Archive for April 2010


The New York Herald discovers the “accelerationist hypothesis” on April 27, 1933

One nice thing about reading a decade’s worth of newspapers from long ago is that every so often you come across something that puts a smile on your face.  Here’s the New York Herald from a week after FDR devalued the dollar:

As the effects of the first jab in the arm wear off, the country is plainly more than a little worried over the cure-all drug called inflation.  The first dose was just a promise – and what beautiful dreams it produced!  Exchange was about to be stabilized, stocks and commodities were to go kiting, everyone was to be prosperous – long live the 50-cent dollar!

Now the headache of the morning after is already unmistakable in many quarters.  Such is the familiar inevitable history of the inflation treatment, and it is interesting to see even the first preliminary stage following the classic formula.  Nothing is more certain to produce a temporary thrill, a delusion of wellbeing; nothing is more certain that, as the effects wear off, the patient feels worse than ever.  That is the chief viciousness of inflation.  It is in literal truth a habit-forming drug requiring ever larger and larger doses to keep the patient satisfied. (New York Herald, 4/27/33)

Did Bob Murphy write for the Herald back in 1933?

We know that Phillips didn’t really invent the Phillips curve in 1958, instead Irving Fisher wrote the first Phillips curve paper way back in 1923.  And now it seems that the Herald invented the accelerationist hypothesis back in 1933.

German war debts and the Greek debt problem

While revising my manuscript I came across this tidbit:

The impact of floating the dollar went far beyond simply providing more flexibility to the Fed. When the war debts issue resurfaced in mid-June [1933], the NYT observed that:

“Wall Street notes a remarkable contrast between the attitude toward the war debt question last December and that at the present time.  Last year, financial circles began to become apprehensive about the war debt question long before Dec. 15. . . . At the present time, although the war debt payments are due by next Thursday, there has been almost no discussion of the subject in financial circles, and the possibilities of wholesale default have left the markets unperturbed.” (6/11/33, p. N5)

This is important because it shows that it was not the fiscal, but rather the monetary aspects of the war debts problem which was of greatest concern to the markets.  Now that the dollar was being devalued, the markets no longer had to worry about the possible deflationary impact of a war debts dispute.

If Greece were not part of the euro, then Greek debt problems would probably not be impacting Wall Street.  I’m not certain exactly why they have recently affected Wall Street, but I would guess that there is worry that the debt problems in Europe may impact the stance of world monetary policy.  Perhaps there is fear that a eurozone crisis would make the dollar stronger, and that this would slow the US recovery.  In the early 1930s the war debt problems made gold stronger, and delayed recovery for any currency still tied to gold.

BTW, nominal rates were still near zero in 1933, but markets recognized that the adminstration was committed to reflation.  The fact that interest rates are near zero is not a reason to assume monetary policy is ineffective.  It is effective if the policymakers have the courage to make it effective.

The wonderful “failure” of the Milwaukee voucher program

It is interesting to see how progressives interpret experiments in competition.  Matt Yglesias has a post entitled:

The Milwaukee Voucher Failure

He makes the following observation:

The choice program does seem to lead to a lot of consumer satisfaction, but not actual improvements in performance.

In other words, actual parents like the results, and are trying to get their kids into the program, but central planners don’t like the results.  They prefer to measure the effectiveness of schools by how well students do on tests.

I know I am in the minority in not being a fan of the testing approach to school quality (probably even in the minority among my fellow right-wingers.)  So let’s say I am completely wrong about tests, and the central planners are completely correct.  In that case Yglesias is still wrong, as the article he links to suggests that the voucher program has been a big success, even if test scores are the proper criteria for judging school quality:

Wolf, who has led this effort as well as the federally-endorsed evaluation of the DC voucher program, summarized, “Voucher students are showing average rates of achievement gain similar to their public school peers.” Translation: when it comes to test scores, students with vouchers are performing no differently than other kids. (It is worth noting that MPCP students are being educated more cheaply than are district school students).

So the voucher program achieved the same learning objectives at a lower cost, or more bang for the buck.  Since when is that regarded as failure?  Let’s consider the following two possibilities:

1.  Spending more money on education (at the margin) increases learning.

2. Spending more money on education (at the margin) doesn’t increase learning.

First assume case one is true.  This would imply that if we adopted vouchers, and spent as much per student as the Milwaukee public schools spend per student, we would get higher test scores.  That is called “success.”

Now assume case two is correct.  This would imply that there is no point in spending more money on education.  We should simply try to hold down costs.  This means that the voucher program in Milwaukee succeeded in the only way schooling can succeed; it provided education at a lower cost than the public school system.

I’m sure that case two sounds very cynical to a progressive like Yglesias.  I imagine that he thinks more spending can make a difference, perhaps if targeted to certain methods that have been shown to work.  OK, then how about taking the tax saving from voucher schools, and giving those schools a government grant to improve education in whatever area progressives like Yglesias think that money can still help at the margin?  Wouldn’t that be a win-win for everyone except unionized public school teachers?  I wonder why such a policy has almost no chance of happening.

I suppose the progressive counter-argument is that the policy failed according to the criterion set by the voucher proponents.  I have been a voucher proponent from the beginning, and certainly never thought success should be measured by test scores.  I’ve always thought parental satisfaction was the proper criteria.  Indeed, I would hope that all free market economists agreed on this point.  There may be some conservatives who argued that test scores would improve, but why should we care what they think?  Every day the progressive bloggers tell us that conservatives are morons.  I’d rather judge the program on how well it actually did, using the standard economic criteria of costs and perceived customer benefits, not the single criterion used by central planners.

If a policy that leads to greater consumer satisfaction at lower cost, and produces no negative side-effects in test scores, is viewed as a “failure” by progressives, then I don’t think we need to worry very much when progressives criticize the free market.  As Dylan once said: “There’s no success like failure, and failure’s no success at all.”

BTW,  Has anyone else noticed that many of the same progressives who insist that we copy the European public health insurance model also tell us that the successful European voucher programs wouldn’t work here, because we are just too different?  (This last point is not directed at Yglesias, I have no idea on how he views the Swedish and Dutch voucher programs.)

The Great Depression: The Movie

Over the past few weeks I posted the first three narrative chapters of my manuscript on the Great Depression.  Some people have suggested that graphs would help readers better grasp what is admittedly an often confusing and complicated analysis.  So I have been working on creating some new graphs.  It might be helpful to review the gold model of the price level before getting into the graphs:

1.  There was severe deflation between 1929-33

2.  Under a gold standard deflation is equivalent to a rise in the relative value of gold.

3.  The supply of newly-mined gold grew fairly steadily during the 1930s.

4.  Point 3 implies the sharp fall in the price level was attributable to a large increase in the demand for gold.

5.  The demand for gold can rise for one of three reasons:

a.  More private demand for gold (due to fear of currency devaluation.)

b.  More currency hoarding (due to fear of bank failures.)  Currency must be backed by gold.

c.  A higher gold currency ratio.  Central bank gold hoarding is due to . . . well, some would saydue to central bankers being cruel, heartless people who worry more about a tiny bit of inflation than they do about mass unemployment.  Every so often they see “excesses” in the economy, and decide it’s time for a little liquidation and deflation.  One of those times was late 1929, when the stock market seemed to be reaching insane levels.  I recall reading one news story written in the early 1930s where the pundit argued that the prosperity of the 1920s had been unsustainable, it was reaching to point where every working man expected to own an automobile, and icebox and a radio.  The party couldn’t last forever.  At least that was the Fed’s excuse.
Den ganzen Beitrag lesen…

China, conservatism, econome-tricks, and land bubbles.

1.  China’s trade deficit.

Lots of people have linked to the most recent trade data from China, which show a deficit in March.  One month may not be that important, as China is expected to swing back into surplus.  But buried in the report is this almost mind-boggling statistic:

China’s exports totaled $112.11 billion in March, up 24.3 percent from a year earlier. Imports reached $119.35 billion, up 66 percent compared to the same period last year, the Customs Administration said in data posted on its Web site.
Den ganzen Beitrag lesen…