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February 2002; Volume 20, Number 2

The Gang of Eleven

by William L. Anderson

Economists are fond of writing open letters to politicians in attempts to lead them down "proper" policy paths. In 1930, a thousand economists signed an open letter to President Herbert Hoover asking him not to sign the infamous Smoot-Hawley Tariff. Hoover signed it anyway, creating one more disastrous policy mistake that ultimately created the Great Depression.

In recent times, more than one hundred economists (including me, although I was a late signer) endorsed an open letter calling for the government to drop its anti-Microsoft jihad. President Bill Clinton and his Department of Justice ignored the letter’s advice, and the Wall Street Journal ran an article pointing out that the Independent Institute, which sponsored the letter, received more than $100,000 in donations from Microsoft. Since the vast majority of economists who signed the letter have never received a penny from Bill Gates or his company, the Journal’s accusations were meaningless, but that did not keep the anti-Microsoft crowd from crying foul.

In the two previous cases, the presidents should have listened to the economists. In the first case, the Great Depression might have never happened—or at least the economic downturn of the early 1930s would not have been as severe as it was. In the second case, the government has helped create turmoil and instability in a vital cog of our nation’s economy. That does not mean, however, that presidents and other politicians should always listen to what economists have to say in open letters. 

The latest "letter to the president" comes in the form of a document calling for the government to give the ailing economy the "right kind" of "stimulus." This one seems authoritative enough: nine Nobel Prize winners, including Joseph Stiglitz, George Akerlof, Robert Solow, James Tobin, and Douglas North, are among the eleven economists whose signatures "grace" the letter. 

Others include Akerlof’s wife, Janet Yellen, who with fellow signer Laura Tyson headed President Bill Clinton’s staff of economic advisers. The other thing the signers have in common is that they are partisan Democrats, with many having served in the Clinton administration. Not surprisingly, these "eminent" economists tell us that the expansion of government will bring recovery— provided the state manages to encourage spending by the right people in the right places at the right time. Otherwise, they warn, the recession will last for a long time.

The letter declares that permanently cutting income tax rates for individuals who pay the bulk of taxes and corporations, as well as other measures aimed at easing the tax burdens on the most productive people, not only are "unjust," but will further damage the economy. According to these economists, government must find a way to get money to low-income individuals, although the programs that funnel that money should be temporary, so people who receive the money might be more tempted to spend it than save.

Furthermore, money "given" to low-income people, the signers declare, is more likely to be spent, as wealthy individuals who receive tax breaks might save their money, which these economists believe is disastrous for the country. Stiglitz recently laid out the entire theme in a Washington Post article, writing that the Bush administration was pushing "a wrong kind of stimulus."

The article excoriates the Bush administration for failing to put more money into the hands of low-income people, preferably by sending them checks directly from the U.S. Department of the Treasury. Referring to John Maynard Keynes’s assertion that investors are motivated by "animal spirits," Stiglitz goes one up even on Keynes. Expectations, he writes, are not only important for investors, but also for consumers, who "are worried about losing their jobs [and] are more likely to save the proceeds of any tax cuts." This, of course, is a disaster to Keynesians, since they believe that the economy is always a potential basket case unless propped up at all times by aggregate demand, which is the product of consumer spending.

There is no need to rise to the defense of George W. Bush, as his economic performance has been abysmal. His response to the events of September 11 has been to increase the power of the State at all levels, which is further hindering economic activity, and that war along with all of the new "home front" restrictions would be enough to slow the economy. Furthermore, his administration has engaged in bailouts and subsidies to ailing industries instead of providing authentic tax and regulatory relief that is so desperately needed. 

However, the proposals of the "Gang of Eleven" are so bad and so wrongheaded that it is difficult to know where to begin. Because Austrian economists have so effectively dealt with similar Keynesian-style proposals in the past, I see no need to plow all of that ground again, so my criticisms will deal, instead, with more fundamental issues.

Modern economics fails at the very heart of analysis, that being the attempt to make economics into a branch of mathematics instead of a systematic way of examining human action. Additionally, modern economics deals poorly at best with a basic component of the economy, that being money itself. It is safe to say that the signers of the latest letter in question are clueless about money —and that includes those economists who won their Nobel Prizes as a result of their monetary theories.

Typical graduate courses in monetary theory or undergraduate courses in money and banking fail to point out that money is an economic variable. While these courses give a cursory glance at money as a medium of exchange, they almost immediately move to examining money in terms of aggregates. Hence, we have terms like "money supply," which has many different definitions, depending upon what one counts as money. 

Austrians, on the other hand, see money as a medium of exchange that is used by individuals. People use money because it provides a convenient way for people to engage in indirect exchange. While typical economics textbooks also define money as a means of exchange, they fail to point out that changes in how much money is in circulation will affect different individuals in different ways. 

For example, as Ludwig von Mises and Murray Rothbard pointed out, when the amount of money in circulation increases, the marginal value of money decreases, which means that more money is needed to make exchanges than was the case before the money supply rose. By defining inflation not as a simple increase in a manufactured "price level" but rather as a decrease in the value of money relative to the things it can purchase, Austrian analysis enables someone to understand more deeply what happens when monetary authorities push up the amount of money in an economy. 

New money does not simply fall on society out of a helicopter. Instead, it comes into the economy through the fractional reserve banking system, which means that those who are in a position to receive new loans are able to spend the new money first. As the newly created money works its way through the economy, prices begin to increase. However, those folks who were first in line to receive the new money find that they are able to pay for things at the old prices. 

Meanwhile, as the new money moves along, those at the "back of the line" who are either on fixed incomes or cannot quickly increase their own income find themselves paying the higher new prices with "old money." Hence, inflation involves a transfer of wealth, with those who are politically connected often finding themselves able to be at the front of the line when the Fed opens the new money spigots.

To understand this scenario of how inflation works requires that one also understand the dynamics of an economy. However, the "Gang of Eleven" and their legions of allies in government and in academe cannot conceive of an economy actually made up of individual decision makers. Instead, they prefer to think of an economy as a set of abstract aggregates in which one pulls and pushes levers to "fine-tune" economic activity. 

Moreover, these economists commit yet another great sin, that being their separation of production and consumption. In the real world, the source of what we consume is what we produce, something that J.B. Say and his fellow "classical" economists understood long before someone tried to place economics into sets of mathematical equations.

In the brave new world of macroeconomics, however, consumption and production are totally unrelated. One produces in order to stay busy, and one consumes in order to "buy back" the product that was made. There is no other connection between the two. Hence, we hear inanities such as "patriotic spending" and excoriation of employers who lay off employees after the firms’ balance sheets begin to tip into the red, as though hiring of employees really were just nothing more than an exercise in the expansion of the welfare state.

Thus, these economists may actually believe that it would be good for the economy if the U.S. Marines were to fly helicopters over the nation and push out $100 bills. After all, in their view, money is "purchasing power," not a commodity that one receives in exchange for the performance of productive services. (In their view, once people begin to spend money, the economy automatically begins to produce goods and services in the proper quantity. The only thing that is important is that the government places new money in the pockets of individuals who then are expected to spend, spend, spend all of us into instant prosperity.) 

Given that the majority of professional economists hold such views on the "macro" economy, it comes as no surprise that they would be hostile to any suggestion that government may be the cause of boom-and-bust cycles. Therefore, anyone who might believe that easing the burden of government which businesses and individuals are bearing meets with scorn, catcalls, and outright angry denunciations from Paul Krugman’s New York Times column.

Not every open letter from economists to the president of the United States is a lemon. However, the latest letter from some of the most august luminaries in professional economics should be ignored. To paraphrase Stiglitz and Akerlof, there indeed is imperfect information when it comes to economic knowledge, and no people better demonstrate that their knowledge of economics is quite imperfect than those who signed that outrage. 

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William L. Anderson teaches economics at Frostburg State University (



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