Congratulations to Melody!

My wonderful daughter just turned 16, and she is sweet. She also works very diligently in her studies, and practices music all the time. (It is a great pleasure to hear the wonderful tones waft through the house from her french horn or piano.) So it is not surprising at all that Melody is in the top 10 out of roughly 700 students in her class...or that she was invited to perform with the Governor's All-Star Band at this year's Carolighting. Unfortunately, the event was rained out...but the honor remains. Yeah, Mel!

Congratulations to Benjamin and Archelle!

I have been blessed to stay in touch with my dear friend Benjamin Lincoln, even though he moved to Atlanta almost 10 years ago. He has had great success as a software developer, which surprises no one who is familiar with his smarts, friendliness, and integrity.

A young woman named Archelle has also noticed his admirable qualities--and he, hers--so they will be tying the knot at their A.M.E. church in March. A round of applause!

Congratulations to Benjamin!

My hulk of a 12-year-old, Benjamin Falter, recently earned a green belt in karate. He has manifested enterprise, persistence and humility in his approach to karate, so you can rest assured that I will be making plenty of posts about his success in many other endeavors.

The Inevitability of Booms and Busts

It seems that the Mises Institute is tilting at windmills in its hope to end economic booms and busts by reenacting the gold standard and outlawing fractional reserve banking. As long as human beings are making decisions about the prices of goods and services--i.e., as long as you and I, dear readers, are investing and consuming--we will be experiencing the crazy ups and downs. We can turn back the repeal of the Glass-Stegall Act, but we can't outlaw human nature.

This month's Atlantic Monthly published a couple of very impressive articles about how our wonderful, wacky humanity is the root of the problem. "Pop Psychology" describes experiments done by economists where a dozen participants are each given a certain amount of "securities" (for example, a certificate that yields a 24-cent dividend every 4 minutes) and cash (the real stuff, negotiable instruments). The experiment is limited to 15 rounds of dividends, so after an hour of trading the participants get to keep whatever money remains from their trading activity and dividends.

It is a trivial exercise to calculate the economic value of the security: during the first round it is $3.60 (15 times $.24), in the second round it is $3.36, etc. Anyone who believes that the trading price of the securities for these 60-minute securities in the 12-person market will largely reflect their apparent economic value, though, does not understand human behavior. (And truth be told, I must count myself among the misinformed/astonished.) What drives the market price of the securities is not their apparent economic value, but the desire of the participants to buy low and sell high. So what happens 90% of the time in these experiments is that the profit-seekers drive the price of the securities skyward--until the 15th round, at which point the market crashes.

Sound familiar?

So now you know why reverting to the gold standard will never end the cycle of booms and busts; we can change the banking system, but we are powerless to stop the tide of human behavior. I pointed out in a previous post that the cycle of expansion and contraction has occurred both when currency has been pegged to the gold standard and when it hasn't. I would be overstating the case to see that good banking policy is inconsequential; good policy might reduce the amplitude of the swings. At the same time, we do need to recognize that there is no policy that can relegate booms and busts to the dustbin of history.

In the second article, Henry Blodget (of Wall Street notoriety) examines the conduct of participants in the recent real estate and credit bubble, and finds it to be completely unremarkable. Of course home purchasers kept bidding up the price of real estate; they wanted to keep making profits. Investment bankers wanted to keep earning their bonuses. Politicians wanted the good times to keep rolling. Mortgage lenders wanted to keep earning origination fees. It takes a village to raise a child, and I guess it takes a village to cause a stampede in the real estate market.

In the wake of the inevitable bust, there has been much finger-pointing, but far too little self-examination. Perhaps we will learn our lesson for a generation, but eventually people will start saying "It's different this time, prices really can keep spiraling upward" and the next boom and crash will happen.

"Money, Banking and the Federal Reserve"

I just finished viewing a youtube video produced by the Mises Institute that gives an interesting explanation of how money and banking works. Every freshman in Econ 101 needs to watch this video to learn why berries or wampum could be the currency of choice, rather than reserve notes, and what fractional reserve banking is all about. It also covers a good bit of banking history, although as I will discuss in a bit, it is highly selective in its coverage of the subject.

Then the video engages in a long rejection of central banking, and calls for a return to the gold standard. There are several related themes that the Mises Institute cites:

1. The Federal Reserve Board of Governors (FRB) is not accountable to anyone. No one audits their operations; they can buy and sell assets as they please. You cannot obtain a transcript of their deliberations; they only publish a brief summary.
   
2. Inflation is baked in to the current banking system--300% in the 25 years after Nixon ended Bretton Woods! But you don't want a low inflation environment; you want the currency you own to gain value over time. Only a deflationary environment can provide the confidence that investors and entrepreneurs need to do their part for economic growth.
3. Central banking is the cause of all economic booms and busts. It leads to booms and busts because the presence of a "lender of last resort" removes the need for banks to lend prudently during the good years.
   
4. History shows that a return to the gold standard will stabilize the economy; for example, sound money was the impetus for a pleasant 18-year expansion from 1879 to 1896. On the other hand, the video implicates central banking as the ultimate cause of the Great Depression.

The video's analysis ignores so much history, so much about how banking operates, and so many serious pragmatic issues, that I scarcely know where to begin my critique. For now, since my time is limited, I'll just list some semi-random thoughts:

1. The members of the Federal Reserve Board are appointed by the President and confirmed by the Senate. Opinions vary as to whether this provides enough accountability for the Board, but the appointment/confirmation process certainly mitigates the problem. In addition, the video is dramatically wrong about the availability of transcripts for the FRB's meetings; they have been available since 1994. The video was produced in 1996, so there is no excuse for this misleading argument.
2. Central banking's promotion of monetary inflation is not the only cause of the boom/bust cycle. Any time investors believe that outsized profits can be gained from some new resource, technology or business practice, they stampede into the capital market and produce a rush of new lending. This is a boom cycle, and it doesn't need the assistance of central banking. The Holland tulip craze, the 19th century railroad boom, and the 21st century housing boom were driven primarily by investors' appetites for enormous and easy returns. The video praises the reliability of a market-regulated currency, but in point of fact the rush into the housing market by Wall Street lenders and Main Street borrowers that we saw during W's early years is but the latest example of how the market can drive a currency boom. An earlier example, provided by the video itself, is how the long expansion after the Civil War was followed by a decade's worth of instability that culminated in the Crash of 1907. That crash in turn led to the birth to the Federal Reserve during a 1910 meeting of Wall Street titans on Jekyll Island. Of course, the fact that 18 years of boom followed by a decade of instability and bust occurred when the Fed did not yet exist is an extremely strong refutation of the video's argument, but the producers rise to the challenge of completely overlooking this inconvenient fact.
   
3. While few are happy during the bust after a boom, Daniel Gross argues that the boom/bust cycle is critical for a healthy economy. Booms often give us infrastructure (like telegraphs, railroads, and fiber-optic cable) that can boost production for decades. Of course, not all booms are of equal value (think tulip bulbs and vacant housing), but you've got to expect some chaff with the wheat. At the risk of redundancy, I again point out that booms are what happen when investors get excited about emerging opportunities; history has proven that you can't have marvelous new opportunities without a boom/bust cycle.
   
4. Do not believe the video when it states that you want your money to gain value over time. The years 1929 - 1940 saw the greatest increase in the value of money in American history; this period is also referred to as the Great Depression. The link between increasing money value and severe economic depression is quite obvious. If the value of goods I can buy with money will increase over time, I have no incentive at all to invest it; I can get a risk-free increase in value just by stuffing my money in a mattress. So from the viewpoint of society, when the value of money is increasing, investment naturally falls sharply. Furthermore, this fall in value can be a vicious circle: as the value of money increases, investment drops; as investment drops, economic activity drops; as economic activity drops, the value of money in hand goes up; as the value of money in hand goes up, investment drops more, etc. This, in a nutshell, is how the Great Depression happened.
5. The video attacks fractional reserve banking from pillar to post, but it is impossible for a conversion to the gold standard to eliminate fractional reserve banking. Here's why: the world's outstanding gold reserves are but a tiny fraction of the world's economic output. As long as the reserve assets on hand are but a fraction of the lending in the economy, there will be fractional reserve banking. It is mathematically impossible to have any form of banking other than fractional reserve banking when aggregate reserves are lower than aggregate deposits. "Well, we'll just revalue gold so that banking reserves and demand deposits are in equilibrium," Ron Paul might reply. While that is possible, I'm not sure I want to give a windfall profit of $15 trillion to a handful of mining companies.
6. The video proclaimed (in 1996) that the federal budget had been in deficit every year since Nixon ended Bretton Woods. Of course, just like it seems you have to wash your car to enjoy a rainfall, no sooner was this video released than our country enjoyed a string of impressive budget surpluses from 1996 to 2001. Of course, the Republican Congress and President put an end to that with a huge tax cut and out-of-control military spending in the years 2001 and following, but that's a different story.
7. The video proposes that investors will lend their gold to banks for (negotiated) fixed periods of time at a fixed interest rate, and the banks will in turn will lend to creditworthy borrowers. Congratulations, Mises Institute, you have just invented the Certificate of Deposit (CD).
8. The video proposes that banks will charge fees to depositors for holding their savings and demand deposits, instead of earning profits by lending a portion of the deposit money. In other words, the Mises Institute proposes to kill fractional reserve banking. Of course, this would decrease the availability of capital dramatically, which would starve our economy of the resources needed to pursue new investment opportunities. In other words, the Mises Institute's proposal would provoke a downturn so colossal that we would rename the 1930s as the "Mild Disappointment."
9. It is true that deposit insurance and the Fed's discount window serve as a "lender of last resort," which can encourage private lenders to take some imprudent risks. However, the alternative is not some nirvana where all investors and lenders are perfectly rational. Rather it's a system where you and I will be afraid to put our savings in a bank for fear that some crazy loan officer will lend it to his visionary cousin Marvin's real estate company, and we'll lose the capital we painfully gathered for decades as we raised our families. And if you and I are afraid of putting our money in savings accounts, it will be the 1930s all over again.

EDIT: I have corrected the inadvertant misspelling of the name of Mises Institute. Thanks, Thom!

Analyzing the Republican Pro-Life Case

As readers of the comments on my previous blog are aware, it is impossible to support a Democrat for pro-life reasons without stirring up controversy. A lot of controversy. In addition to the published comments, I have received many emails and even letters from passionate Christians and family members who implore me to consider further arguments.

I do appreciate the sentiment and thoughts. I have very carefully considered these arguments, and at one point seriously contemplated the possibility of voting for Bob Barr. (Sorry, Senator McCain--I could never vote for anyone who labels a Palestinian peace activist as a "neo-Nazi.") The arguments are as follows:

1. Abortion restrictions such as parental consent/notification laws actually do reduce abortions, according to a 2006 analysis by Prof. Michael New.
2. Obama plans to sign the Freedom of Choice Act (if it is passed), which would eliminate any restriction of any type on abortion. Doctors, nurses, and hospitals could no longer refuse to provide abortion. Partial-birth abortions could no longer be restricted. State parental notification and informed consent laws would be nullified.

As I examined the data as carefully as possible, though, I think my original public policy analysis was sound. A vote for Obama is vote to improve the economic and societal situation of expectant mothers, and thus is a vote to reduce abortion. Let's see why:

1. New's analysis is faulty because it fails to control for the correct variables. Prof. New only controlled for income growth and racial demographics in his analysis of the effects of abortion restriction policies. The Catholics in Alliance for the Common Good (CACG) analysis, however, controls for 16 economic and welfare policy factors, in addition to the abortion restriction policies. Once these additional factors are considered, the effect of abortion restriction policies becomes immaterial. As Wright and Bailey report in the CACG paper:

Using the nationwide data, we also analyzed the effect of state-level laws that are designed to prevent abortions. In the Appendix, we show that laws concerning parental and informed consent had no significant effect on the number of abortions in the United States. We tested for the effect of both passing and enforcing parental and informed consent laws, and find that the net effect on the abortion rate of both passing and enforcing these laws was very close to zero. While we did find that partial-birth abortion laws are associated with decreases in the abortion rate, this result was not statistically different from zero and was not consistent across different specifications. These results stand in contrast to earlier research, but that research did not control for important socioeconomic factors such as government assistance and employment rates by gender.

Thus the primary policy factors to reduce abortions are economic assistance programs that can help expectant mothers, although the elimination of Medicaid funding for abortions also helps.

2. The Freedom of Choice Act appears to be little more than lip service to the pro-choice movement. I urge my readers to go read the actual Act, rather than rely on what I or anyone else says. You will see that it basically enacts as a matter of federal legislation the policies already propounded by Roe v. Wade and Doe v. Bolton.

• It does not prevent medical professionals from exercising their conscience--a right which does not rely on state abortion restriction legislation.
  
  
• It does not prevent states from restricting partial-birth abortions; in fact, the effect of the Act does not extend beyond the 22d week of pregnancy, since it states

  A government may not...deny or interfere with a woman's right to choose...to terminate a pregnancy after viability where termination is necessary to protect the life or health of the woman
  

  This balancing of the unborn child's right to life with the woman's life or health is no different from today's law.
  
• And I do not believe that the law will affect state's choices not to fund abortions with Medicaid dollars. The Act is spectacularly vague on the question of Medicaid funding, and even if it could be interpreted to override state funding choices, it would never survive a state challenge based on the 10th Amendment ("the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.")

A Pro-Life Evangelical Votes for Democrat Obama

Starting in 1984, I have never voted for a Democrat for President, primarily because the Republican candidate expressed a pro-life stance, and had the backing of a party with a pro-life platform. 2008 is different. Here's why:

1. Valuing the dignity of human life goes far beyond opposing abortion. I've decided that being pro-life means:

• You care about the world that you are leaving to future generations.
• You care about the dignity of the most vulnerable--the poor, the oppressed, the elderly, the unborn.
  
• You care about the eradication of injustice and inequality.
• You recognize that Americans have no special dispensation from God to act as they please, since all human beings are created equal, whether they are Iraqi, Zimbabwean, French, Chinese, or American. This doctrine leads to a real humility with regard to choosing to invade other countries militarily. I salute the men and women who serve courageously in our armed forces, but I cannot abide the Bush Doctrine and those who uphold it (most notably McCain and Palin).
  

So my previous view of pro-life policy was far too narrow, because it focused on just one (albeit important) aspect of life. And here I might add that influential Christian thinkers, both Catholic and Protestant, have been preaching this broad view for some time. In fact, the seven principles of Catholic social teaching, as declared in Pope Leo XIII's encyclical Rerum Novarum ("Of New Things"), are:

* Life and Dignity of the Human Person
* Call to Family, Community, and Participation
* Rights and Responsibilities
* Option for the Poor and Vulnerable
* The Dignity of Work and the Rights of Workers
* Solidarity
* Care for God's Creation

As I look over this list, I see a lot of areas where Democrats, in my view, hold the upper hand. They do much better in the "option for the poor and vulnerable," especially as this pertains to tax policy. They support the rights of workers to organize and earn a living wage far more strongly than Republicans. They have more consistently expressed a concern for stewardship of God's creation. They have earned my vote.

2. The Democratic emphasis on pragmatic policies to reduce abortions holds greater promise than the Republican emphasis on the ideal of making abortion illegal.

First, the Republican approach of restrictive legislation is preordained to fail due to the legal doctrine of stare decisis (adherence to precedent). Short of a constitutional amendment, Roe v. Wade and other decisions that allow a woman to give preference to her health as determined by her and her physician rather than her unborn child will remain the law of the land. In other words, our next President and his judicial appointments, whether they be pro-life or pro-choice, will have very little influence on the legality of abortion, because the issue has already been decided on constitutional grounds.

Second, access restriction legislation is far less effective at reducing abortion than liberal welfare policies. The "Reducing Abortion in America" public policy study released by Catholics in Alliance for the Common Good concludes that abortion restriction policies such as parental consent laws have had a negligible impact on abortion rates. On the other hand, "social and economic supports such as benefits for pregnant women and mothers and economic assistance to low-income families have contributed significantly to reducing the number of abortions in the United States over the past twenty years." Here I will let the report speak for itself:

"[A] two standard deviation difference among states in the reported level of economic assistance to low income families is correlated with a 20% lower abortion rate. Across the entire United States, this translates into 200,000 fewer abortions. The Welfare Reform Act of 1996 allowed states to impose a cap on the number of children eligible to receive economic assistance in low-income families. Removing this family cap would decrease abortions by about 15% or 150,000 nationwide. The findings also suggest that, in the 1990s, states with more generous grants to women, infants and children under the age of five as provided by the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) program had a 37% lower abortion rate. Finally, higher male employment in the 1990s was associated with a 29% lower abortion rate."

In other words, if you truly desire to reduce abortions in the US,

• Remove family caps to welfare assistance (which have been enacted primarily in Republican strongholds like Mississippi and South Carolina [my home state]).
• Increase welfare assistance to the poor, especially in the WIC program. Follow the Democratic California and NY assistance model, not the Republican Mississippi and SC model.
• Help poor men gain employment skills, and employment.

So which of the major parties, and which of the Presidential candidates, will be more supportive of liberal welfare assistance policies? If you care about reducing abortions, this is the question you should be asking. If you want my vote, stop talking about welfare and tax policy in terms of supposedly promoting socialism and income redistribution, and start talking in terms of compassion and bringing children into the world. This is how the Democratic Party is choosing to frame its policies, and it is quite clear to me that the Democratic policies are dramatically more conducive to reducing abortions.

The great irony of the abortion debate is that some of the most vociferous voices against abortion have, through their conservative welfare policies, contributed to hundreds of thousands more abortions each year. I will grant that this promotion of abortions has been unwitting. Now that you and I know the truth of the matter on what really helps to reduce abortions, though, we need to vote November 4 on the basis of what really happens as a result of policy decisions--not on the basis of a political party's rhetoric. Deeds, not words, are what count.

3. The Democratic Party's new language about the importance of reducing abortions and its embrace of pro-life Democrats such as Pennsylvania governor Bob Casey appear to be genuine. For the first time that I can remember, the Democratic Party has this year recruited dozens of pro-life advocates to run for Congress and has actively supported them with millions of dollars in campaign funds. Pro-choice elements of the party may not be happy with this shift, but they have not prevailed.

Will the Democrats go the distance with this new-found approach to reducing abortions and supporting pro-life candidates, or will it turn out to be a cynical ploy designed to garner votes in 2008? It's impossible to predict the future, but I'm willing to give the Democrats a chance to demonstrate their sincerity. Part of the reason I'm willing to give them this chance is that I have not been particularly impressed with Republican leadership on the issue over the past 24 years; the gulf between Republican talk and Republican action has been quite acute. Even this year, McCain's attempt to select Tom Ridge or Joe Lieberman, staunchly pro-choice friends, as his vice presidential running mate do not make me think that a McCain administration would really care about the issue. For that matter, Sarah Palin never took any notable action on pro-life concerns during her tenure as governor of Alaska. She has behaved in an exemplary fashion in choosing to lovingly raise a Down's Syndrome baby, but this personal virtue has not had any corresponding public policy action.

My decision is made. Because I have concluded that an Obama presidency will be more pro-life (as properly defined) in action, he has earned my vote on November 4.