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Volume 11, Issue 1: January 5, 2009

  1. Israel’s War in Gaza May Backfire, Eland Argues
  2. History Refutes the Case for a Military Economic-Stimulus Package
  3. Is Regulation the Best Safeguard Against Investment Fraud?
  4. This Week in The Beacon

1) Israel’s War in Gaza May Backfire, Eland Argues

Israel’s incursion against Hamas in Gaza, like its war against Hezbollah in southern Lebanon two and a half years ago, may be tactically sound but strategically detrimental, according to Independent Institute Senior Fellow Ivan Eland.

In his latest op-ed, Eland writes: “After the disastrous wars on Lebanon in 1982 and 2006, in which Israel won militarily but ultimately lost politically, one would think Israel would have avoided yet another disastrous disproportionate military response in response to Hamas’s rocket attacks on southern Israel. But no such luck. If the definition of insanity is repeatedly doing the same thing and expecting a different result, Israel’s policy has to be deemed ‘crazy.’”

Hezbollah’s stature grew after the Israeli onslaught and withdrawal from Lebanon in 2006, Eland notes. If Hamas survives it too may enjoy a public-relations victory; but even if Israel wiped out Hamas completely, Arab anger would likely become even more virulent and thus reduce Israel’s security in the long run. Israel would therefore be better served, Eland suggests, by responding to Palestinian violence more proportionately and by ceding land acquired during the 1967 Israeli-Arab War.

“Is Israeli Policy Crazy?” by Ivan Eland (1/2/09)

Recarving Rushmore: Ranking the Presidents on Peace, Prosperity, and Liberty, by Ivan Eland

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2) History Refutes the Case for a Military Economic-Stimulus Package

Harvard University economist Martin Feldstein argued recently in the pages of the Wall Street Journal that increases in U.S. defense spending would be a sensible measure to help revive a moribund economy. Independent Institute Senior Fellow Robert Higgs, who has published extensively on the economics of U.S. military spending, takes issue with Feldstein’s claim: “That a man so drenched in professional honors and attainments would be peddling such long-discredited claptrap speaks volumes about the state of mainstream economics,” Higgs writes in a new op-ed.

Feldstein’s claim that increased government spending is needed to heal an ailing U.S. economy flies in the face of what happened at the end of World War II, according to Higgs. At that time, Keynesian economic theory predicted a deep and prolonged recession as government spending fell significantly. But contrary to predictions of gloom, economic normalcy resumed quickly after the war, as the private sector absorbed labor and capital released from government control. Historically speaking, Feldstein’s “military Keynesianism” doesn’t have a leg to stand on.

Continues Higgs: “It would seem that Feldstein, like nearly every other lion of the mainstream economics profession, failed to notice that by the very empirical-test standard the profession considers sacrosanct, this theory was decisively refuted by the events of 1945-47—or perhaps the mainstream believe that after their model had, as they see it, proved its mettle so beautifully on the upside from 1940 to 1945, its abysmal failure to predict from 1945 to 1947 need not be taken seriously.”

“Military Keynesianism to the Rescue?” by Robert Higgs (1/2/09)

Depression, War, and Cold War: Studies in Political Economy, by Robert Higgs

Arms, Politics, and the Economy: Historical and Contemporary Perspectives, edited by Robert Higgs

Crisis and Leviathan: Critical Episodes in the Growth of American Government, by Robert Higgs

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3) Is Regulation the Best Safeguard Against Investment Fraud?

Predictably, the Madoff financial scandal has prompted calls for stricter regulation of the investment industry, just as the collapse of the Manhattan Capital hedge fund led to calls for new anti-fraud regulations in 2004. If those regulations reduced fraud significantly, they would seem to be a reasonable solution to a real problem, but at least two assumptions underlying the SEC’s proposal in 2004 were dead wrong, financial journalist Chidem Kurdas argues in the winter 2009 issue of The Independent Review.

First, government regulators already possessed the ability to detect fraud at Manhattan Capital. Hence, the extra benefit of the SEC’s proposal was unclear. Was the SEC engaging in a bureaucratic cover-up or trying to justify a larger budget? Second, securities regulations themselves can increase the likelihood that an investment will turn sour: by lulling investors into thinking their funds are more secure than they really are, regulations reduce the incentive to closely monitor one’s investment.

Wishful thinking can undermine the diligence of investors and regulators alike, but there’s often a big difference in the consequences of their respective mistakes, according to Kurdas. When investors fail, they and other investors tend to learn from their mistakes. But when regulators fail, new regulations are proposed, and investors are not given stronger incentives to learn. “The conventional response of boosting government watchdogs magnifies the impact of their mistakes while reducing both the watchdogs’ and the public’s incentive to learn,” writes Kurdas. “It creates a vicious spiral of more regulation, regulatory failure, and even more regulation.”

“Does Regulation Prevent Fraud? The Case of Manhattan Hedge Fund,” by Chidem Kurdas (The Independent Review, Winter 2009)

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4) This Week in The Beacon

Below are the past week’s offerings from The Beacon, the web log of the Independent Institute. Please post your comments to the blog.

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