Ron Paul Revolution Continues…

Jason Jewell of Faulkner University reviews Mises: The Last Knight of Liberalism in the Journal of Faith and the Academy, Summer 2008:

That it took nearly thirty-five years after Mises's death for the first full-length critical biography of him to be published is an indication of how desperately mainstream economics wishes to ignore his work. But it must be said that Guido Hülsmann's Mises: The Last Knight of Liberalism, an exhaustively researched treatment of Austria's greatest economist, was worth the wait. It is the product of a decade of combing through obscure archives in several countries and a thorough study of the thought of both Mises and his contemporaries. (It is worth noting that we might still be waiting for this book's appearance had not the Ludwig von Mises Institute, which funded Hülsmann's research, decided to publish it itself instead of turning it over to Columbia University Press or Oxford University Press, both of which wanted the title, but with substantial textual cuts, an astronomical retail price, and a turnaround time of over a year. The Mises Institute's ability to publish the work much more quickly and at a lower cost is indicative of technological changes in the printing world and the growing market share of small, independent publishers.)

Hülsmann divides his text of over 1,000 pages into six chronologically-arranged sections tracing the logical phases of Mises's life: his youth and education; his early work in the so-called Austrian school of economics, which culminated in his first great treatise, The Theory of Money and Credit (1912); his service as an artillery officer in World War I and involvement in the postwar Austrian recovery, including the publication of his second great treatise, Socialism (1922); his most influential years as a teacher and economist in Austria in the 1920s and early 1930s; his years in Switzerland (1934-1940); and, finally, his sojourn in the United States, which included the publication of his third and fourth major treatises, Human Action (1949) and Theory and History (1957). Each of these six sections is subdivided into several chapters, some of which still run to well over fifty pages. Fortunately, Hülsmann has taken pity on his readers and provided helpful subheadings within each chapter which break his content into more digestible units.

An outstanding feature of Mises is Hülsmann's placing of his subject into a well-developed context. For example, he digresses to explain the status of Jews (Mises was Jewish) in Vienna society and Austria-Hungary more generally in the fin de siècle; he also devotes upwards of seventy-five pages to establishing the context of the Austrian school and the important forerunners of Mises, such as Karl Menger and Eugen von Böhm-Bawerk. This survey will help particularly a general readership not already familiar with the methodological differences between Austrian and mainstream neoclassical economics. By the time Hülsmann arrives at a discussion of The Theory of Money and Credit, the reader knows exactly why the work was immediately hailed as a critical breakthrough for its integration of monetary theory into the system of marginalist value theory pioneered by Menger decades earlier.

Republicans used to talk about reducing the welfare state. I remember when candidate Ronald Reagan in 1980 promised to end the Energy and Education departments. Some Republicans, who themselves have caught the entitlement-spending/social-engineering bug, now propose the creation of a federal department of families.

Indeed many Republicans, who once said they were against the welfare state, now brag they are better at running the welfare state than the Democrats. FULL ARTICLE

A message for investors: If the CEO of a company starts gaining status, watch out.

Economists have long examined the phenomenon of superstars — how people at the very top of their field earn far more than anyone else. Unfair as it seems, often the superstars’ big paychecks are justified. The differences between the best and the next best may be small, but the rewards to coming in first place are so great that baseball teams will pay up for the best pitchers, and software firms will pay up for the best engineers.

But when it comes to CEOs, superstars aren’t all they’re cracked up to be, argue Berkeley economist Ulrike Malmendier and UCLA Anderson School of Management economist Geoffrey Tate in a paper posted to the National Bureau of Economic Research’s Web site this week.

The economists looked at CEOs who won awards from publications like “Business Week” and other organizations. Then they found CEOs from companies that had performed comparably to the winners’ firms, but who hadn’t won an award. After receiving awards, CEOs extracted more money from their companies — mostly in the form of stock and options — than their nonwinning counterparts. But in comparison, their companies’ returns and stock performance suffered.

One problem might be that the award-winning CEOs got distracted from the business of running their companies. The economists found that the award-winners wrote more books. They also had lower golf handicaps. –Justin Lahart

The big airline-traffic declines haven’t started yet, despite the flood of bad news in the industry. In fact, some airlines this week reported a rise in June passenger traffic from a year ago, especially on international routes, as travelers made good on their summer vacation plans.

Early reports from U.S. airlines indicate that June passenger traffic for domestic flights was about the same as a year ago, with airlines posting gains on most international routes. Southwest Airlines Co., the biggest carrier of domestic passengers, said traffic edged up 0.7% in June, on a 5.7% increase in seat capacity. At Continental Airlines Inc. traffic rose just 0.1%, with domestic passenger traffic down about 4% from last year. International flying was up 2.5%, led by a 6.5% gain in transatlantic passenger traffic.

Encouraging news? Not really. The deep cuts in carriers schedules won’t come until after Labor Day, when most carriers are planning sharp cuts in their schedules, as they cope with the high cost of fuel and an expected fall-off in passenger demand amid the weak U.S. economy.

The International Air Transport Association said Wednesday that, according to its most recent data, global air traffic was up 6% in May, more than expected. The pace slowed from the 7.4% growth recorded in May of 2007. (Air traffic generally tracks the economy, and has been growing globally at about 5% per year.) Strong growth this year, despite economic worries, came mainly because U.S. airlines have been adding seat capacity on international routes, where flying is more profitable. Still, said IATA Chief Executive Giovanni Bisignani, with jet fuel prices up 87% from a year ago, airlines are facing operating costs that have risen by 20% to 30%. “Efficiency everywhere is imperative,” he said.

So far, U.S. carriers have announced cuts in unprofitable flights that add up to a reduction of about 5% of industry flying by the fourth quarter of this year. When fall flight schedules are finalized, 10% or more of flying will be eliminated. Analysts have said the industry needs to shrink by 20% to remain profitable over time.

“It isn’t the summer we’re worried about,” Jamie Baker at J.P. Morgan wrote in a research note. “We continue to expect material [passenger demand] slippage this fall, accompanied by increasingly aggressive capital-raising efforts from virtually all airlines.” –Ann Keeton

While financial markets are showing some signs of progress, it will still “take a substantial amount of time” to get the financial system fully back on its feet, Federal Reserve governor Frederic Mishkin said. That means the recovery as well as economic growth is likely to be sluggish, Mishkin said at an economics forum in Israel. Here are excerpts of his remarks:

Mishkin

Speaking as a central banker soon to return to the relatively tranquil ivory tower of Columbia University, I don’t think it is far off the mark to characterize the turmoil of the past year as one of the worst financial shocks that the United States has confronted since the Great Depression. However, although the U.S. economy clearly has slowed, aggressive actions by the Federal Reserve and other central banks as well as fiscal stimulus have helped us weather the storm better than we would have otherwise.

Had the Federal Reserve and other central banks not stepped in and acted with appropriate vigor to provide liquidity, the consequences for the real economy very likely would have been quite severe. Public liquidity, however, is only an imperfect substitute for private liquidity. Although it is critical that the Federal Reserve acts as a lender of last resort when financial stability is threatened, the efficient allocation of capital is best promoted by competitive financial markets and institutions. However, the flow of credit has been impeded by the developments I outlined previously. Financial markets and institutions will be able to resume their proper roles in allocating capital and supporting economic growth only when confidence in them recovers. And it is clear that financial institutions have some way to go toward reforming business models and practices. Large financial institutions in the United States and Europe have reported credit losses and asset write-downs amounting to more than $375 billion and have been working to repair their balance sheets by raising new capital from a wide range of sources. This process will take time, but at least we can see some progress.

We expect to strengthen the financial system with an array of regulatory changes, which includes strengthening of capital and liquidity rules, more disclosure requirements, closer supervision of the measurement and management of firm-wide risks, and steps to increase the transparency and resilience of the financial infrastructure. Private investors and other market participants clearly also have crucial roles to play in strengthening the financial system.

While the current turmoil is not yet over, we have seen some signs of improvement. We have learned much from this episode. I am confident that it will be studied for some time to come, and that we will forge a better financial system as a result.

Back in early 2000, Daniel Johnson, a professor at Colorado College, found himself with extra funding leftover from a separate project and with the help of an undergrad decided to use the resources to see whether economic variables could predict the medal winnings of each country in the upcoming summer Olympics.

Source: Daniel Johnson

“We were shocked at how accurate our predictions were,” he said. His model used five basic pieces of data for each participating nation: GDP per capita, total population, political structure (democratic, authoritarian, military or communist), climate (the number of frost days) and home-nation bias. “It’s a pretty simple model,” Mr. Johnson said.

His results and subsequent predictions weren’t too well-publicized — it was, after all, an exploratory project. But once the Games concluded and countries’ medal count showed a 95-96% correlation to his predictions (“We were so accurate we thought we’d made a mistake,” he says), people started to pay attention. Calls poured in, including calls from two nations “who shall remain nameless” asking him for advice to gear up for the next Games.

“It would be harmful for me to offer advice,” the self-proclaimed un-athletic professor jokes. “I don’t know, get more income per capita?”

For each summer and winter Olympics since 2000, Mr. Johnson’s medal count predictions have been remarkably accurate. And now, ahead of the Aug. 8 start to this summer’s Olympics in Beijing, Mr. Johnson has released his latest estimates. (Read about his 2006 predictions.)

The U.S. is expected to match its 2004 Athens medal count with a total of 103, though slip slightly to 33 gold medals from 35. Russia is predicted to finish second overall with 95 medals (and 28 golds).

But the big story this year is China, the host nation, expected to take home 89 total medals and a whopping 44 golds. The country could even beat the U.S. to become the top medal-earner overall, Mr. Johnson says. “China we badly underestimated in Athens and we could still be underestimating,” he said, adding that China’s expected 44 golds would match the U.S. tally when it hosted the 1996 Olympics in Atlanta, Ga.

Typically, host nations’ medal count is boosted by about 25 from its baseline performance, and China took home 32 golds in Athens. Plus, its GDP per capita has soared since the last Games. Adding to the posturing is that China is expected to be pushing quite hard for success in the Games as a testament to its arrival as a global superpower.

Mr. Johnson says what matters most isn’t comparing the take-home medal count of one nation compared to another but instead measuring it against the nation’s own expected performance, based on his metrics. “This is more of a benchmarking analysis than anything else,” he said, to gauge which nations are over- or under-performing their expected totals. Plus, the overall tally is obviously influenced by the size of each nation and how many athletes they train and send to the games. “One reason Botswana doesn’t win a lot of medals is they don’t send a lot of participants each year,” he said. –Kelly Evans

Cash-strapped U.S. consumers hurt by the weak economy continued to fall behind on credit payments during the first quarter, a trend one financial industry group said Wednesday it expects to continue.

The American Bankers Association said a variety of loan categories showed an increase in the percentage of accounts at least 30 days past due during the quarter, including personal loans, bank credit cards and mobile home loans. Transportation-related loans — those for recreational vehicles, marine craft, and direct auto loans — also saw an increase in consumers falling behind in payments.

“It was a tough quarter for some people,” ABA Chief Economist James Chessen said in a statement. “Faced with rising food and gas prices and little income growth, fewer resources have been available to manage debt.”

Of note was the sizable increase in the percentage of home equity lines of credit, or HELOC, that were considered delinquent. The ABA said 1.10% of HELOC loans were at least 30 days past due on a seasonally adjusted basis during the first quarter, up 0.14 percentage point from the previous quarter and compared with 0.60% delinquent in the first quarter of 2007.

Bank credit-card delinquencies showed a similar quarter-to-quarter increase, climbing to 4.51% in the first quarter from 4.38% at the end of 2007. The ABA said the five-year average delinquency rate for bank card loans was 4.4%.

hessen said to expect delinquencies to remain elevated in the near future, as “persistently high gas and food prices will eat away at overall resources.”

Some closed-end loan categories — those with a fixed loan amount and fixed repayment period — showed quarter-to-quarter improvement in delinquency rates during the quarter. Delinquencies on fixed home-equity loans fell to 2.34% in the first quarter from 2.39% at the end of 2007 , while the percentage of delinquent indirect auto loans — those made by a third party — fell four basis points to 3.09%. Both loan categories, however, showed a rise in the percentage of delinquent loans over the last 12 months.

The ABA said a composite ratio of eight closed-end installment loan categories fell to 2.62% in the first quarter, down from 2.65% in the fourth quarter, but up from 2.42% in the first three months of 2007. –Michael R. Crittenden

Private sector jobs dropped 79,000 in the U.S. in June, according to the ADP national employment report, released Wednesday by payroll giant Automatic Data Processing and consultancy Macroeconomic Advisers.

That’s above the expected decline of 20,000 seen in a Dow Jones Newswires survey. May’s report was revised to an increase of 25,000 from an increase of 40,000. “This month’s decrease in employment was broad-based across industrial sectors and suggests continued weakness in employment,” said Joel Prakken, chairman of Macroeconomic Advisers.

The ADP has been much stronger than the government’s payroll numbers in recent months. According to the Bureau of Labor Statistics, payrolls have fallen by 324,000 so far this year through May. ADP says 142,000 net jobs were created through May.

The ADP employment report provides a snapshot of the private sector job market just ahead of the official payrolls report, which this month will be published one day early — Thursday — due to the Independence Day holiday Friday. ADP’s report does not include government jobs, which in May rose by 17,000.

Job losses were led by the goods-producing sector, which saw employment decline by 76,000 last month, while employment in the services sector slipped 3,000, the first decline since November 2002, Prakken noted. Large businesses, with 500 employees or more, shed 51,000 jobs and medium-sized businesses 35,000 jobs in June. Small businesses, which employ less than 50 workers, created just 7,000 jobs.

Construction employment dropped 34,000 in June, posting its 19th consecutive monthly decline. The sector has lost 349,000 jobs, Prakken said, since its peak in August 2006. Employment in the financial sector declined 3,000 in last month.

The labor market has been weakening progressively this year as the economy struggles with the continued fallout from the subprime mortgage crisis and its ramifications for financial markets. Oil prices have continued their march upward. Employment in the manufacturing sector continues to decline. In May nonfarm employment dropped for the fifth month in a row and the unemployment rate spiked up to 5.5% from 5.0%.

June’s numbers won’t likely be much better. The Conference Board’s June consumer confidence survey showed pessimists who expect jobs to decline in the months ahead vastly outnumbering the optimists expecting gains.

TrimTabs Investment Research, which bases its data on income tax withholding numbers, calculates the number of jobs lost in June at 133,000, noting particular weakness in the last two weeks of June. According to the Challenger survey, employers announced plans to cut payrolls by 81,755 in June, bringing the second quarter total announcements to 275,292.

Economists expect nonfarm payrolls in June to decline by 55,000 and the unemployment rate to tick down to 5.4%. –Madeleine Lim

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, stressed continuing risks to growth over inflation worries in a speech Tuesday evening. Unlike many Fed presidents, Mr. Lockhart expects little improvement in growth in the second half of this year and says further deterioration in housing and financial markets is “entirely possible.” Though officials must be “especially vigilant” to inflation psychology, he does not expect persistently higher inflation through a wage-price spiral. Excerpts of his prepared remarks to a Georgetown University audience:

Lockhart

My base case forecast for the economy involves a stronger-than-expected first half of 2008 with growth of 1 to 2 percent but not much pickup in the second half. The drag of high energy costs, continuing financial market stress, and a still-declining housing sector may continue for a while with gradual improvement of growth in 2009. There is much uncertainty surrounding this outlook. More adverse alternative scenarios are entirely possible. Self-reinforcing progressive deterioration could continue in the housing market, in turn affecting the financial markets. And neither the financial markets nor the overall domestic economy is protected from surprise events around the world.

… [L]et me emphasize that I’m taking the recent inflationary pressures very seriously. A path to recovery involving stronger growth but with higher and persistent inflation would fit the old adage about winning the battle but losing the war. For that reason, in my view, the current set of circumstances calls for being especially vigilant and attentive to public and business psychology as regards costs and prices. Policy needs to react decisively against signs of the onset of formal compensating practices, including contracts, that treat inflation as a persistent reality — in other words, something that must be lived with. Such signs are not apparent, and I don’t expect them to materialize.

A roundup of economic news from around the Web.

Compiled by Phil Izzo