, that come 2014, we and our allies will have quit the place.  And neighboring Pakistan, a nuclear-armed country with 170 million people, is written off as a hotbed of extremism.  Meanwhile, Syria burns and calls for help, but the call goes unanswered.  The civil war there has become a great Sunni-Shiite schism.  Lebanon teeters on the edge. …Our foreign policy has been altered, as never before, to fit one man’s electoral needs….Give him your warrant, the palace guard intone, at least until the election.  In tales of charismatic, chosen leaders, it is always, and only, about the man at the helm.”  Fouad Ajami, ibid.

‘Apres moi, le deluge’.