Economics – Page 29 – Garrett M. Petersen

Would Mises have Supported Fiscal Stimulus?

I am currently reading Human Action for the first time, so I will pose a question here for anyone more familiar with Mises’ theory of the trade cycle than I am: Would Mises view the US government’s deficit spending as mitigating the harmful effects of quantitative easing?

Mises repeatedly emphasizes that his theory describes the sequence of events that follow from an injection of money (in the broader sense) into the economy through the loan market. If this new money enters the market in such a way as to affect commodity prices and wage rates before entering the loan market then, according to Mises, it would not generate a boom and subsequent bust. I will quote him at length (pp. 568 of the Scholar’s Edition, available here):

The Difference Between Credit Expansion and Simple Inflation

In dealing with the consequences of credit expansion we assumed that the total amount of additional fiduciary media enters the market system via the loan market as advances to business. All that has been predicated with regard to the effects of credit expansion refers to this condition.

There are, however, instances in which the legal and technical methods of credit expansion are used for a procedure catallactically utterly different from genuine credit expansion. Political and institutional convenience sometimes makes it expedient for a government to take advantage of the facilities of banking as a substitute for issuing government fiat money. The treasury borrows from the bank, and the bank provides the funds needed by issuing additional banknotes or crediting the government on a deposit account. Legally the bank becomes the treasury’s creditor. In fact the whole transaction amounts to fiat money inflation. The additional fiduciary media enter the market by way of the treasury as payment for various items of government expenditure. It is this additional government demand that incites business to expand its activities. The issuance of these newly created fiat money sums does not directly interfere with the gross market rate of interest, whatever the rate of interest may be which the government pays to the bank. They affect the loan market and the gross market rate of interest, apart from the emergence of a positive price premium, only if a part of them reaches the loan market at a time at which their effects upon commodity prices and wage rates have not yet been consummated…

It is important to pay heed to these facts in order not to confuse the consequences of credit expansion proper and those of government-made fiat money inflation. [emphasis added]

Many of the assets added to the Fed’s balance sheet in the past five years have been US government bonds. The Fed is effectively funding the US federal government by printing money. This new money enters the economy not through the loan market but through government demand for goods and services. If I am reading Mises correctly, we should not worry about these fiat dollars on the basis of the Austrian theory of the trade cycle. To be sure, they represent a transfer of wealth from the holders of US dollars to the US government, but they don’t distort the loan market in such a way as to create an unsustainable boom since they act first on the prices of the goods and services bought by the government before they enter the loan market.

To put it another way, government borrowing crowds out private borrowing and investment by businesses. Since these private investments would likely have been malinvestments due to the Fed’s distortion of the loan market, we might prefer these investments to be crowded out rather than made.

Mises would certainly have preferred that the Fed not respond to the 2008 crash by running the printing presses at full tilt. However, given that the Fed has undertaken such a policy, Mises might have preferred that these funds be lent to government rather than entering circulation through the loan market.

[Update: This analysis presumes that the fiscal stimulus comes in the form of government consumption (e.g. highways, bridges, food stamps) and not in the form of subsidized loans to businesses.]

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Would Mises have Supported Fiscal Stimulus?

The Difference Between Credit Expansion and Simple Inflation

In dealing with the consequences of credit expansion we assumed that the total amount of additional fiduciary media enters the market system via the loan market as advances to business. All that has been predicated with regard to the effects of credit expansion refers to this condition.

There are, however, instances in which the legal and technical methods of credit expansion are used for a procedure catallactically utterly different from genuine credit expansion. Political and institutional convenience sometimes makes it expedient for a government to take advantage of the facilities of banking as a substitute for issuing government fiat money. The treasury borrows from the bank, and the bank provides the funds needed by issuing additional banknotes or crediting the government on a deposit account. Legally the bank becomes the treasury’s creditor. In fact the whole transaction amounts to fiat money inflation. The additional fiduciary media enter the market by way of the treasury as payment for various items of government expenditure. It is this additional government demand that incites business to expand its activities. The issuance of these newly created fiat money sums does not directly interfere with the gross market rate of interest, whatever the rate of interest may be which the government pays to the bank. They affect the loan market and the gross market rate of interest, apart from the emergence of a positive price premium, only if a part of them reaches the loan market at a time at which their effects upon commodity prices and wage rates have not yet been consummated…

It is important to pay heed to these facts in order not to confuse the consequences of credit expansion proper and those of government-made fiat money inflation. [emphasis added]

(more…)

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Assigning the Burden of Proof

Have you ever experienced learning a new word and then hearing it everywhere in the days after you learn it? I’ve had a similar experience since making my argument that the burden of proof that the minimum wage is beneficial falls on the law’s supporters. Now I’m seeing people making burden-of-proof arguments everywhere. Bryan Caplan, in a post on EconLog, quotes Mike Huemer making the argument explicitly:

[T]here is a kind of moral presumption against coercive interventions. Laws are commands backed up by threats of coercive imposition of harm on those who disobey them. Harmful coercion against an individual generally requires some clear justification. One is not justified in coercively harming a person on the grounds that the person has violated a command that one merely guesses has some social benefit. If it is not reasonably clear that the expected benefits of a policy significantly outweigh the expected costs, then one cannot justly use force to impose that policy on the rest of society.

Ryan P. Long, over at Open Borders: The Case, makes what is essentially a burden-of-proof argument for open borders:

[W]hile it’s easy to merely allege that “the immigrants” caused crime to increase in your neighborhood or property values to decrease, it is substantially more difficult to prove it. I leave the burden of proof for [the idea that the differences between people really do translate into a reduced quality of life] on immigration’s critics.

Migrants from poor countries often see a 20-fold increase in their earnings just by setting foot in a wealthy country, so you had better have a good reason for barring them from doing so. The people at Open Borders: The Case do a great job arguing for the positive benefits of increased migration, but if we assigned the burden of proof correctly, it would be open borders’ opponents who would have to do the hard arguing.

Finally, while he doesn’t make an explicit burden of proof argument, Bob Murphy’s recent EconLib article raises the important point of non-price allocation under a binding minimum wage:

Raising the minimum wage might represent a drastic harm to the most vulnerable and desperate workers if the specific employees who would be working for $10.10 an hour are different from those who would be working for $7.25 an hour. What could happen is that the higher wage would attract new workers into the labor pool, allowing firms to become pickier and, thus, to overlook the least-productive workers, who would remain unemployed or lose their jobs to more-highly-skilled workers.

Murphy constructs a scenario where the demand curve for low-skilled labour is particularly inelastic, but the supply curve is still elastic, meaning that while the number of job openings has changed little, the number of low-skilled workers chasing those jobs has increased.

Even though (by construction) our hypothetical minimum wage has not significantly reduced total employment, it has, nonetheless, drastically impaired the functioning of the labor market. The “glut” of workers on the market means that non-price allocation mechanisms must come into play. Since there are now multiple applicants for a given job opening, employers can rely on other criteria, including racial and class background, to choose which worker gets the job. It is much more likely that an applicant will need to “know somebody” to get hired, and that teenagers from “respectable” backgrounds will be the ones to work at fast food restaurants, displacing teenagers who might be in more desperate circumstances.

These concerns are not merely hypothetical. Even many economists in favor of the wage hike agree that raising the minimum wage will affect the turnover of workers. For example, one of the leading revisionist authors, Arindrajit Dube, says that in one of his earlier co-authored studies “we… find that both hires and separations of low-wage workers (teens, restaurant workers) fall in response to [a] minimum wage increase, but employment levels do not change noticeably.” [footnotes removed]

What Bob is saying is that there’s more to the minimum wage law than just employment. Even if the revisionist studies that show small employment effects are entirely correct (which is not at all clear) there’s still plenty of reason to think that the minimum wage hurts the very people it’s supposed to help.

But let’s suppose, for the sake of argument, that employment isn’t reduced by the minimum wage, and that the non-price allocation mechanisms are efficient, so it really does do more good than harm to low-skilled workers. Would this morally vindicate today’s supporters of the minimum wage?

I don’t think so. As Mike Huemer argued in the article quoted above, interference bears a higher burden of proof than non-interference:

[W]hen the state actively intervenes in society–for example, by issuing commands and coercively harming those who disobey its commands–the state then becomes responsible for any resulting harms, in a way that the state would not be responsible for harms that it merely (through lack of knowledge) fails to prevent. Imagine that I see a woman at a bus stop opening a bottle of pills, obviously about to take one. Before I decide to snatch the pills away from her and throw them into the sewer drain, I had better be very certain that the pills are actually something harmful. If it turns out that I have taken away a medication that the woman needed to forestall a heart attack, I will be responsible for the results. On the other hand, if, due to uncertainty as to the nature of the drugs, I decide to leave the woman alone, and it later turns out that she was swallowing poison, I will not thereby be responsible for her death. For this reason, intervention faces a higher burden of proof than nonintervention.

Imposing a minimum wage before we have enough evidence to say it does more harm than good is morally questionable whichever way the chips fall. Saying to low-skilled workers, “we weren’t sure that banning all contracts that pay a wage between zero and ten dollars per hour would help or hurt you, but we imposed the minimum wage anyways, and it turns out it did help you,” is morally equivalent to saying to someone, “I wasn’t sure that I would win that hand of poker, but I bet your life savings on it anyways, and it turns out I did win!”

How good a hand would you need to morally justify such a bet? A pair of eights? Three jacks? A straight flush? Even if you’re as sure that the minimum wage will do more good than harm as you are that three jacks will win a round of poker, the fact that you’re gambling with someone else’s livelihood should make you think twice about taking that bet.

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