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The Lighthouse is the weekly email newsletter of the Independent Institute.
Subscribe now, or browse Back Issues.

Volume 10, Issue 28: July 14, 2008

  1. The Fed’s Recession
  2. American Neo-Puritanism
  3. Europe and Its Discontents
  4. Globalization and Culture
  5. Announcing The Beacon: The Blog of the Independent Institute

1) The Fed’s Recession

The cause of the current U. S. economic malaise—rising prices (except in housing), slow economic growth, and bearish stock market—isn’t hedge-fund speculators, OPEC, Congress’s spending spree, or Big Oil, as many politicians and pundits have argued. It’s the Federal Reserve, according to Independent Institute Research Fellow Dominick T. Armentano. Whether or not the United States is technically in a recession—in the narrow sense of having two consecutive quarters of falling gross domestic product—“the Fed’s recession” is an apt name for current economic conditions.

“Between 2001 and 2005, the Fed inflated the money supply far beyond what households were willing to save out of current income,” writes Armentano in a recent op-ed. The Fed’s easy money/low interest-rate policy triggered first a boom in housing, then a sharp rise in the price of commodities such as oil and gold, and, finally, price inflation for everything else. When Alan Greenspan’s Fed saw the error of its ways, it raised interest rates, thereby setting the stage for the bust in the housing market. Under the leadership of Fed Chairman Ben Bernanke, the central bank has recently cut rates—but this will only worsen inflationary expectations, according to Armentano.

“The enduring lesson here is that debasing the currency by inflating the money supply is always counterproductive,” Armentano continues. “The Fed should allow interest rates to rise according to market forces and permit the liquidation of remaining malinvestments. When crude oil prices start falling sharply, we will know that monetary policy finally makes sense.”

“Near Insanity at the Federal Reserve,” by Dominck T. Armentano (East Bay Business Times, 7/3/08) Spanish translation

More by Dominick T. Armentano

Purchase Money and the Nation State: The Financial Revolution, Government and the World Monetary System, edited by Kevin Dowd and Richard Timberlake.

“In Money and the Nation State, Dowd and Timberlake have organized a very interesting book that effectively addresses the important monetary and financial issues facing the global economy today. They usefully document the evolution of our modern monetary system and then develop a provocative agenda for change that should be examined at the highest levels of policy making.”
—Manuel H. Johnson, former Vice Chairman, Federal Reserve System

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2) American Neo-Puritanism

From the Puritan era to Prohibition to the “war on drugs,” America’s self-righteous busybodies have always tried to impose their brand of respectability on the rest of society. James E. Klein’s forthcoming book, Grappling with Demon Rum, examines how class consciousness shaped the temperance movement in early Oklahoma. In his latest essay, Independent Institute Senior Fellow Robert Higgs shows how those attitudes have persisted.

A core tenet of the puritanical obsession, Higgs notes, is an unshakable belief in the ability of governments to “reform” people in accordance with their rulers’ preferences.

“Combine this priggish insecurity and moral pomposity with the ideological appeal of the modern therapeutic state and the irresistible attractions of money and power to be seized when governments at every level throw their vicious violence onto the scales,” writes Higgs, “and you have an insoluble social problem—insoluble because the drugs are only a symptom of the underlying class warfare in which those with the bigger political battalions are constantly tempted to wage preemptive strikes against their ‘unruly’ neighbors, especially if those neighbors are black, brown, red, yellow, poor, foreign-born, adherents of an ‘alien’ religion, or in some other visible respect ‘strange.’”

“The ‘Respectable’ People Continue to Make War on the Rest of Us,” by Robert Higgs (7/11/08)

Purchase Against Leviathan: Government Power and a Free Society, by Robert Higgs

Read a detailed summary.

“Defenders of liberty need look no further than to Robert Higgs’ Against Leviathan: Government Power and a Free Society for intellectual ammunition. This hard-hitting book exposes the multitude of ways the growth of the welfare-warfare state threatens our freedom and prosperity.”
—Ron Paul, U.S. Congressman

Purchase Drug War Crimes The Consequences of Prohibition, by Jeffrey A. Miron

Read a detailed summary.

“In Drug War Crimes, Miron offers a powerful economic analysis detailing the irrationality of using the criminal law to prohibit drugs. He offers an equally powerful explanation of the terrible human harm caused by the drug war and advances the only practical alternative to the present failed policies.”
—Joseph D. McNamara, former Chief of Police of San Jose, Calif. and Kansas City, Missouri; Research Fellow, Hoover Institution

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3) Europe and Its Discontents

Has cosmopolitan Europe become xenophobic? It seems so. The European Parliament has cleared the way for member countries to imprison undocumented aliens for up to a year and a half and to deport their children. This measure rests largely on the economic fallacy that immigrants “steal” jobs from native-born workers, argues Independent Institute Research Fellow Alvaro Vargas Llosa in a new op-ed.

“If we compare employment figures relating to the early 1990s, when there were fewer immigrants, with those of the new millennium, when most of Europe’s 8 million illegal aliens settled on the continent, it is obvious that immigrants don’t steal jobs,” Vargas Llosa writes. “By expanding the economy with an additional supply of labor, immigration ultimately generates an even greater demand for workers. Which is exactly why Spain has much lower unemployment today—8.5 percent—than in the early ‘90s, when the rate was in double digits.”

Rather than halting illegal immigration, European governments should focus on enforcement of laws against theft and violence—and on reforming their overly generous welfare states. “The eruption of violence in some of the ghettos that surround Paris is perhaps the best argument for reforming the welfare state that has anesthetized Europe’s economy in recent years,” Vargas Llosa continues. “While the high tax burden and the stringent regulatory environment made it difficult to create businesses and hire new workers, the French welfare state gave many of those immigrants a free education, a free health service, unemployment benefits and the promise of an unearned pension. Giving them handouts but barring them from the possibility of work bred a dependency and resentment that led to their heinous acts of violence. The problem, then, was not immigration but the welfare state itself.”

“Europe’s Fear,” by Alvaro Vargas Llosa (7/9/08) Spanish translation

Purchase Lessons from the Poor: Triumph of the Entrepreneurial Spirit, edited by Alvaro Vargas Llosa.

Lessons from the Poor shows that the mightiest soldiers in the war on poverty are poor people themselves.... The message of the book is profoundly hopeful—as governments remove obstacles to entrepreneurship, there is much potential for the poor to lift themselves out of poverty.”
—William R. Easterly, Professor of Economics and Director, Development Research Institute, New York University

Purchase Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development, edited by Benjamin Powell.

“It is often taken for granted that where opportunities exist to improve people’s lives, they will be pursued. The splendid book Making Poor Nations Rich develops this insight from various angles, and through an elegant mix of theoretical observation and case studies.”
—Timur Kuran, Duke University

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4) Globalization and Culture

Critics of global capitalism denounced last week’s G8 summit in Tokyo for helping to foster environmental degradation, exploitative sweatshops, and Western economic domination over the developing world. Another complaint they have voiced increasingly in recent years is that globalization destroys culture, but according to Independent Institute Adjunct Fellow Art Carden, this characterization vastly distorts the complex give-and-take of cultural adaptation that globalization promotes.

Trade spurs cultural competition primarily by exposing people to a greater range of cultural products from across the globe. But trade in cultural products is not a winner-takes-all contest: it creates niche markets “in which everyone’s preferences, no matter how esoteric, can be satisfied,” writes Carden. Following John Stuart Mill, Carden also credits international commerce with helping to promote harmony between countries. Even that global scourge of technology and commerce—internet porn—seems to have some positive consequences in reducing violence: Carden cites research by Clemson University economist Todd Kendall showing that “rates of sex crimes fell as internet pornography became more widespread.”

“In the final analysis, we should not fret about the alleged moral and cultural depravity of modernity,” Carden concludes. “Rather, we should maintain and preserve the processes and institutions conducive to the development of art and culture.”

“Does Globalization Destroy Culture?” by Art Carden (7/8/08)

Also see:

“Globalization and Cultural Diversity: Friends or Foes?” An Independent Policy Forum featuring Tyler Cowen (5/27/03)

“Can Protectionism Ever Be Respectable? A Skeptic’s Case for the Cultural Exception, with Special Reference to French Movies,” by Jacques Delacroix with Julien Bornon (The Independent Review, Winter 2005)

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5) Announcing The Beacon: The Blog of the Independent Institute

Did you know that the Independent Institute has a blog? Now you can obtain news and commentary from the Independent Institute several times a week by visiting The Beacon.

Posts over the past week include historian David Beito on Barack Obama’s foreign-policy shift and Independent Institute President David J. Theroux on similarities between the U.S. Department of Homeland Security and the police state of the People’s Republic of China. Other recent posts discuss the legacy of the late Sir John M. Templeton, the Fourth Amendment, and ballot access in North Carolina.

Please visit. Each Beacon blog post is open for comments.

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