Mark Skousen, Author at MSKOUSEN.COM

Las Vegas: America’s Playground

July 28, 1999 By Mark Skousen Leave a Comment

Forecasts & Strategies
Personal Snapshots

by Mark Skousen

“Americans are, above all, a problem-solving people.”
–Paul Johnson, A History of the American People

The transformation of Las Vegas is a perfect example of why the United States of America is still the greatest country in the world. After World War II, developers created in the middle of the Nevada desert a sleazy, tacky town devoted to gambling, shows and sex. But in the past few years, entrepreneurs have created a brand-new Vegas.

Last month, I spent two fun-filled days at the Mirage Resort without gambling. The new Las Vegas offers a wide variety of services for the non-gambler: sports and swimming facilities, great restaurants and buffets, giant IMAX theatres, excellent golf courses, Wet’n Wild water theme park, several spectacular roller-coaster rides, shopping malls (including the sumptuous Forum Shops next to Caesar’s Palace), and a myriad of other forms of entertainment. As a result, Las Vegas is becoming America’s playground.

Another example of urban renewal is New York’s Times Square and 42nd Street. corporations such as Walt Disney have joined with the city to tear down the seedy side of Times Square and re-create a safe environment for local New Yorkers and tourists.

I’m reminded of one other example: Chicago’s Rush Street used to be a crime-infested section of town. Over the past few years, the city fathers have cleaned up the district, and now it’s a hot spot for night life for young people and college students.

PAUL JOHNSON’S NEW BOOK ON AMERICA

The eminent British historian Paul Johnson says, “Americans are, above all, a problem-solving people.” The transformation of Las Vegas, New York’s Times Sauare and Chicago’s Rush Street proves it. It’s our nature to solve problems. Under Reagan, U.S. fought to reduce interest rates, inflation and marginal tax rates.

Under Clinton, the deficit has come down, welfare has been reformed, and crime fallen. And much more can be done. As Johnson states, Americans “will attack again and again the ills in their society, until they are overcome or at least substantial redressed.”

If you want to read an upbeat, one-volume history of the U.S., there is no better source than Paul Johnson’s new book, A History of the American People ($35 or less, available at all major bookstores, on the Internet at www.Amazon.com or through Laissez Faire Books, 800/326-0996). It is a sheer delight to read. Johnson does not hide his admiration, his “labor of love,” of this “most remarkable people,” “this greatest of human adventures,” and this “human achievement without parallel”–the United States of America.

This one-volume history is fresh and exciting to read, not the stale history you may have read when you were a student. Johnson covers material not normally found in the history books, such as the impact of religion and art on American life. Johnson makes you proud of being an American again.

Johnson says, regarding the history of America, “We need to retell it.” Equally, we Americans need to reread it!

No More Political Labels, Please

July 5, 1999 By Mark Skousen 1 Comment

LIBERTY Magazine

By Mark Skousen

A rose is a rose is a rose. But a conservative is a libertarian is a liberal. When labels confuse rather than clarify, they should be dropped.

RESOLVED: That we use political labels as little as possible when describing
people’s ideologies. When somebody asks me, “Are you a liberal? Conservative? Libertarian? I answer, “What’s the issue?” Categorizing someone’s ideas as either “liberal” or “conservative” is often used to avoid real thinking about actual issues.

I refrain from referring to political positions as either “left” and “right” in my writing. I generally use the word “liberal” to describe a person’s spending habits, as in the case of a “liberal” spender–one who is generous or possibly overly lavish. I also occasionally refer to a person who is open-minded and tolerant of other people’s views as being “liberal” minded. “Conservative” on the other hand, seems best used in the context of investing–I call a person who is prudent and moderate in his choice of investments a “conservative investor” (as opposed to “speculative”)–though it also seems reasonable to describe one who wants to conserve time-honored values as a “conservative.” Not surprisingly, I like to be called “liberal” or “conservative” depending on the issue, the action or the mind-set. I dislike being called either if it is a method for throwing me into a convenient ideological box.

The three main reasons why labels are best avoided in political discussions are: (1) Labels are often an inaccurate description of a person’s or group’s views. (2) Labels often become pejorative terms used in character assassination (3) Labels put people into political boxes and keep them there, preventing individuals from objectively considering alternative opinions and changing their minds.

Obsolescence, Left and Right

The terms “left” and “right” came into use after the French revolution. In the French National Assembly, the “liberals” sat to the left of the president’s chair, the “moderates” in the center, and the “conservatives” to the right. Those on the left were designated “liberals” and “radicals” because they wanted to make major reforms in politics and the economy. Their opponents on the right became “conservatives” and “reactionaries” because they were aristocratic nationalists who wanted to return to the status quo of the ancien regime. Those in the center were the “moderates” who were looking for a compromise. This political spectrum has often been used in describing the signers of our Declaration of Independence. Still, though Thomas Jefferson has often been called a classical liberal, calling him a left-winger seems out of place.

This dichotomy may have made sense during the American and the French revolutions. But once the principles of freedom and constitutional law were established (in America, at least), the “liberals” gradually became “conservatives” by defending the new status quo of liberty and limited government. Turnabout being fair play, in the 20th century the collectivists who pushed to eliminate economic freedom and expand the role of the state became the “liberals” or “progressives.” Having adopted the favorable titles of “progressive,” “modern” and “advanced,” they scorned the opposition as “right-wing” and “reactionary.” Thus, in the twisted world of political labeling; what the 19th century liberals supported–free enterprise capitalism and laissez faire government–the 20th-century liberals opposed by pushing for big government and interventionism in the marketplace.

Label confusion has reigned ever since, and the political spectrum has become a rhetorical version of Abbott and Costello’s “Who’s on first?” routine. The 19th century liberal ideals became the policies of some (but by no means all) 20th century conservatives.

Marxists, Communists and other international collectivists became the “radical left,” while the Fascists of the 1930s in Italy and Nazi Germany were designated “right wingers” simply because they opposed the “Reds.” But the only difference in their politics was nationalism vs. internationalism. The fascists were every bit as collectivist as Stalin.

Believers in economic and political liberty had a hard time dealing with label stereotypes in the 1950s. They opposed the New Deal and wanted a return to laissez faire, so they were dubbed “reactionary conservatives.” Because they were ardent “anti-Communists,” they were linked closely with the Fascists and Nazi-era “rightists.” Many conservatives responded by saying they were “old fashioned liberals,” but this didn’t mean anything to anyone in the torrent of nebulous labels.

Growing up in the 1950s and 1960s, I resented these and other pejorative labels. It was nearly impossible to convince anyone of the virtues of free enterprise capitalism, laissez faire government, and opposition to communism if my views were always called “reactionary,” “old fashioned’ and “Neanderthal.” The conservatives responded in kind by calling the New Deal liberals “radicals,” “pseudo progressives’ and “communist sympathizers.” Only the “moderates” sounded “responsible,” and depending on their position on an issue, they usually got hit by traffic going both ways. There was a lot of bad blood, and very little sharing of ideas. Conservatives refused to read John Kenneth Galbraith and The Washington Post, and liberals eschewed Milton Friedman and National Review.
In the 1970s and 1980s, the labels became more complex and less enlightening as the political stereotypes began to crack. We now witness dictatorships of the left and the right, market economies of the left and right, revolutions of the left and right, and totalitarianisms of the left and right. We have socialist left-wing parties privatizing public services, and conservative rightwing governments imposing tariffs and higher taxes. We have extreme liberal Democrats supporting deregulation of the airlines and decontrol of natural gas. We have the nation’s most liberal newspaper, The New York Times, coming out against the minimum wage. We have a right-wing anarchocapitalist endorsing radical left-wing land reform in Latin America and legalization of drugs in the United States.

In the Middle East we have right-wing Christians killing left-wing terrorists. Soviet opponents of perestroika and glasnost are called “conservatives” by the American press, as are South African racists. Political analysts are having a devil of a time labeling an old “liberal” publication, The New Republic, because its views are no longer predictable. Politicians are now starting to run as individuals and not as members of a political party. And what’s this about conservative lobbyists joining hands with liberal lobbyists to fight IMF funding? None of this makes sense if we insist on dividing the world into the standard left-right divisions.

But, alas, instead of scrapping the entire phony nomenclature, everyone seems to be making up more labels. There’s the New Right and the Old Right, the Southern Conservative Democrats and the Northern Liberal Democrats, the Neo-Conservatives and the Paleo-Libertarians, the Post-Keynesians, the Neo-Marxists, and the Neo-Liberals. The list goes on and on, growing like topsy and confusing everyone except the most stalwart who spend all day reading everything from every point on the political compass.

Fortunately, some editors and publishers have recently recognized the misleading and counterproductive nature of labeling and have largely discarded it. Reason magazine is one example. Eschewing ad hominem political tags, Reason analyzes issues on their own merits, not based on who espouses them.

For the Scrap-Heap of History

It’s time to make a change in our political lexicon. The national press and the political analysts need to stop using the outdated and misleading leftwing liberal/right-wing conservative dichotomy. When someone’s philosophy is labeled and compartmentalized, thinking stops and name-calling begins. Once an economist is labeled a Marxist, only the Marxists listen. When a political analyst writes a column called “On the Right,” no one except the “right-wing” faithful reads it. Dividing ideology into camps on two sides of the political spectrum tends to elevate both sides to an equal status, as if both policies hold equal sway and are equally justifiable. Then the moderates whisper, “Perhaps we should compromise!” We are left with the erroneous impression that “the extreme left is just as bad as the extreme right.” Categorizing philosophies leads toward political nihilism and away from the desire to find the truth.

In short, it is high time that political pundits and the national media put away their cold-war mentality and endorse a new standard where each person stands on individual merit and not in some political box. Left and right, liberal and conservative, radical and reactionary–all are words of the past that divide people. I say scrap them. When adjectives are absolutely necessary, let’s at least try to be more specific. Use adjectives and nouns that are meaningful, accurate and unbiased. If we don’t, the war of political ideas will be decided on the basis of an axiom of my colleague, Larry Abraham: “Those who control the adjectives win.”

The Battle for Diamond Head: A Case of Market Failure?

April 30, 1999 By Mark Skousen Leave a Comment

Economics on Trial
THE FREEMAN
APRIL 1999

The Battle for Diamond Head: A Case of Market Failure?

by Mark Skousen

“Hawaii’s great and beloved landmark … is too precious an asset to be sacrificed.”
—Honolulu Advertiser editorial ( 1967)

Last month I addressed the theory of entrepreneurial error in conjunction with the year 2000 computer problem. This month I raise another issue dealing with the possibility of market failure: Should government protect a local landmark from commercial development? Are zoning laws and other building restrictions necessary in a free society to stop “greedy” speculators and “fast buck” promoters from creating “urban sprawl” and unsightly commerce?

Recently my family and I spent a few days in Hawaii. Walking along famed Waikiki Beach, I couldn’t help noticing how a string of high-rise apartments and hotels halted abruptly along the Diamond Head shoreline.

The Story of Diamond Head

Why the sudden abatement? In the late 1960s Diamond Head was the center of a fierce debate between the developers and the conservationists. Following statehood in 1959, tourists flocked to this paradise of the Pacific, and Waikiki Beach, sandwiched between downtown Honolulu and Diamond Head, became the hottest real estate market for resort hotels and condominiums. Honolulu newspapers ran photos of a rapidly disappearing view of Diamond Head, and local citizens became alarmed. A grassroots organization, Save Diamond Head Association, was formed in 1967 and demanded a halt to building any more skyscrapers along the shoreline.

Why save Diamond Head? In the nineteenth century, British sailors found crystalline rocks on its slopes and mistook them for diamonds. Conservationists argue that Diamond Head is a symbol of paradise, the mid-Pacific’s most famous beacon. One visitor wrote during the debate, “I found Diamond Head, which has been declared a state monument, in imminent danger of turning into a monument for the fast buck, its craggy profile threatened with disappearance behind a palisade of tall concrete buildings.”1

Here’s the conflict: Hawaii’s natural beauty and delightful climate attracted millions of new tourists in the 1960s. The tourist boom in turn created a rush in real estate development. But the high-rise buildings along with enormous billboards-were blocking out the natural beauty that attracted tourists in the first place. What to do?

The fight between the developers and environmentalists came to a head in December 1967. After a packed four-hour public hearing, five members of the nine-member city council voted against further commercial development. The other four members abstained. In 1968, Diamond Head was designated an official national landmark.

Is There a Market Solution?

Could the market properly plan for a growing Hawaii without destroying its natural beauty and aloha spirit, or must government intervene?

Sometimes the market faces a difficult choice between two conflicting goals. In the case of Diamond Head, it was the battle between development and a landmark symbol. Unfortunately, it’s events like these that give capitalism a bad name. Could private developers have done better? Could it have been in their own self-interest to limit the height of hotels and condos and preserve Oahu’s historic skyline while still making a profit? Can progress and profit go together?

What do free-market economists have to say about zoning and building codes? In The Constitution of Liberty, FA Hayek notes that local governments have often done a poor job of city planning, sometimes amounting to “administrative despotism.”2 He cites rent controls, zoning regulations, and excessive taxation as examples. Nevertheless, he does support “some regulation of buildings permitted in cities,” including minimum building codes.3

Economists have often been critical of zoning laws as an infringement of property rights. In a recent book on the subject, Tom Bethell asserts that zoning laws hurt the poor, cause urban sprawl, and invite political corruption. He points to Houston as an example of a dynamic city which has grown without zoning regulations.4

If conservationists really wanted to save Diamond Head, why didn’t they buy the shoreline property and keep developers out? Instead of running to the City of Honolulu, Save Diamond Head Association should have raised the capital to stave off builders. Since 1953, Nature Conservancy, a nonprofit environmental organization with 900,000 members, has been buying and preserving land and habitats (now totaling over 10 million acres in the United States). Of course, such a plan would have been costly, with Waikiki property prices around $1 million an acre in 1967-68.

Property rights should include the right to be left alone from noise and air pollution. Should these rights also include the right of original owners to view Diamond Head?

1. Kenneth Lamott, Holiday Magazine, July 14, 1967, quoted in Helen Geracimos Chapin, Shaping History. The Role of Newspapers in Hawaii (Honolulu: University of Hawaii Press, 1996), p. 268. Chapter 26 of Chapin’s book, “Above Ground: The Battle for Diamond Head,” summarizes the history of this conflict through the eyes of two local newspapers, the Star-Bulletin and the Advertiser.

2. F.A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960), p. 355. Hayek devotes an entire chapter to “Housing and Town Planning,” an area often ignored by economists.

3. Ibid., pp. 35457.

4. Tom Bethell, The Noblest Triumph: Property and Prosperity Through the Ages (New York: St Martin’s Press, 1998), pp. 297-99.

Y2K and Entrepreneurial Error

March 28, 1999 By Mark Skousen Leave a Comment

ECONOMICS ON TRIAL
The Freeman
March 1999

by Mark Skousen

“No businessman in the real world is equipped with perfect foresight; all make errors.”
–Murray N. Rothbard (1)

Over the past year, I’ve been involved in a series of debates over the impact of the Year 2000 Problem, the potential collapse of computers–and perhaps the economy–owing to the fact that since computer programs use two digits instead of four to indicate years, the year 2000 will be treated as 1900. On the one extreme is Gary North, who claims that the Y2K problem is so serious that it will gravely disrupt society for years. On the other end is Harry Browne, who says that enlightened entrepreneurs will avert a worldwide disaster.

What’s interesting about the debate is that free-market advocates are found on both sides. North and other naysayers focus on the propensity of market players to make entrepreneurial errors and engage in shortsightedness. Browne and other optimists stress the entrepreneurs’ ability to solve problems, especially when so much is at stake. (Some businesses could go bankrupt if they don’t address the Y2K problem.) In short, the market works.

My concern is that the “market always works” camp comprises true believers who blindly think the market can solve all problems almost automatically. They seem to fit into the rational equilibrium-always school of economics where entrepreneurial misjudgment, imperfect knowledge, and uncertainty play little or no role.

MARKETS ARE NOT PERFECT

The Austrian economists teach otherwise. Israel Kirzner, noted for his studies on entrepreneurship, attacks the model of perfect efficiency as “wholly unsatisfying.” He adds that, “It is most embarrassing to have to grapple with the grossly inefficient world we know with economic tools that assume away the essence of the problem with which we wish to deal.” (2)

The market is characterized by profit and loss, success and failure, certainty and uncertainty. There is always room for improvement, and the entrepreneur’s role is to eliminate errors and inefficiencies. Thus, it should come as no surprise that many businesses and financial institutions are making significant headway in fixing their computer programs to avert the Y2K problem.

On the other hand, it would be folly to ignore that many businesses have budgeted insufficient time and money to fix or replace their computers. Evidence is growing that most firms, especially small businesses, are not doing enough. Many major corporations and government agencies, both here and abroad, admit that they only have time to fix critical systems. The rest will fail on January 1, 2000.

Free-market advocates sometimes place too mcuh faith in the market’s ability to solve problems and ignore ubiquitous error in an entrepreneurial economy. Think about all the ways people make mistakes every day in the marketplace: Investors buy the wrong stock. Businessmen declare bankruptcy. Marriages break up. Consumers over-spend and over-eat, especially during the holidays. Kids fail to do homework. Drivers have accidents. Ships sink. Builders don’t meet deadlines. Economists make false predictions. Entrepreneurs cut corners, deceive customers, and embezzle funds. Economic failure, stupidity, and incompetence are common to human nature. As Ludwig von Mises noted, “To make mistakes in pursuing one’s ends is a widespread human weakness.” (3)

The decision by computer programmers in the early 1950s to use two digits instead of four is a classic example of individual shortsightedness. To save space, they cut corners, and now, a generation later, the whole world is paying a heavy price for their blunder.

CLUSTER OF ERRORS

In most cases, entrepreneurial error is random, unpredictable, and self-correcting. As Murray Rothbard states, “As a rule only some businessmen suffer losses at any one time; the bulk either break even or earn profits.” (4)

There are, however, cases of widespread error–mistakes that affect virtually every part of an industry or economy. Rothbard, in standard Austrian school fashion, explained depressions in terms of “a sudden general cluster of business errors.” (5) Of course, the Austrians attribute those errors and the business cycle in general to monetary inflation by government.

Yet can’t error with far-reaching harm occur in the market without government being responsible? Austrian economists don’t normally discuss this possibility, but it undoubtedly exists. Market decision-makers have made shortsighted blunders that have had universal consequences. Examples of such errors include asbestos in construction, pesticides in agriculture, and air and water pollution in manufacturing. The Y2K computer glitch is a particularly tough challenge because it is universal and time-sensitive. In most cases, the deadline cannot be postponed.

THE MARKET’S SELF-CORRECTING MECHANISM

Fortunately, the market has a built-in mechanism to minimize mistakes and entrepreneurial error. The market penalizes mistakes and rewards correct behavior. Business leaders know that computer problems can destroy their business; fixing the Y2K bug will avoid losses and may even be profitable. They are willing to pay the price. As Kirzner has said, “Pure profit opportunities exist whenever error occurs.” (6) At the same time, the market will severely penalize businesses that have ignored the Y2K problem or have procrastinated.

Followers of free markets should take note: markets may be self-correcting, but they are not all-seeing.

FOOTNOTES

1. Murray N. Rothbard, Man, Economy, and State (Nash Publishing, 1970), p. 746.

2. Israel M. Kirzner, “Economics and Error,” in Perception, Opportunity, and Profit (University of Chicago Press, 1979), p. 135.

3. Ludwig von Mises, Theory and History (Yale University Press, 1957), p. 268. Mises adds that “Error, inefficiency, and failure must not be confused with irrationality. He who shoots wants, as a rule, to hit the mark. If he misses it, he is not ‘irrational’; he is a poor marksman.”

4. Murray N. Rothbard, America’s Great Depression, 4th ed. (Richardson & Snyder, 1983 [1963]), p. 16.

5. Ibid.

6. Kirzner, op. cit., pp. 132-33.

Who is the Greatest Economist of the 20th Century?

February 5, 1999 By Mark Skousen 2 Comments

WHO IS THE GREATEST ECONOMIST OF THE 20TH CENTURY?

“But half a century later, it is Keynes who has been toppled and (_________________), the fierce advocate of free markets, who is preeminent.” –Daniel Yergin and Joseph Stanislaw, The Commanding Heights, p. 15.

Who deserves to be the greatest economist of the 20th century? This question was debated at my session of the annual American Economic Association meetings in New York City last month. We polled the audience of about 150 economists, and John Maynard Keynes won. Keynes revolutionized the economics profession by contending that the free-market economy is inherently unstable and requires government intervention (through deficit spending, progressive taxation and monetary inflation) to keep it on the path of full employment.

Of course, the audience may have been biased since the topic of the session was on Keynes’s most famous proponent, Paul A. Samuelson. Still, Keynesian economics–the economics of government interventionism at the macro level–is very much alive, and therefore, Keynes must be regarded as the most influential economist of the 20th century.

FRIEDMAN’S COUNTERREVOLUTION

However, influence is not the same as greatness. Milton Friedman came in second in the informal poll and in terms of greatness, he exceeds Keynes. Time magazine’s editor-in-chief, Norman Pearlstine, gives the nod to Friedman as the “economist of the century” (Time, December 7, 1998). And in a recent study of living economists most frequently cited in college textbooks, Milton Friedman came in #1 by a landslide. He was cited in all the textbooks. (Paul Samuelson came in a distant #12.) Friedman’s contributions are many: He demonstrated that government, not free enterprise, caused the Great Depression (through a disastrous monetary policy); he showed that monetary policy was more powerful than fiscal policy; he made the case against progressive taxation, deficit spending and monetary inflation. He won the Nobel Prize in 1976 for these efforts. His best books are Capitalism and Freedom and Free to Choose (both still in print, available through Laissez Faire Books, 800/326-0996).

Sharing the Prize

Milton Friedman should also share the prize of greatest economist with Friedrich A. Hayek, the Austrian who studied under Ludwig von Mises. As Yergin notes in The Commanding Heights (quoted above), Hayek made a convincing case against socialist central planning in The Road to Serfdom and other anti-socialist works. He developed a powerful tool for explaining business cycles, known as Austrian capital theory. His theory of knowledge and entrepreneurship is vital in today’s global economy. He rightly won the Nobel Prize in 1974.

So my vote goes to both Friedman and Hayek.

WHO DO YOU CONSIDER THE GREATEST INVESTOR?

As we approach the end of the 20th century, scholars are compiling lists of the greatest writers, politicians, entrepreneurs and scientists of this remarkable century.

I know who gets my vote for greatest investor: Warren Buffett. Not only has he consistently beaten the market, but his optimism about America has paid off handsomely. Too bad he doesn’t own any Internet stocks. He could have been the world’s first trillionaire!

R.I.P., THE SUPERBOWL INDICATOR

I bid a fond farewell to the Superbowl Indicator. Every so often, market players get caught up in an irrational indicator that allegedly makes it easy to predict the markets. In the 1970s it was the soybean-silver ratio. In the 1980s it was the Kondratieff Cycle. And in the 1990s it was the Superbowl Indicator. Supposedly, if the National Football Conference (NFC) won the Superbowl, stocks would rise; if the American Football Conference (AFC) won, stocks would fall. Amazingly, this indicator worked for decades. Throughout the 1990s, the NFC team won and the stock market rose. Then last year the Denver Broncos of the AFC won, and many stock market pundits exited the market or sold short. Big mistake–the S&P 500 rose 28% in 1998! And thus ended once and for all the Superbowl Indicator. Good riddance, and may it be replaced by sound strategies based on free-market economics!

A Golden Comeback, Part III

November 29, 1998 By Mark Skousen 1 Comment

Economics on Trial THE FREEMAN NOVEMBER 1998

by Mark Skousen

“A free gold market … reflects and measures the extent of the lack of confidence in the domestic currency.”
— LUDWIG VON MISES

In the past two columns, I’ve highlighted the uses and misuses of gold. Despite occasional calls for a return to a gold standard, the Midas metal has largely lost out to hard currencies as a preferred monetary unit and monetary reserve. Most central banks are selling gold.

Gold has also done poorly as a crisis hedge lately. It has not rallied much during recent wars and international incidents. U.S. Treasury securities and hard currencies such as the German mark and Swiss franc have become the investments of choice in a flight to safety.

Nor has gold functioned well as an inflation hedge over the past two decades. The cost of living continues to increase around the world, yet the price of gold has fallen from $800 an ounce in 1980 to under $300 today.

What’s left for the yellow metal? I see two essential functions for gold: first, a profitable investment when general prices accelerate and, second, an important barometer of future price inflation and interest rates.

Gold as a Profitable Investment

Since the United States went off the gold standard in 1971, gold bullion and gold mining shares have become well-known cyclical investments. The first graph demonstrates the volatile nature of gold and mining stocks, with mining shares tending to fluctuate more than gold itself. The gold industry can provide superior profits during an uptrend, and heavy losses during a downtrend.

One of the reasons for the high volatility of mining shares is their distance from final consumption. Mining represents the earliest stage of production and is extremely capital intensive and responsive to changes in interest rates.1

Gold as a Forecaster

Gold also has the amazingly accurate ability to forecast the direction of the general price level and interest rates. In an earlier Freeman column (February 1997), I referred to an econometric model I ran with the assistance of John List, economist at the University of Central Florida. We tested three commodity indexes (Dow Jones Commodity Spot Index, crude oil, and gold) to determine which one best anticipated changes in the Consumer Price Index (CPI) since 1970. It turned out that gold proved to be the best indicator of future inflation as measured by the CPI. The lag period is about one year. That is, gold does a good job of predicting the direction of the CPI a year in advance. (All three indexes did a poor job of predicting changes in the CPI on a monthly basis.)

Richard M. Salsman, economist at H. C. Wainwright & Co. in Boston, has also done some important work linking the price of gold with interest rates. As the second graph demonstrates, the price of gold often anticipates changes in interest rates in the United States. As Salsman states, “A rising gold price presages higher bond yields; a falling price signals lower yields. … Gold predicts yields well precisely because I~ it’s a top-down measure. It is bought and sold based purely on inflationdeflation expectations; thus it’s the purest barometer of changes in the value of the dollar generally.”2

In sum, if you want to know the future of inflation and interest rates, watch the gold traders at the New York Mere. If gold enters a sustained rise, watch out: higher inflation and interest rates may be on the way.

1. For further discussion regarding the inherent volatility of the mining industry, see my work The Structure of Production (New York: New York University Press, 1990), pp. 290-94.

2. Richard M. Salsman, “Looking for Inflation in All the Wrong Places,” The Capitalist Perspective (Boston: H. C. Wainwright & Co. Economics),October 15, 1997. For information on his services,call (800)655-4020.

A Golden Comeback, Part II

October 29, 1998 By Mark Skousen Leave a Comment

Economics on Trial THE FREEMAN OCTOBER 1998

by Mark Skousen

“Gold maintains its purchasing power over long periods of time, for example, half-century intervals.”
Rou JASTRAM, The Golden Constant1

In last month’s column, I focused on gold’s inherent stability as a monetary numeraire. Historically, the monetary base under gold has neither declined nor increased too rapidly. In short, it has operated very closely to a monetarist rule.

What about gold as an inflation hedge? In this column, I discuss the work of Roy Jastram and others who have demonstrated the relative stability of gold in terms of its purchasing power–its ability to maintain value and purchasing power over goods and services over the long run. But the emphasis must be placed on the “long run.” In the short run, gold’s value depends a great deal on the rate of inflation and therefore often fails to live up to its reputation as an inflation hedge.

The classic study on the purchasing power of gold is The Golden Constant: The English and American Experience, 1560-1976, by Roy W. Jastram, late professor of business at the University of California, Berkeley. The book, now out of print, examines gold as an inflation and deflation hedge over a span of 400 years.

Two Amazing Graphs

The accompanying two charts are from Jastram’s book and updated through 1997 by the American Institute for Economic Research in Great Barrington, Massachusetts. They tell a powerful story:

First, gold always returns to its full purchasing power, although it may take a long time to do so; and

Second, the price of gold became more volatile as the world moved to a fiat money standard beginning in the 1930s. Note how gold has moved up and down sharply as the pound and the dollar have lost purchasing power since going off the gold standard.

In my economics classes and at investment conferences, I demonstrate the long-term value of gold by holding up a $20 St. Gaudens double-eagle gold coin. Prior to 1933, Americans carried this coin in their pockets as money. Back then, they could buy a tailormade suit for one double eagle, or $20. Today this same coin–which is worth between $400 and $600, depending on its rarity and condition-could buy the same tailor-made suit. Of course, the double-eagle coin has numismatic, or rarity, value. A one-ounce gold-bullion coin, without numismatic value, is worth only around $300 today. Gold has risen substantially in dollar terms but has not done as well as numismatic U.S. coins.

Gold as an Inflation Hedge

The price of gold bullion was over $800 an ounce in 1980 and has steadily declined in value for nearly two decades. Does that mean it’s not a good inflation hedge? Indeed, the record shows that when the inflation rate is steady or declining, gold has been a poor hedge. The yellow metal (and mining shares) typically responds best to accelerating inflation. Over the long run, the Midas metal has held its own, but should not be deemed an ideal or perfect hedge. In fact, U.S. stocks have proven to be much profitable than gold as an investment.

The work of Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania, has demonstrated that U.S. stocks have far outperformed gold over the past two centuries. Like Jastram, Siegel confirms gold’s long-term stability. Yet gold can’t hold a candle to the stock market’s performance. As the chart, taken from his book, Stocks for the Long Term, shows, stocks have far outperformed bonds, T-bills, and gold. Why? Because stocks represent higher economic growth and productivity over the long run. Stocks have risen sharply in the twentieth century because of a dramatic rise in the standard of living and America’s free-enterprise system.

One final note: Stocks tend to do poorly and gold shines when price inflation accelerates. As Siegel states, “Stocks turn out to be great long-term hedges against inflation even though they are often poor short-term hedges.”2 Price inflation is the key indicator: When the rate of inflation moves back up, watch out. Stocks could flounder and gold will come back to life. In my next column, I’ll discuss the ability of gold to predict inflation and interest rates.

1. Roy W. Jastram, The Golden Constant: The English and American Experience, 1560-1976 (New York: Wiley & Sons, 1977), p. 132.

2. Jeremy J. Siegel, Stocks for the Long Run: A Guide to Selecting Markets for Long-Term Growth (Burr Ridge, Ill.: Irwin, 1994), pp. 11-12.

TEXTBOOKS TAKE FREE-MARKET TACK But Many Welfare-State Myths Still Are Taught

October 22, 1998 By Mark Skousen Leave a Comment

NATIONAL ISSUE — Investor’s Business Daily

TEXTBOOKS TAKE FREE-MARKET TACK But Many Welfare-State Myths Still Are Taught

Date: 10/22/98
Author: Michael Chapman

Many students today learn a lot about free-market economics. Problem is, John Maynard Keynes, the godfather of the welfare state, is doing the teaching.

Still, in recent years, textbooks have improved. Free-market economists like Milton Friedman and Friedrich Hayek get some play. But their successful ideas still aren’t getting the coverage they deserve.

The problem is what’s not taught, the ”sins of omission,” said economist Mark Skousen, author of ”Economics on Trial: Lies, Myths, and Realities.”

”I give the textbooks higher marks now,” he said, ”but there’s still much more to do.”

Free enterprise and private property are what America was built on. The idea of private property – ”life, liberty and the pursuit of happiness” – is enshrined in the Declaration of Independence.

Economic freedom is essential to political freedom, says Nobel Prize winner Friedman.

In countries with little economic freedom, such as China or the former Soviet Union, he says, there’s little political liberty. You can’t have one without the other.

So it’s vital that American students learn the facts about free enterprise. But do they?

A few textbooks at the high school and college undergraduate levels are good, says Burton Folsom Jr., a former college professor and now senior fellow at the Michigan- based Mackinac Center for Public Policy.

”The new high school textbooks are moving away from Keynes,” he said. ”But they’re still bad on antitrust, taxes and the Great Depression. They repeat myths about (John D.) Rockefeller and Reagan.”

Professor Richard Ebeling, head of the department of economics and business at Hillsdale College, agrees.

Some college texts now cite free-market economists such as Friedman and the monetarists or Hayek and the so-called Austrians, Ebeling says. But these schools of thought ”are explained in terms of a general Keynesian model or theory.”

”The Keynesian mind-set still dominates,” he said.

With that mind- set come many economic myths, false beliefs about markets and a skewed view of how the world works.

Folsom and his colleagues at the Mackinac Center are finishing a study of 16 high school textbooks. The books were reviewed to find whether students were getting a good economics education. So far, three books earned A’s, six got D’s, and two wound up with F’s.

Texts in their fifth or sixth editions still rely on Keynes, Folsom says. But the new texts are kinder to free enterprise.

”They’re good on trade issues and entrepreneurship – and there is some skepticism of big government,” Folsom said. However, they’re bad on antitrust, he says.

For instance, they repeat the myths about John D. Rockefeller and the robber barons, Folsom says.

”Rockefeller never had a monopoly. He had an oligopoly (a market controlled by a handful of firms),” Folsom said. ”The price of refined oil fell from 30 cents to 6 cents a gallon . . . (and) Standard Oil’s market share declined to 64% (in 1911 from 88% in 1890) because of competition – before the government broke it up.”

Standard’s share of oil production had dropped from 34% in 1890 to 11% in 1911 before antitrust enforcers broke this ”monopoly.”

Folsom also notes that U.S. Steel was the largest steel company in 1901; it held 61% of the market.

But because of competition, not antitrust laws, U.S. Steel’s market share fell to 39% by the mid-’20s.

”This is never mentioned in the textbooks,” Folsom said. The same holds true for American Sugar, he says, which held 98% of the market in the 1890s only to see its share decline due to competition.

A second myth, Folsom found, concerns taxes.

”Supply-side still hasn’t sunk in. Tax cuts in the ’20s produced more federal revenue, and cuts in the ’80s doubled federal revenue.” Only two texts were fair on this topic, Folsom says.

College texts still don’t treat supply-side economics right, Skousen says. ”It still gets a lot of criticism.”

A third myth is that laissez- faire capitalism caused the Great Depression and government spending cured it, say Folsom, Skousen and Ebeling.

”Almost every textbook misses on this,” Folsom said. ”Friedman proved that the Federal Reserve caused it, and government programs didn’t get us out of the Depression.”

Walter Williams, chairman of the economics department at George Mason University, agrees.

”Some textbooks say that runaway capitalism caused the Depression, when it was the Fed and the Smoot-Hawley tariff that did it,” Williams told IBD. ”Friedman confirmed this.”

Among economists, only those of the Austrian School, such as Hayek and Ludwig von Mises, clearly predicted the ’29 stock market crash and the Depression that followed.

They both blamed the Fed’s manipulation of the money supply, years before Friedman documented it. Yet the Austrian School rarely gets a mention in textbooks.

Williams adds that other related myths are that ”World War II brought us out of the Depression and that war is good for the economy.”

In fact, war means less money for real investment, he said, because money that could be going to factories and equipment is instead spent on troops and arms.

The minimum wage and the business cycle got fair treatment in about half the texts, Folsom said, but it’s still ”a mixed bag.”

Many texts still view the Fed as ”the savior” of the business cycle, he said, ”but we had more stability under the gold standard.”

There’s little debate among academic economists anymore that the minimum wage causes unemployment, Williams says. ”The debate is the magnitude.”

If money’s a problem, why not just make the minimum wage $25 an hour? Or $100? Obviously, supply and demand would intercede, and people would see the danger, Ebeling says.

Ditto for Fed control of the money supply. ”(Interest) rates are real. Why not make the rate zero? It’s like setting the price of shoes at zero.”

The myth that the minimum wage ”is a wonderful way of helping poor people,” however, is peddled by professors in other fields, said Donald Boudreaux, a former economics professor and now president of the Foundation for Economic Education.

”There is a knee-jerk reaction for government intervention at universities, even among those who’ve had economic training,” Boudreaux said. ”It’s a statist culture.”

Boudreaux adds that the problem with the textbooks began with Paul Samuelson. He’s a Keynesian and Nobel Prize winner whose books have dominated economics teaching since the ’40s.

Samuelson argues that economics is a science, Boudreaux says.

”He sees the economy as a machine that government can manipulate,” he said. ”The ideology is that if we get good people, we can master the economy.”

Ebeling adds that the myth is that ”the market is a planned mechanism” and planning is needed because markets fail.

This thinking pervades college textbooks, he says. It ignores the entrepreneur, who is the prime mover, and myriad complex and intricate relationships at the microeconomic level.

In some ways, the teaching of college economics has grown worse, Boudreaux says.

”By and large, the top schools, they teach technique, mathematical manipulation of economic models, a series of equations. They’re divorced from reality.”

But Skousen also sees a shift away from Keynes in newer college texts.

”All textbooks have shifted more toward free markets,” he said. They are going back to the classical, long-term growth model first and the Keynesian, short-term equilibrium model second. Friedman is cited more often, he said, and the Austrians get a little credit.

One of the biggest myths still peddled, however, is that the economy is consumer- driven, Skousen says.

”You see this all the time,” he said, ”references to retail sales, consumer spending. Consumption should be almost ignored. Focus on production. The economy is investment-driven.”

A Golden Comeback, Part I

September 29, 1998 By Mark Skousen Leave a Comment

Economics on Trial THE FREEMAN SEPTEMBER 1998

by Mark Skousen

“A more timeless measure is needed; gold fits the bill perfectly.”
–MARK MOBIUS

When speaking of the Midas metal, I’m reminded of Mark Twain’s refrain, “The reports of my death are greatly exaggerated.” After years of central-bank selling and a bear market in precious metals, the Financial Times recently declared the “Death of Gold.” But is it dead?

Following the Asian financial crisis last year, Mark Mobius, the famed Templeton manager of emerging markets, advocated the creation of a new regional currency, the asian, convertible to gold, including the issuance of Asian gold coins. “All their M1 money supply and foreign reserves would be converted into asians at the current price of gold. Henceforth asians would be issued only upon deposits of gold or foreign-currency equivalents of gold.” Mobius castigated the central banks of Southeast Asia for recklessly depreciating their currencies. As a result, “many businesses and banks throughout the region have become bankrupt, billions of dollars have been lost, and economic development has been threatened.” Why gold? “Because gold has always been a store of value in Asia and is respected as the last resort in times of crisis. Asia’s history is strewn with fallen currencies. … The beauty of gold is that it limits a country’s ability to spend to the amount it can earn in addition to its gold holdings.”

Not Just Another Commodity

Recent studies give support to Mobius’s new monetary proposal. According to these studies, gold has three unique features: First, gold provides a stable numeraire for the world’s monetary system, one that closely matches the “monetarist rule.” Second, gold has had an amazing capacity to maintain its purchasing power throughout history, what the late Roy Jastram called “The Golden Constant.” And third, the yellow metal has a curious ability to predict future inflation and interest rates.

Let’s start with gold as a stable monetary system. With most commodities, such as wheat or oil, the “carryover” stocks vary significantly with annual production. Not so with gold. Historical data confirm that the aggregate gold stockpile held by individuals and central banks always increases and never declines.2 Moreover, the annual increase in the world gold stock typically varies between 1.5 and 3 percent, and seldom exceeds 3 percent. In short, the gradual increase in the stock of gold closely resembles the “monetary rule” cherished by Milton Friedman and the monetarists, where the money stock rises at a steady rate (see Chart I).

Compare the stability of the gold supply with the annual changes in the paper money supply held by central banks. As Chart II indicates, the G-7 money-supply index rose as much as 17 percent in the early 1970s and as little as 3 percent in the 1990s. (Why has monetary growth slowed even under a fiat money standard? The financial markets, especially the bondholders, have demanded fiscal restraint of their governments.) Moreover, the central banks’ monetary policies were far more volatile than the gold supply. On a worldwide basis, gold proved to be more stable and less inflationary than a fiat money system.

Critics agree that gold is inherently a “hard” currency, but complain that new gold production can’t keep up with economic growth. In other words, gold is too much of a hard currency. As noted the world gold stock rises at a miserly annual growth rate of less than 3 percent and oftentimes under 2 percent, while 70% GDP growth usually exceeds 3 or 4 percent and sometimes 7 or 8 percent in developing nations. The result? Price deflation is inevitable under a pure gold standard. My response: Critics are right that gold-supply growth is not likely to keep up with real GDP growth. Only during major gold discoveries, such as in California and Australia in the 1850s or South Africa in the 1890s, did world gold supplies grow faster than 4 percent a year.3

Prices Must Be Flexible

Consequently, an economy working under a pure gold standard will suffer gradual deflation; the price level will probably decline 1 to 3 percent a year, depending on gold production and economic growth. But price deflation isn’t such a bad thing as long as it is gradual and not excessive. There have been periods of strong economic growth accompanying a general price deflation, such as the 1890s, 1920s, and 1950s. But price and wage flexibility is essential to make it work.

Next month. Update on Jastram’s study The Golden Constant, and gold’s amazing ability to maintain its purchasing power over the past 400 years.

1. Mark Mobius, “Asia Needs a Single Currency,” Wall Street Journal, February 19, 1998,p. A22.
2. See the chart on page 84 of my Economics of a Pure Gold Standard, 3rd ed. (1997), available from FEE. Note how the world monetary stock of gold never has declined between 1810 and 1933.
3. Ibid., p X6.

You Be the Banker

September 7, 1998 By Mark Skousen Leave a Comment

CLOSED-END FUND SURVEY
Forbes
September 7, 1998

You Be The Banker
by Mark Skousen

If credit risk bothers you less than interest rate risk, consider owning a prime rate fund.

Two rules of thumb on buying closed-end funds, elucidated elsewhere in this survey, have to do with the cost of ownership. One is that you should almost never pay a premium over net asset value to get a closed-end. The other is that you should be wary of a fund that has a higher than normal expense ratio. The story on page 230 sets out the reasoning for these rules.

I’d like to make a case for breaking both rules for a fund category that complements your bond portfolio. I’m talking about so-called prime rate funds. These are portfolios of bank loans, held by closed-end funds.

First, why diversify into this class of funds? Since 1994 bonds have been on a tear. But there’s a downside. Yields on 30-year Treasurys have slid to a measly 5.6%. That’s not bad in relation to recent inflation rates, but it’s a somewhat lopsided bet. It’s pretty unlikely that rates would move down another two points, handing you a fat capital gain, but it is quite possible that between now and 2028 rates could move back up two points, to where they were just a few years ago.

How, then, to get a decent yield without taking on long-term interest rate risk? Prime rate funds invest in variable-rate senior loans to corporations at interest rates tied to the so-called prime rate. Currently this benchmark at most banks is 8 1/2%. That is several percentage points higher than the yield on Treasurys, mortgage paper or money market instruments like certificates of deposit.

Even after charging stiff fees of 1.4% or more, funds holding these loans are yielding at least 7%. Although the net asset value of the funds is not completely unchanging, like that of money market funds, the fluctuations to date have been minuscule.

There’s a reason why you should be willing to stomach those high expense ratios: Your fund, to a degree, is acting more like a bank than a bond fund. It has to appraise borrowers’ credit quality and take a chance on an investment that is not traded every day and is not liquid. There’s a lot more work involved than there is in taking positions in five Treasury notes and sitting on them.

What happens when interest rates shoot up and bond prices fall? Conventional bond funds get hammered, but the prime rate funds, whose interest income floats up with the prime rate, have been remarkably stable. In 1994, when investors suffered terrible capital losses on longterm bonds, Pilgrim America Prime Rate Trust enjoyed a stable net asset value and delivered more than 7.5% total return for the year.

What’s the downside? For one, declining interest income if the prime rate declines. Next, credit quality. The senior loans are collateralized and go to respectable borrowers, but there are no government guarantees. Third, liquidity. Two funds trade publicly, but the rest are redeemable only quarterly.

Among the funds I like are Van Kampen Prime Rate Trust B shares, currently yielding 7%. Unlike the Pilgrim fund, it doesn’t use leverage. You buy at net asset value. The fund offers shareholders the ability to tender shares quarterly, receiving net asset value less a redemption charge starting at 3% the first year and then declining 1/2% per year. A brand-new sister fund, Van Kampen Senior Income Fund, will use leverage and deliver a slightly better yield. Senior Income trades publicly as a closed-end and is currently at a slight premium.

Pilgrim America Prime Rate Trust, the oldest of the breed (trading since 1992), sports an 8% yield, goosed up by some leverage. Caution: Pilgrim can play tough. In 1995 shareholders were dismayed by a rights issue that forced them to either add to their holdings or risk dilution. At a recent $10.16, Pilgrim goes for a slight premium. Try to get it for less than $10.

Emerging Markets Floating Rate Fund is for the brave. This one invests in floating-rate loans to governments in Latin America, eastern Europe, Asia and Africa. With emerging markets out of favor, the shares have dropped from $17.75 in June 1997 to a recent $12.88, close to net asset value. The yield is 12%, but that figure makes no allowance for loan losses–and you just might see a default on some of these loans someday.

Forbes · September 7, 1998