Archives: December, 2011

From Russia with Butter

Just in time for the Christmas baking season, Norwegians are facing an acute butter shortage. Last Friday, customs officials detained a Russian trying to smuggle 90 kilos of the creamy goodness into the country by car.

Wait. What?!? Isn’t Norway that rich Scandinavian country with all the oil ?

Yup, that’s the one.

Wow… This European debt crisis is already causing shortages of staples?

No, that’s not it.

Huh. I feel silly asking this, but are they at war with someone?

Not as far as we know.

Well what gives then?

The story linked above claims bad weather hurt crops and milk production while demand has risen due to a high fat fad diet.

Well why don’t they just, you know, import more?

That’s what Sweden’s doing—they’ve had similar weather and they’ve got the same diet fad, but their stores (and soon their arteries) are chocked full of butter. But the Norwegians couldn’t do that.

Why on earth not?

Norway has a butter monopolist called “Tine” that is deliberately protected from foreign competitors by government-imposed import tariffs.

Well, with all due respect: duh! We’ve only known the damaging effects of monopolies and protectionism for, like a couple of hundred years. You’d think the Norwegian people would have wised up and ditched them by now. Americans would never stand for that sort of thing.

Norwegians seem pretty angry right now, and it sounds as though they may do just that. But I wouldn’t be too smug about the United States. Turns out, it’s got its own $600 billion per year government protected monopoly that makes Tine look like small potatoes indeed. Here’s a hint:

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New Video Punctures Myths about Great Depression, Exposes Damaging Impact of Statist Policies by Hoover and FDR

I’ve commented many times about the misguided big-government policies of both Hoover and FDR, so I can say with considerable admiration that this new video from the Center for Freedom and Prosperity packs an amazing amount of solid info into about five minutes.

Perhaps the most surprising revelation in the video, at least to everyone other than economic historians, is that America suffered a harsh depression after World War I, with GDP falling by a staggering 24 percent.

But we don’t read much about that downturn in the history books, in large part because it ended so quickly.

The key question, though, is why did that depression end quickly while the Great Depression dragged on for a decade?

One big reason for the different results is that markets were largely left unmolested in the 1920s. This meant resources could be quickly redeployed, minimizing the downturn.

But this doesn’t mean the crowd in Washington was completely passive. They did do something to help the economy recover. As Ms. Fields explains in the video, President Harding, unlike Presidents Hoover and Roosevelt, slashed government spending.

Supreme Court Takes Up Arizona Immigration Law

The Supreme Court has agreed to review Arizona v. United States, the case regarding SB 1070, the Arizona law (only) four sections of which have been enjoined by the lower courts: requiring police to check the immigration status of anyone they have lawfully detained whom they have reasonable suspicion to believe may be in the country illegally; making it a state crime to violate federal alien registration laws; making it a state crime for illegal aliens to apply for work, solicit work in a public place, or work as an independent contractor; and permitting warrantless arrests where the police have probable cause to believe that a suspect has committed a crime that makes him subject to deportation.  For my previous analysis of SB 1070 and the legal challenges to it, see here, here, here, and here.

By taking up this case, the Supreme Court is wisely nipping in the bud the proliferation of state laws aimed at addressing our broken immigration system.  One way or another, states will know how far they can go in addressing issues relating to illegal immigrants, whether the concern is crime, employment opportunities (providing or restricting them), registration requirements, or even so-called sanctuary cities.

Of course, states wouldn’t be getting into this mess if the federal government – elected officials of both parties – hadn’t abdicated its responsibility to fix a system that serves nobody’s interests: not big business or small business, not the rich or the poor, not the most or least educated, not the economy or national security, and certainly not the average taxpayer.  For their part, SB 1070 and related laws in Alabama, Georgia, and elsewhere are (with small exception) constitutional – the state laws are merely mirroring federal law, not conflicting with it or otherwise intruding on federal authority over immigration – but bad public policy.  (For more on both these conclusions, read my SCOTUSblog essay from last summer.)

What this country needs is a comprehensive reform that obviates the sort of ineffectual half-measures the states are left with given Congress’s shameless refusal to act.  It’s not very often that Cato calls for the federal government to do something, but the immigration system is quite possibly the most screwed-up part of the federal government – which of itself is a significant statement coming from someone at Cato – and one that is so incredibly counterproductive to American liberty and prosperity.

The Court will hear Arizona v. United States in the spring.  For more immigration-reform developments, see this note in today’s Wall Street Journal and my blogpost on Utah’s plan, which the federal government has also since sued to enjoin.

Fed Apologists Gone Wild

In today’s Washington Post, Robert Samuelson laments in “Fed bashing gone wild” that public concerns about the Federal Reserve’s behavior during the financial crisis undermine the Fed’s ability to save our economy.  In Samuelson’s words:  “If the Fed is stigmatized for succeeding, we may find that next time it won’t be there.”  I’m struggling to figure out what “success” Samuelson is talking about.

He begins his piece relating how the Fed was created in reaction to the Panic of 1907 but that inaction on its part made the Great Depression worse.  His concern:  “Criticism that the Fed was too active in 2008 may induce it to be too passive in another crisis.”  He conveniently leaves out the NY Fed’s role in helping create the 1920’s stock market bubble, which was a direct result of its efforts to manage the dollar-sterling exchange rate.  But that omission shouldn’t be surprising as Samuelson also fails to mention the Fed’s role in inflating the recent housing bubble (how is three years of a negative real federal funds rate ever good policy?).

Implying that the massive number of bank failures in the Great Depression would have been avoided with a more active Fed also ignores, or “revises”, history.  What about Canada, it also had a depression, but lacked any central bank and did not witness any bank failures?  There’s a large academic literature on banking stability during the Great Depression, those interested in facts couldn’t do much better than starting here.

Of course Samuelson also repeats the same myth that we’d be in another Depression had not the Fed rescued, under very generous terms, the financial system.  All due respect to Mark Zandi’s opinion, but serious research has found that “from the start of the financial crisis (third quarter of 2007) to its peak (first quarter of 2009), both large and investment-grade non-financial firms show no evidence of suffering from an exceptional systemic credit contraction.”  The “freeze” in the commercial paper was only in the bank-backed ABS market, not the industrial side.  This was never about helping Harley-Davidson make pay-roll, it was always about bailing out Citibank and the like.

The Federal Reserve has a long record of failure.  I don’t see it as an exaggeration to say its been the cause of crisis far more often than the cure.  If we simply look the other way, as Samuelson would have us do, then we are certain to have many more loose-money driven booms and busts, resulting in additional financial crises.

Monetary and Fiscal Policy at Cato Unbound

This month we’re talking macroeconomics at Cato Unbound. Tim Congdon kicks things off with an essay about the confused legacy of John Maynard Keynes. We have been told, again and again, that the United States is in a liquidity trap – because the federal funds rate can’t go below zero.

There are several problems with this often-repeated claim. First, even at a federal funds rate of zero, other instruments of monetary policy remain effective. Second, a central bank lending rate of zero is not at all what Keynes himself meant when he used the term “liquidity trap.” Third, what Keynes did mean is a source of considerable ambiguity, as necessitated by the simplified model he presented in his General Theory of Employment, Interest, and Money. And finally, a liquidity trap that conforms to his model may never actually occur, at least not in the strict sense.

Advancing these claims is Tim Congdon, the United Kingdom’s leading monetarist and author of the recent book Money in a Free Society. He is joined by three other prominent economists, each with a slightly different view of the issue. They are Dean Baker, co-director of the Center for Economic and Policy Research; Don Boudreaux of George Mason University; and Robert Hetzel, an economist with the Federal Reserve Bank of Richmond.

As always, Cato Unbound readers are encouraged to take up our themes and enter into the conversation on their own websites and blogs, or at other venues. Trackbacks are enabled. We also welcome your letters and may publish them at our option. Send them to jkuznicki at cato.org