A.B.C.T. not as easy as 123: Investigating the Legitimacy of the Austrian Business Cycle Theory

In the last Macroeconomics lecture that I attended, Professor Stevenson (a great guy), tried to provide us with a perspective on the many theories of why the economic business cycle, or the boom-bust cycle, occurs. He discussed Keynes' "animal spirits" explanation, the classical 'change in factors of production' explanation, the political business cycle explanation, and finally the idea that its the fault of banks' ability to extend credit. The last one came awfully close to the reasoning behind the Austrian Theory of the Business Cycle, but of course I have not heard any of the words Austrian, Mises, or Hayek in this class all semester.

That lecture made me wonder if I fully understood the ATBC, so shortly afterward I looked it up on Wikipedia. Once again, it did not fail me, and the article there did make me realize that I owe their explanation of things a more through investigation.

Bill Moyers and Oprah Winfrey

Last Thursday in Spanish class, we watched Bill Moyers' documentary "Buying the War", which aired in April 2007 and told the story of "how the media bought what the White House was selling". This documentary was well-done and made it crystal clear that the Bush administration was wrongfully manipulating the American people to support a war on terror against Iraq in the years following the 9/11 attacks. The segment concerning Cheney's media strategy was particularly infuriating. Here's that complete section - it sends chills down my spine.

PRESIDENT BUSH (Discussion with Congressional Leaders, 9/26/02): The Iraqi regime possesses biological and chemical weapons.

DONALD RUMSFELD (DOD Press Briefing 9/26/02): We do have solid evidence of the presence in Iraq of Al Qaeda members.

PRESIDENT BUSH: The regime has long standing and continuing ties to terrorist organizations.

BOB SIMON: Just repeat it and repeat it and repeat it. Repeat Al Qaeda, Iraq. Al Qaeda, Iraq. Al Qaeda, Iraq. Just keep it going. Keep that drum beat going. And it was effective because long after it was well established that there was no link between Al Qaeda and the government of Iraq and the Saddam regime, the polls showed that an overwhelming majority of Americans believed that Al Qaeda… that Iraq was responsible for September 11th.

JONATHAN LANDAY: Most people actually believed and accepted that Saddam Hussein had weapons of mass destruction. I have to admit that until we really started burrowing into the story, that I believed it, too.

Is this something that they could go along with...

BILL MOYERS: LANDAY FOUND PLENTY OF EVIDENCE TO CONTRADICT THE OFFICIAL PROPAGANDA, AND THE FACTS QUICKLY CHANGED HIS MIND.

JONATHAN LANDAY: I simply spent basically a month familiarizing myself, with what Saddam's weapons of mass destruction programs had been and what had happened to them. And, there was tons of material available on that from the UN weapons inspectors. I mean, they got into virtually everything, and their reports were online.

If you go down here the Iraq Nuclear Verification Office, they put up regular, here you go, key findings, what they found out about Iraq's nuclear weapons programs. It's all here in the open for anybody who wants to read it.

BILL MOYERS: INTERNATIONAL INSPECTORS HAD GONE INTO IRAQ AFTER THE FIRST GULF WAR TO SEARCH FOR AND TO DESTROY SADDAM HUSSEIN'S WEAPONS SYSTEMS. LATE IN 1998, THE INSPECTIONS CAME TO AN ABRUPT HALT AFTER THE IRAQI GOVERNMENT REFUSED TO COOPERATE. BUT, THAT HARDLY MEANT NO ONE WAS WATCHING.

JONATHAN LANDAY: During the period of time between when the inspectors left Iraq, which was in 1998 - the end of 1998 and then, the United States had covered the place with spy satellites, and U2 over flights, and, you know, other intelligence services had their eyeballs on this place.

DICK CHENEY: (Speech to the VFW 8/26/02) There is a great danger that...

BILL MOYERS: THAT'S WHY LANDAY WAS SURPRISED BY WHAT VICE PRESIDENT CHENEY TOLD A GROUP OF VETERANS IN LATE AUGUST 2002.

DICK CHENEY: (Speech to the VFW 8/26/02) Many of us are convinced that Saddam Hussein will acquire nuclear weapons fairly soon.

JONATHAN LANDAY: I looked at that and I said, "What is he talking about?" Because, to develop a nuclear weapon you need specific infrastructure and in particular the way the Iraqi's were trying to produce a nuclear weapon was through enrichment of uranium.

Now, you need tens of thousands of machines called centrifuges to produce highly enriched uranium for a nuclear weapon. You've gotta house those in a fairly big place, and you've gotta provide a huge amount of power to this facility. Could he really have done it with all of these eyes on his country?

DICK CHENEY: (Speech to the VFW 8/26/02) But we now know that Saddam has resumed his efforts to acquire nuclear weapons.

JONATHAN LANDAY: So, when Cheney said that, I got on the phone to people, and one person said to me - somebody who watched proliferation as their job - said, "The Vice President is lying."

BILL MOYERS: ON THE BASIS OF HIS INTELLIGENCE SOURCES LANDAY WROTE THERE WAS LITTLE EVIDENCE TO BACK UP THE VICE PRESIDENT'S CLAIMS.

BILL MOYERS: BUT THE STORY LANDAY WROTE DIDN'T RUN IN NEW YORK OR WASHINGTON - KNIGHT RIDDER, REMEMBER, HAS NO OUTLET IN EITHER CITY. SO IT COULDN'T COMPETE WITH A BLOCKBUSTER THAT APPEARED TWO DAYS LATER ON THE FRONT PAGE OF THE NATION'S PAPER OF RECORD, WITH A FAMILIAR BY-LINE.... QUOTING ANONYMOUS ADMINISTRATION OFFICIALS, THE TIMES REPORTED THAT SADDAM HUSSEIN HAD LAUNCHED A WORLDWIDE HUNT FOR MATERIALS TO MAKE AN ATOMIC BOMB USING SPECIALLY DESIGNED ALUMINIMUM TUBES.

AND THERE ON MEET THE PRESS THAT SAME MORNING WAS VICE PRESIDENT CHENEY.

DICK CHENEY (MEET THE PRESS NBC 9/8/02): … Tubes. There's a story in the NEW YORK TIMES this morning, this is-- and I want to attribute this to the TIMES. I don't want to talk about obviously specific intelligence sources, but--

JONATHAN LANDAY: Now, ordinarily information like the aluminum tubes wouldn't appear. It was top secret intelligence, and the Vice President and the National Security Advisor would not be allowed to talk about this on the Sunday talk shows. But, it appeared that morning in the NEW YORK TIMES and, therefore, they were able to talk about it.

DICK CHENEY (MEET THE PRESS NBC 9/8/02): It's now public that, in fact, he has been seeking to acquire and we have been able to intercept to prevent him from acquiring through this particular channel the kinds of tubes that are necessary to build a centrifuge and the centrifuge is required to take low-grade uranium and enhance it into highly-enriched uranium which is what you have to have in order to build a bomb."

BILL MOYERS: Did you see that performance?

BOB SIMON: I did.

BILL MOYERS: What did you think?

BOB SIMON: I thought it was remarkable.

BILL MOYERS: Why?

BOB SIMON: Remarkable. You leak a story, and then you quote the story. I mean, that's a remarkable thing to do.

At another point in the documentary, Moyers portrays my hero Oprah Winfrey as a part of the propaganda machine promoting the idea that the US should go to Iraq not only to fight the "terrorists" there but also to liberate the Iraqi people from Saddam Hussein:

BILL MOYERS: EVEN OPRAH GOT IN ON THE ACT, FEATURING IN OCTOBER 2002 NEW YORK TIMES REPORTER JUDITH MILLER.

JUDITH MILLER: (OPRAH 10/9/02) The US intelligence community believes that Saddam Hussein has deadly stocks of anthrax, of botulinum toxin, which is one of the most virulent poisons known to man.

BILL MOYERS: LIBERAL HAWK KENNETH POLLAK.

KENNETH POLLAK: And what we know for a fact from a number of defectors who've come out of Iraq over the years is that Saddam Hussein is absolutely determined to acquire nuclear weapons and is building them as fast as he can.

BILL MOYERS: AND THE RIGHT HAND MAN TO AHMED CHALABI.

OPRAH: And so do the Iraqi people want the American people to liberate them?

QUANBAR: Absolutely. In 1991 the Iraqi people were....

WOMAN: I hope it doesn't offend you...

BILL MOYERS: WHEN ONE GUEST DARED TO EXPRESS DOUBT OPRAH WOULD HAVE NONE OF IT

WOMAN: I just don't know what to believe with the media and..

OPRAH: Oh, we're not trying to propaganda-- show you propaganda. ..We're just showing you what is.

WOMAN: I understand that, I understand that.

OPRAH: OK, but Ok. You have a right to your opinion.

When I saw that, I was crestfallen and disappointed in Oprah, but willing to accept that Moyers had accurately assessed her contribution to the propaganda and that her actions during that show do not discredit her character and accomplishments - we all have faults, as I told Seth at the end of class.

However, in this case, Moyers got it wrong. As the intelligent readers of the website Women in Media and News opened my eyes to through their comments to the article posted there ( "Bill Moyers rocks but..."), Oprah was actually one of the few journalists to courageously present the argument against the Iraq War. In fact, she did a whole "Anti-war series", as Wikipedia dutifully and faithfully explains.

Here is one eloquent comment on WIMN that comes to Oprah's defense:

Lex, May 2007:

If you read Michael Moore’s book he claims that Oprah was the ONLY mainstream media voice who had strong antiwar shows prior to the war including having Michael Moore himself on her show the day before the war. Moyer just showed one clip from one show to make it look like Oprah was buying into the propaganda but ignores the half dozen other shows she did leading up to the war which were strongly antiwar. That woman in Oprah’s audience really woke Oprah up, and Oprah got her act together quite nicely following that show.

For proof that Oprah did actually try to widen Americans' perspective on the Iraq War, watch this YouTube video, "Oprah tries to stop America from going to war with Iraq".

Oprah is not perfect, but she does have the integrity, humility, and courage to try to broadcast the full picture to her audience. Thank you, Oprah, and thank you Bill Moyers for making the documentary that needed to be made. However, in all honesty, Wikipedia is the best source I know of that can be relied upon to communicate the full story. I love it.

Paul Krugman and Robin Wells' Approval of Money Manipulation

I am angry at my Macroeconomics textbook (Paul Krugman and Robin Wells, Second Edition).

In the Chapter 15 Appendix, "Reconciling the Two Models of the Interest Rate", the authors discuss how to reconcile the supposedly GDP-enhancing effects of lowering the interest rate in the money market (by way of increasing the money supply) with the "savings-investment spending identity" and the market for loanable funds as explained in previous chapters. Basically, they argue that when people can more easily get their hands on cash, they will both produce more and save more. They must try to give reasons for such an effect because of the savings-investment spending identity, which states that all investment spending in the economy must be backed up by an equal amount of savings.

Krugman and Wells' argument here is this: The Fed increases the money supply. The price of money, which is the interest rate, falls. Cheap loans lead to greater investment in capital. More is produced, which increases the Gross Domestic Product. An increase in GDP means an increase in household income means an increase in savings, and - voila - those are the savings that back up the original increase in investment.

Krugman and Wells argue that the amount of savings at the end of that chain effect will exactly equal the amount of original investment:

...when a fall in the interest rate leads to higher investment spending, the resulting increase in real GDP generates exactly enough additional savings to match the rise in investment spending.

But that is only in a perfect world. The book tells a story of investment leading to savings, but logically, savings comes before investment. The funds that are saved are the funds that are invested and the presence of savings is what determines whether or not it makes sense to invest. If there aren't a lot of saved-up funds, there is a reason for that. When your uncle goes broke, the next thing for him to do isn't to invest in the stock market, it's to get a stable job and start saving! Busts are what happen when we realize that we invested much more recklessly than our savings could ever have justified. Unfortunately when the Federal Reserve increases the money supply, the resulting decrease in the interest rate happens because the increase in inherently worthless cash actually succeeds in mimicking an increase in truly saved-up funds.

Increasing the money supply to lower the interest rate is a tricky way of installing a price ceiling in the money market. Instead of making a law that orange juice can't cost more than a dollar a glass, the government dilutes the orange juice with water up to the point that the price falls to one dollar a glass due to the perceived abundance. Of course the interest rate will fall if people perceive an abundance of savings at hand ready to be invested. The resulting increase in quantity demanded leads to a shortage of true funds. Price ceilings lead to shortages. And they also lead to inefficient allocation. In other words, early-bird shoppers who don't even like orange juice all that much end up buying it simply because it is too hot a deal to pass up, leaving less for those who value it highly.

The authors admit, at the end of the section, "our story about how a fall in the interest rate leads to a rise in aggregate output, which leads to a rise in savings, applies only to the short run" (the short run means the time before people catch on to the lie). However, he maintains that the short run effects are worth it. He justifies the action because the early-bird grocery shoppers, feeling like they got such a great deal, end up spending more on other items as a result. What he ignores is that the increased spending is a direct result of consumers being tricked into acting against their better judgment. And when individuals spend and invest against their better judgment, there is actually a painful long-term effect: the economic bubble and its inevitable burst.

Thomas E. Woods has written a clear, concise article explaining the immorality and inefficiency of expansionary monetary policy titled "Money and Morality: The Christian Moral Tradition and the Best Monetary Regime".

Visit Krugman's blog: "The Conscience of a Liberal"