Excuse Me, Professor: Challenging the Myths of Progressivism

by Lawrence Reed

  •Claims that arts spending is magically “multiplied” are specious and usually self-serving, and never look at alternative uses of the same money

  •Culture arises naturally and spontaneously among people who chose to interact with each other. Art is part of that, but it also competes with all sorts of other things people choose to do with their time and money

  •If art is truly important, then the last thing we should want to do is politicize it or divert it toward those things that people with power think we should see or hear

  #35

  “GOVERNMENT IS AN INFLATION FIGHTER”

  BY LAWRENCE W. REED

  “GOVERNMENT,” OBSERVED THE RENOWNED AUSTRIAN ECONOMIST LUDWIG VON Mises, “is the only institution that can take a valuable commodity like paper, and make it worthless by applying ink.”

  Mises was describing the curse of inflation, the process whereby government expands a nation’s money supply and thereby erodes the value of each monetary unit—dollar, peso, pound, euro, or whatever. It shows up in the form of rising prices, which most people confuse with the inflation itself. The distinction is important because, as economist Percy Greaves once explained so eloquently, “Changing the definition changes the responsibility.”

  Define inflation as rising prices and, like Jimmy Carter, you’ll think that oil sheiks, credit cards, and private businesses are the culprits, and price controls are the answer. Define inflation in the classic fashion as an increase in the supply of money, with rising prices as a consequence, and you then have to ask the revealing question, “Who increases the money supply?” Only one entity can do that legally; all others are called “counterfeiters” and go to jail.

  It’s certainly true that many things, some beyond the control of any human being, can cause some prices to rise. A freeze in Florida, by reducing the supply of oranges at least temporarily, will prompt a spurt in orange juice prices. Bombing factories in wartime will boost the prices of whatever those factories were making. After people pay higher prices for reduced supplies, they may have less money in their pockets for buying other things, causing downward pressure on those other prices. But a prolonged, broad-based rise in most or all prices is the result of one thing: a decline in the value of money, and that occurs because whoever is producing the money is overdoing it.

  Consider this analogy: Let’s say you like Campbell’s tomato soup so much you eat it every week. Then one week you notice that it’s a little less red and doesn’t taste quite as “tomatoey.” A week later, it’s downright pink instead of red and tastes more like water than tomatoes. Week after week this disagreeable trend continues. Would you blame consumers or would you point your finger at Campbell’s, the producer? When your money buys less and less, year after year, what sense would it make to blame the people who use the stuff instead of the people who manufacture the stuff?

  Most economists worth their salt have long argued that inflation is always and everywhere a monetary matter. As one of them put it, rising prices no more cause inflation than wet streets cause rain. The monetary authorities inflate and then prices rise, in that order, and if the people’s confidence in that money dissipates, the price hikes will be astronomical. A little history lesson is in order.

  Before paper money, governments inflated by diminishing the precious-metal content of their coinage. The ancient prophet Isaiah reprimanded the Israelites with these words: “Thy silver has become dross, thy wine mixed with water.” Roman emperors repeatedly melted down the silver denarius and added junk metals until the denarius was less than 1 percent silver. The Saracens of Spain clipped the edges of their coins so they could mint more until the coins became too small to circulate. Prices rose as a mirror image of the currency’s worth.

  Rising prices are not the only consequence of monetary expansion. Inflation also erodes savings and encourages debt. It undermines confidence and deters investment. It destabilizes the economy by fostering booms and busts. If it’s bad enough, it can even wipe out the very government responsible for it in the first place. It can lead to even worse afflictions. Hitler and Napoleon both rose to power in part because of the chaos of runaway inflations.

  All this raises many issues economists have long debated and about which I have my own views. Who or what should determine a nation’s supply of money? Why do governments so regularly mismanage it? What is the connection between fiscal and monetary policy? Suffice it to say here that governments inflate because their appetite for revenue exceeds their willingness to tax or their ability to borrow. British economist John Maynard Keynes was an influential charlatan in many ways, but he nailed it when he wrote, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

  At varying rates, the unbacked (or “fiat”) paper money issued by government central banks has been falling in value all over the world for decades. Even the U.S. dollar is worth about a nickel of its value in 1914, the first full year of operation of its monopoly issuer, the Federal Reserve. In recent years, perhaps no place was more ravaged by inflation than Zimbabwe in southern Africa. Prices there rocketed upwards at an annual rate exceeding 11 million percent in 2007. After printing trillions of Zimbabwean dollars to finance its socialist schemes, the Mugabe dictatorship ruined the currency utterly.

  South America is home to many serial inflationists—corrupt, crackpot regimes that destroy one paper money after another. Prices in Argentina and Venezuela, for example, are currently climbing between 50 and 100 percent annually, and all indications are that the rates will accelerate in coming months.

  In April 1985 I visited Bolivia to observe the world’s then-highest rate of price hikes, an astonishing 50,000 percent. After stiffing its foreign creditors in the early 1980s, the government in La Paz could only finance its bad habits through taxing its own people and printing paper money. It did lots of both. By 1985, however, only 10 percent of its spending was covered by taxes; the rest was taken care of by the printing press. Paper money became the country’s third largest import. Its own presses couldn’t keep up with the government’s demands, so planeloads of the stuff were flown in every week from Europe.

  On the day I arrived, the Bolivian peso traded at 150,000 to the dollar. Just days later, it had sunk to 200,000. I brought nine million pesos home with me—a million pesos (in 1,000-peso notes) in each of nine wads bound together with string by a local bank. I kept one million, which I have to this day, and sold the other eight to gold bugs and currency collectors for $500 each. Not bad, considering that, at 200,000 to the buck, I paid just $5 for each million-peso wad ($45 for the whole nine million). That little bit of international arbitrage financed my trip, incidentally.

  Bolivian hyperinflation ended just four months later, in August 1985, after the socialist government that engineered it was ousted. It had printed pesos until they were worth less than the ink and paper.

  So, you say, inflation may be nasty business but it’s just the really rotten few that do it. Not so. The late Frederick Leith-Ross, a famous authority on international finance, observed: “Inflation is like sin; every government denounces it and every government practices it.” Even Americans have witnessed hyperinflations that destroyed two currencies—the ill-fated continental dollar of the Revolutionary War and the doomed Confederate money of the Civil War.

  Today’s slow-motion dollar depreciation, with prices rising at persistent but mere single-digit rates, is just a limited version of the same process. Government spends, runs deficits, and pays some of its bills through the inflation tax. How long it can go on is a matter of speculation, but trillions in national debt and public officials who get elected by making promises they don’t want to pay for are not factors that should encourage us. Government is not an inflation fighter. In a world of deficit budgets, out-of-control public sector spending and debt, and pie-in-the-sky promises that government will give you just about everything, government is an inflation factory.


  So it is that inflation is very much with us and is arguably one of the inevitable consequences of government run amok. But it’s not a permanent, sustainable policy. It must end someday. A currency’s value is not bottomless. Its erosion must cease either because government stops its reckless printing or prints until it wrecks the money. Surely, which way it concludes will depend in large measure on whether its victims come to understand what it is and where it comes from.

  SUMMARY

  •When you change the definition of “inflation,” you change the responsibility for it

  •Inflation is not rising prices. In fact, you have inflation first and then as one of the consequences, you get rising prices. Inflation, properly defined, involves an increase in the supply of money

  •Historically, the more control government exerts over money, the more likely the money will lose its value. The more that government spends and doesn’t pay for with tax revenue, the more likely it will resort to the printing press

  •It’s far more accurate to think of government as an inflation factory, not an inflation fighter

  #36

  “OUTSOURCING IS BAD FOR THE ECONOMY”

  BY TYLER WATTS

  IN THE 2012 ELECTION, PRESIDENT OBAMA RELEASED ADS ACCUSING OPPONENT Mitt Romney of “shipping jobs overseas” as CEO of a private-equity firm, Bain Capital. Romney responded not by denying this aspect of Bain’s operations, but rather by insisting that he was no longer actively managing the company at the time the alleged outsourcing occurred.

  I can understand why a politician would downplay such charges. After all, “the economy” is almost always a top election issue. Many voters buy into the rhetoric that companies involved in outsourcing are somehow responsible for a net loss of employment opportunities in the United States.

  Far from being a cause of economic trouble, outsourcing is actually part of any highly developed market economy. Outsourcing, in a fundamental sense, is the source of all wealth.

  To tackle the misconceptions surrounding this controversy, let’s start with a definition. Outsourcing means “hiring foreign workers to do a particular task, as opposed to hiring domestic workers.” Now why would an entrepreneur do this? It should be pretty obvious that the foreign labor costs less. Outsourcing therefore generates some combination of lower prices for the company’s products and higher profits for its owners—indicating that the company is creating more value with the resources it uses. So, as a corporate executive might say in defense of an outsourcing announcement, “it just makes economic sense for our customers and shareholders.”

  But what about the workers? The media focus on the horrid “shipping American jobs overseas” aspect of outsourcing. Even if they acknowledge the gains for consumers (lower prices) and shareholders (higher business profits), many commentators will complain these are offset by the losses to American workers.

  First off, let’s recognize that, in a free society, workers aren’t entitled to their jobs; most employment is an arrangement subject to termination by either party at any time for any reason. Individual workers are always losing jobs for all manner of reasons and finding new ones—even in a recession. The mass layoffs associated with outsourcing are not economically different, just more noticeable, and therefore more subject to political demagoguery—especially in a recession.

  We shouldn’t ignore this kind of labor upheaval, whatever its cause. There is obviously going to be some pain associated with the adjustment process. It’s never easy for people to find new employment opportunities, let alone a large pool of workers released onto the market at the same time. Readjustment costs are especially acute for people with strong local ties, such as family obligations. Underwater mortgages make it difficult for some people to migrate. Retraining for new industries is especially tough for older folks, and so on. Sad stories abound, which politicians artfully manipulate in order to enact laws and programs aimed at interrupting the normal market process in order to “save American jobs.”

  But economic change happens for a reason. In a free market, when outsourcing becomes viable, market forces are telling entrepreneurs, workers, and resource owners, essentially, “The old ways of doing things, the old places, the old patterns that you were so accustomed to—they’re not working so well anymore. There are better ways, better places, and better patterns available. For the good of all mankind, to take advantage of the greatest possible global opportunities, we need some rearranging. A large group of people in place Z will now be able to do what people in place F used to do, but at lower costs. That means people in F need to find something else to do, whether that involves moving to place Q, joining industry Y, retraining, or what-have-you.”

  Of course the market is not a person and has no motives. What we call markets are just the systematic patterns of exchange, production, and specialization that take place between and among countless individuals across the world. Yet the core insight of economics is that while people tend to pursue only their own narrow interests, “market forces” act as if they are trying to maximize the value of what is being produced across the entire market space—in our case, the whole world. Long-distance business transactions are a natural and important part of this market process. It’s only labeled “outsourcing” when it’s done by a large corporation and involves a noticeable transfer of a certain production process across an arbitrary national boundary. The term invokes images of Gordon Gekko-like corporate executives in smoke-filled boardrooms, chuckling about the fat profits to be had by transferring widget production from Chicago to Shanghai.

  But in reality all economic advances involve one form or another of outsourcing. We’re all doing it all the time. When a shopper selects German beer or Colombian coffee, few people accuse her of outsourcing (hardcore “buy-local” activists notwithstanding). Yet the consumer is engaging in trade in which some production took place in a far-off location. Is it any less outsourcing when I go online and buy a book from Boston, or a suit from Seattle? Outsourcing is everywhere!

  Consider what a world of no outsourcing would look like. Everything you use—and I mean everything!—must be acquired within a few miles of where you live. As economist Russ Roberts said, we’ve already tried that. It was called the Middle Ages, and life was “nasty, brutish, and short.” Indeed, economic progress in recent centuries has been marked by ever-increasing outsourcing—what Adam Smith called an ever-extending “division of labor.” We have outsourced most of our food production from the field behind our own huts to the huge farms of the corn and wheat belts, with their great farming machinery, genetic engineering, and chemical marvels, themselves all dependent on highly specialized production processes that are outsourced across the globe.

  We outsourced our clothing needs from the backyard flock and the spinning wheel to the textile mill, which itself was progressively outsourced from northern England in the 1700s to New England in the 1800s, then to the southern United States in the early 1900s, and presently to parts of Asia. We outsourced entertainment from the occasional village troubadour to the big recording studios and now, with the Internet, to specialists all over the world.

  I could go on, but you get the point: Throughout history the rise in outsourcing has paralleled a rise in productivity, a rise in human opportunities and accomplishments, and a rise in global living standards. This is not a coincidence; economics indicates that outsourcing is not a bane to our economic health, but a core component of economic progress.

  Nothing said here, however, is meant to countenance the many government interventions, here and abroad, that distort the patterns of global commerce, making them different from those the free market would have generated.

  Economics makes clear that outsourcing is not the problem; the problem is scarcity. Outsourcing is (part of) the solution. Presidential candidates or anyone interested in promoting economic progress should think about policy changes that would allow American entrepreneurs, workers, and resource owners to better integrate themselves into an increasin
gly interconnected global economy.

  (Editor’s Note: This article first appeared in FEE’s magazine, The Freeman, in November 2012.)

  SUMMARY

  •Outsourcing occurs when people shop around for the best deals; we do it all the time as consumers. If it produces savings, those savings can be utilized for the purchase of other things

  •Outsourcing boosts productivity and living standards. Stopping it means compelling “shoppers” (in this case, businesses) to settle for a more costly or less desirable option

  #37

  “IF FDR’S NEW DEAL DIDN’T END THE DEPRESSION, THEN WORLD WAR II DID”

  BY BURTON W. FOLSOM

  WHAT FINALLY ENDED THE GREAT DEPRESSION? THAT QUESTION MAY BE THE MOST important in economic history. If we can answer it, we can better grasp what perpetuates economic stagnation and what cures it.

  The Great Depression was the worst economic crisis in U.S. history. From 1931 to 1940 unemployment was always in double digits. In April 1939, almost ten years after the crisis began, more than one in five Americans still could not find work.

  On the surface, World War II seems to mark the end of the Great Depression. During the war more than 12 million Americans were sent into the military, and a similar number toiled in defense-related jobs. Those war jobs seemingly took care of the 17 million unemployed in 1939. Most historians have therefore cited the massive spending during wartime as the event that ended the Great Depression.

  Many economists have wisely challenged that conclusion. Let’s be blunt. If the recipe for economic recovery is putting tens of millions of people in defense plants or military marches, then having them make or drop bombs on our enemies overseas, the value of world peace is called into question. In truth, building tanks and feeding soldiers—necessary as it was to winning the war—became a crushing financial burden. We merely traded debt for unemployment. The expense of funding World War II hiked the national debt from $49 billion in 1941 to almost $260 billion in 1945. In other words, the war had only postponed the issue of recovery.