Apropos of Robert Higgs’s recent Beacon post, “Truth and Freedom in Economic Analysis and Economic Policy Making,” my post ties in to his discussion of factual errors and interpretive errors in economic policy. Since those two terms were not presented as jointly exhaustive, let’s note an additional, often complementary type of falsehood, one identified by what I might call (provisionally and with some hesitancy) its initial, first-level effect: the self-serving error.

President Obama claimed, on April 8, that the bipartisan agreement to reduce the federal budget to $38.5 billion below the amount Washington spent in 2010 will yield “the biggest annual spending cut in history.” House Budget Committee Chairman Paul Ryan (R-Wis.) repeated the claim on April 9, calling the reduction “the largest spending cut in American history.”

The claim smells fishy, given that the cut amounts to a bit more than one percent of last year’s budget. Evidently, the analysts at FactCheck.org thought so too. After looking at the data from the Office of Management and Budget, they found that there were 19 times since 1901 when total federal spending fell by a larger rate. Here’s an excerpt from FactCheck.org’s revealing analysis:

The biggest cut, on a percentage basis, occurred in fiscal year 1920 after two years of steep budget increases to finance World War I. That year, spending dropped from $18.5 billion to $6.4 billion, which is $12.1 billion decline or about 65 percent. The $12.1 billion in today’s dollars would be worth $134.3 billion, according to the Bureau of Labor Statistics’ inflation calculator.

Likewise, there was a sharp decline in spending after World War II. Beginning in 1946, Congress cut spending for three straight fiscal years. The biggest drop occurred in 1946, when spending dropped by $37.5 billion or about 40 percent (from $92.7 billion to $55.2 billion). That $37.5 billion would be worth $425.4 billion in today’s dollars — making it the largest cut in adjusted dollars.

This year’s proposed cut is not even bigger than the reduction in spending that occurred last year, when total spending declined $61.5 billion, or 1.7 percent, after the infusion of stimulus money started to dry up. The biggest drop in spending prior to 2010 occurred in 1955, when total spending fell $2.4 billion or 3.4 percent.

The same piece by FactCheck.org, a project of the Annenberg Public Policy Center of the University of Pennsylvania, also debunks the claim, made by House Appropriations Committee Chairman Hal Rogers (R-Ky.), that the budget cut was “five times larger than any other [non-defense discretionary spending] cut in history.”

I saw the move Atlas Shrugged this week-end.  It has received mixed reviews, but I enjoyed it.  I like the book, and seem to have that in common with others who like the movie.  I’m not sure how the movie would come across to someone who hasn’t read the book.

Meanwhile, President Obama has filed his 2010 income tax return.  He paid $454,000 in income taxes on about $1.8 million in income.  In Atlas Shrugged capitalists went on strike in response to oppressive government.  Meanwhile, the president says, “I don’t need another tax cut, Warren Buffett doesn’t need another tax cut.”  No strikers there.

The president’s comment shows a remarkable lack of insight into the way most higher-income people earn their incomes.  Most of the “rich,” by which Obama means people making more than $250,000 a year, earn those incomes by working hard, and by taking risks.  Taxing those people makes them work less hard, and take fewer risks.  Both reduce the productivity of the economy.

In the president’s case, most of his income is royalties on books he’s written in the past.  The job of president is a tough one, we would all agree, but that job accounts for less than a quarter of the president’s income.  Most of it comes from work he did in previous years, when his books were actually written.

Of course he deserves those royalties as a return for writing books people want to read.  But few authors earn the royalties the president does.  I’ve written a lot more books than President Obama, for example, but I couldn’t quit my day job and live off my royalties.  He’s one of those rare people who could, like professional athletes and movie stars.  For every LeBron James and Meryl Streep, there are thousands of people who are acting in community theaters, or coaching school teams because they can’t play professionally, even though they’d like to.  You can’t make public policy based on the lives of those fortunate few.

Most of Warren Buffet’s income is in capital gains.  He deserves that income, but he pays a lower percentage of his income in federal taxes than I do.  I don’t object to that, but he may not be what most advocates of limited government consider the poster child for overtaxed Americans.

Those people—Warren Buffet, LeBron James, Meryl Streep, President Obama—are exceptions, because they are exceptional.  The entrepreneurs who drive economic progress, who are more typical of the “rich,” won’t put in the hard work and won’t take the same risks if the government increases the share of their profits it confiscates.  The tax system enables the government to share in entrepreneurial profits, but the risk of losses fall entirely with the entrepreneur.

The president does not seem to understand this, perhaps because his income has come to him without taking the entrepreneurial risks that drive the American economy.  Salaried people may not see it either.  They work hard for their money, but the difference is, they get paid their salary regardless of whether the risks the entrepreneurs who hired them pay off.

Like the government people in the movie, President Obama sees the nation’s entrepreneurs as getting more than their fair share, at the expense of the rest of us.  Ayn Rand saw those entrepreneurs as the people whose innovations provide jobs and income for the rest of us.  Atlas shrugged, but President Obama stands firm.

For thousands of years, philosophers have told us that if we are to live our lives at their best, we should seek truth, beauty, and goodness. Of course, each of these qualities has raised thorny issues and provoked ongoing arguments. That people have carried on such arguments, rather than surrendering themselves to their raw appetites and animal instincts, may be counted a valuable thing in itself. A final resolution of such deep questions may lie beyond human capacities.

In regard to goodness and beauty, I have nothing worthwhile to add to the discussion. For guidance in seeking goodness, we may look to saints, theologians, moral philosophers, and moral exemplars of our own acquaintance. For demonstrations of beauty, we may turn to nature and to artists, great and small, who have adorned our lives with the grace of music, poetry, and the visual arts. My own professional qualifications, as an economist and an economic historian, do not equip me to contribute anything of value in these areas.

I do feel qualified, however, to speak with regard to truth, because the search for truth has always served as the foundation of my intellectual endeavors. Moreover, my study, research, and reflection within my own professional domains have brought home to me a relationship that others might do well to ponder and respect―a relationship, indeed, an array of relationships, between truth and freedom, such that anyone who seeks the triumph of truth must also seek to establish freedom in human affairs.

The Federal Reserve emerged from the financial crisis of 2007–2009 with new powers to allocate credit to specific firms, including non-bank institutions. This development in effect makes the central bank the U.S. economy’s central planner. But why did Fed Chairman Ben Bernanke lobby for the new lending powers, rather than rely on the Fed’s traditional tools? The answer goes back to his idiosyncratic views about the Great Depression, argues Jeffrey Rogers Hummel in the lead article in the Spring 2011 issue of The Independent Review.

Bernanke agrees with the late Milton Friedman that the Fed is largely to blame for the bank failures that led to the Depression, but he disagrees about the causal mechanism—and thus about the proper course for the Fed to have followed. Friedman, for example, believed the Fed could have prevented the contraction of the early 1930s by injecting enough money and credit into the banking system to keep the level of total spending in the economy (and the level of prices) unchanged, even if some important banks might still have failed. Bernanke, in contrast, has suggested that this course of action would not have sufficed: in addition to maintaining total spending, he thinks the Fed also should have kept credit flowing to the borrowers of important banks, even if those banks needed targeted bailouts to stay afloat.

Thus, the Fed’s new powers reflect the importance that Bernanke places on preserving existing channels of credit when key banks (and non-bank credit providers) face severe strain. According to Hummel, however, the Fed’s success in handling three potential financial crises since the late 1980s undermines the case for Bernanke’s brand of activism: the stock-market crash of October 1987, the public’s worries about Y2K, and the terrorist attacks of September 11, 2001. The Fed met each challenge without the use of targeted bailouts.

“Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner,” by Jeffrey Rogers Hummel (The Independent Review, Spring 2011)

Subscribe to The Independent Review. Special Internet Offer: Sign up online for a paid subscription of $28.95 and receive the next six issues for the price of four. A savings of 33% compared to the newsstand price. Available to new subscribers only, not renewals.

[This item was cross-posted in April 19, 2011, issue of The Lighthouse. For a free subscription to this nifty weekly email newsletter, go here.]

In a very good, new article in the Times of London, “Philosophers are finding fresh meanings in truth, beauty and goodness,” philosopher John Cottingham (University of Reading) discusses the fact that the absurdities of what has dominated philosophy and the bulk of intellectual and political culture for at least two hundred years are increasingly in ruins for anyone honest enough to look. This change has occurred as a result of the seminal work of such scholars as Alvin Plantinga.

Although originally based in pre-Socratic views that were subsequently refuted by Aristotle and Plato, moral and epistemological relativism was reborn and became pervasive in elite intellectual circles during the “Enlightenment” of the 18th and 19th centuries when natural law was abandoned for the subjectivism inherent in naturalism. Virtually every field of knowledge has since been undermined by this myopic view, including law, economics, history, philosophy, psychology, biology, art, literature, theology, etc., with some more damaged than others and some fields such as sociology being based entirely on such a fallacy. Fortunately, the ambiguity and utter confusion of such a monist worldview could not endure because it is fundamentally unworkable and self-refuting. For example, if all knowledge is entirely relative or subjectivist (based solely on instincts and emotions), as both modernists and post-modernists have claimed, then this would also hold for such a theory itself, leaving it as self-refuting. Indeed, no science or field of rational inference could be possible because all human cognition would allegedly be the determined product of physical laws—no scientific enterprise could independently assess anything for which the views of the scientists involved were not themselves also dependent.

The Bureau of Labor Statistics released its Consumer Price Index (CPI) figures today, and it shows that inflation has picked up in the past few months.

Looking at the past year, the CPI has increased 2.7% from March 2010 to March 2011.  But most of that increase has been recent.  In the seven months from March 2010 through October 2010 the CPI rose 0.5%.  The five months from October 2010 to March 2011 saw the CPI rise by 2.2%.  That’s a 5.3% annual rate of inflation over the past five months.

Looking at month-to-month changes might be of limited value, because the price level has short-term fluctuations around long-run trends, but if we just look at last month, the CPI was up almost a full percent (actually, 0.975%), which is an annual rate of 11.7%.  The trend is up.  In February the CPI was up 5.9% at an annual rate, and in January 4.8% at an annual rate.  The figure for December was 2%.

There has been some debate over the past year within the Federal Reserve’s Board of Governors about whether monetary policy has been too loose, and too inflationary.  Recent increases in the CPI suggests it has.

President Obama presented his plan to reduce the deficit by $4 trillion over 12 years.  His plan sets out goals for deficit reduction, but no plan for achieving those goals.

The biggest component in rising projected government expenditures is health care.  The president wants to cap Medicare spending per beneficiary at the GDP growth rate plus half a percent.  Setting aside the fact that because of the baby boom generation moving into Medicare this is still a substantial increase, Medicare is an entitlement program, and a cap can’t be effective unless the program is redesigned to deny benefits to recipients if they exceed some cap (or the program in total exceeds the cap).  Surely the president doesn’t mean that if the program exceeds the cap Medicare recipients would be told “We’re not paying for your care because we’ve exceeded our budget.”

President Obama says Medicare and Medicaid expenditures would be limited by “reducing waste, increasing accountability, promoting efficiency and improving the quality of care.”  That’s what we’ve been doing since these programs were established, and so far it hasn’t worked.  A cap can’t be effective unless the program stops making payments once the cap is reached, and that kind of cap can’t work for Medicare and Medicaid.

If the projected federal debt as a share of GDP doesn’t show a downward trend, the president’s plan would trigger an automatic spending reduction, except for spending on Social Security, Medicare, Medicaid, and low-income programs.  (Not mentioned is interest on the federal debt, which would have to be exempt from the reduction too, unless default on those payments is part of the plan.)  Essentially, the president is saying that if spending is still out of control, those portions of expenditures that are most responsible for it being out of control, and are well over half the federal budget, will be exempt from any automatic reduction.  Sounds good, but in reality it will be unworkable.

The president’s proposal sets goals for deficit reduction, but it avoids the difficult decisions on how to control expenditures that are veering out of control.  Any deficit control measure that has a prayer of working has to include a specific plan stating how the Medicare, Medicaid, and Social Security programs will be reformed so their growth stays in line with overall economic growth.  The president’s proposal does not do that.

The president’s proposal is rhetoric, and not an actual plan.  It sets goals without articulating how those goals can be accomplished.

The Washington Times has an interesting op-ed up about Justice Kagan’s view of money.  Here is a snippet:

Justice Kagan’s dissent gave the game away in its first sentence. The tuition tax credit, she wrote, is “diverted tax revenue.” Later, she elaborated, “Both deplete funds in the government’s coffers by transferring money to select recipients.” Only an extreme statist would write such a thing. The point of a tax credit is to let people direct their own money rather than putting it into “the government’s coffers” in the first place. Only if all money starts as government property can a tax credit be seen as taking money from government hands.

The case from which this issue arises is Arizona Christian School Tuition Organization v. Winn.

Over at the leading libertarian magazine, Reason, writer Shikha Dalmia attacks conservatives for using FOIA laws to invade the privacy of historian William Cronon. At the same time, Dalmia defends Open Records laws while noting that groups may abuse their rights by going after individuals. On that score, the Left comes in for a tongue lashing for politicizing the process (and so much else in academia).

Frankly, I’m surprised that Professor Cronon was so clueless about the dangers of work email addresses. I’ve said it before (here, here, and here):  your work email is state property and open to reading by your university or outsiders who file FOIA requests.

Bottom line: DO NOT USE YOUR .edu account for anything unrelated to work. Use another account.

Scott Horton, human rights attorney and editor of widely-read blog, No Comment will be in the next speaker in the Liberty and Power Lectures on Thursday, April 14.

His talk, “James Madison, Executive Powers and the Rise of the National Security State,” will begin at 5 p.m. at the Bedsole Moot Court Room at The University of Alabama School of Law.

Horton served as council to Andrei Sakharov and other activists in the former Soviet Union and cofounded the American University in Central Asia, Eurasian region. More recently, the Associated Press hired him to represent Bilal Hussein, a Pulitzer Prize winning photojournalist who the U.S. military detained for over a year.

He is a co-founder of the American University in Central Asia, where he currently serves as a trustee, and has been involved in some of the most significant foreign investment projects in the Central Eurasian region. Scott recently led a number of studies of abuse issues associated with the conduct of the war on terror for the New York City Bar Association, where he has chaired several committees, including, most recently, the Committee on International Law. He is also a member of the board of the National Institute of Military Justice, the EurasiaGroup and the American Branch of the International Law Association and a member of the Council on Foreign Relations.

Scott’s parents came from Lawrence County, Alabama. He is a cousin of Judge James E. Horton of Limestone Co., Alabama, the judge who threw out the conviction of the “Scottsboro” boys after concluding that it was not based on the evidence—and who was then driven from the bench.