Well, it seems that Free​bank​ing​.org may be having its own little Bitcoin bubble, what with all the recent posting on the topic by Brad, Kurt, and myself. Still I can’t help adding one more, having planned to do so since my last post on the topic, and having as well a selfish motive in mind, to wit, that of supplying myself with some materials with which to revise and expand my paper on “Synthetic Commodity Money.”

I wish to accomplish that end by challenging Bitcoin fans to propose means by which one might combine the same advantages as Bitcoin presently offers with a mining or production protocol that, instead of adjusting mining rewards so as to achieve some predetermined output rate and limit, adjusts them so as to automatically alter the rate of coin production as needed to achieve some other objective. For example, the objectives might be that of achieving a steady rate of cybercurrency appreciation (as measured by the cybercurrency-equivalent CPI), or a steady level or growth rate for the total value of cybercurrency payments. But there are many others also worth contemplating. The general question is whether it is possible to have a more “elastic” or otherwise macroeconomically friendly alternative to Bitcoin. (Even the output of gold, after all, tended in the long run to respond to changes in that metal’s relative price, thereby ruling-out both persistent inflation and persistent (or sharp) deflation.)

In putting forward this challenge I don’t mean to endorse any particular monetary or macroeconomic policy ideal. I’m only interested in exploring the extent to which it may be possible to have mining protocols other than those calling for a steady (or steadily declining) rate of coin output. If there are, then the question whether any of them would in fact supply the basis for a “better” cybercurrency is one that would then be worth taking up.

As food for thought to those pondering the challenge, here are a few of the very interesting suggestions I received concerning it in the comments to my original Bitcoin post:

(Peter Surda): you cannot design a synthetic commodity whose supply mirrors macroeconomic aggregates, because these aggregate variables are exogenous to the network (whereas the hashing parameter of networks like Bitcoin only depends on time and the number of blocks in the blockchain, which from a perspective of the network are endogenous), so they cannot be unambigiously measured.

(Derka): Yes you can certainly base altcoin production (supply inflation) on any parameter (nominal or real GDP, employment, etc.), the tricky part is doing it without centralizing trust. For the sake of demonstration, call the parameter of interest X.

Option 1) Centralize authority. Give the WSJ authority (via public/​private key encryption) to report the value of X to the altcoin network. The altcoin network responds algorithmically to this news. Perhaps if X is NGDP and is down, increase production!

Option 2) Give the authority to the miners. Every miner could record the current value of X in the blocks they produce. Problematically, the miners will collude and devalue the currency to reap the hyperinflated rewards.

(Koen): but would it not be possible for the network to respond to patterns that occur in the network but that are reliably associated with (e.g. being the effect of or having the same cause as) certain (macro-)economic phenomena? I mean, for example, contractions in the money supply seem to have both a (macro-)economic reality outside of the network and specific effects within the network

(Justin Reitz): Off the cuff, it might be possible to use the Federal Reserve’s FRED API to automatically pull data on a chosen economic aggregate. Of course there are all sort of issues: timeliness of Fed data, data updates, security of the the FRED API, how to reduce the virtual currency in circulation, etc.

(tdbtdb): Perhaps this is what you mean when you mention the security of FRED, but clearly having such a system depend on FRED would put it under the control of whoever controls FRED, nagating the whole point. So there are 2 risks, one that unauthorized hackers could compromise FRED, the other that the people feeding data to FRED might feel tempted to lie.

I wish I could offer some real prize for more thoughts like those above, let alone for any more substantial answer to my challenge. But as I am no fatcat but only a humble college professor, I can offer nothing save my gratitude, and the modest reward of doing whatever I can to credit those responsible for their contributions to one component of what H. G. Wells (himself no mean futurist) considered the “permanently effective task before Mankind,” namely, that of “working out and applying…a Science of Currency.”

It’s to be expected that privacy will suffer a bear market after a terrorist attack or attempt. I’ve seen worse, of course, but was concerned this week to read a piece by Richard Epstein on the Hoover Institution web site that I think sounds needless anti-privacy notes. Professor Epstein is not only an important public intellectual, but a Cato adjunct scholar of which we’re proud, and a friendly professional colleague (to whose defense I’ll leap when he’s wronged).

The issue is what policies governments might adopt toward the end of terrorism prevention. Professor Epstein finds the statement of Massachusetts state senator Robert Hedlund (R‑Weymouth) to be a bridge too far. Hedlund says:

It’s not surprising that you have law enforcement agencies rushing out to use [the Boston bombing and subsequent manhunt] as pretext to secure additional powers but I think we have to maintain perspective and realize that civil liberties and the protections we’re granted under the Constitution and our rights to privacy, to a degree, are nonnegotiable…

You don’t want to let a couple of young punks beat us and allow our civil liberties to be completely eroded. I don’t fall into the trap that, because of the hysteria, we need to kiss our civil liberties away.

Professor Epstein calls that “dead wrong,” saying, “the last thing needed in these difficult circumstances is a squeamishness about aggressive government action.” Given the importance of preventing terrorism, claims of right against increased surveillance and racial or other profiling should be “stoutly resisted,” he says.

I agree with Professor Epstein that flat claims about a “right to privacy” shouldn’t limit surveillance. “Concern” with racial or ethnic profiling is not a sound basis for desisting from the practice. But I don’t take Hedlund’s statement to be a product of squeamishness, and I think it is in the main correct.

Where I think Professor Epstein goes wrong insofar as he wants law enforcement to have its way is in setting aside “technical difficulties” and “means-ends” questions as peripheral. For me, the Fourth Amendment’s bar on unreasonable searches and seizures demands coordination between means and ends in light of the technological situation (both in terms of doing harm and discovering it). It is not a given that government action is reasonable, and no amount of priority given to a threat makes an incoherent response reasonable and constitutional.

An illustration ad absurdum may help: Say the United States is credibly threatened with the possibility that a North Korean agent has snuck a nuclear weapon into the country. In response, the government institutes a program of 100% crotch checks at street corners in major cities. There is essentially no relationship between checking crotches and finding a nuclear weapon (which at its smallest is something like the size of a steamer trunk) or evidence of its whereabouts. It is unreasonable, even given the huge threat, to look for a North Korean nuke where it can’t be found. Searching the crotches of innocents is unreasonable. Affecting the persons of individuals as it does, due to the Fourth Amendment, it is unconstitutional.

The issues in terrorism prevention and punishment are closer, obviously, but it is at least worth discussing whether greater surveillance–greater-than-Boston-Marathon surveillance–would deter terrorists or make them easier to apprehend. Many terrorists are not concerned with worldly justice, and we have in the recent example two brothers who walked right through one of Boston’s most watched and filmed events to deposit their bombs on the street. The possibility of apprehension seems not to have deterred them.

The question raised by the Boston bombing seems not to be whether there should be surveillance, but rather whether the government should supplant civil society’s image-collection–dozens of private actors collecting data for pleasure and (all of our) security–with its own, watchful government net.

One can imagine a network of government cameras so dense, with special surveillance drones scrambled for any large event, that every visage is captured a number of times. If the vagaries of light and angle can be overcome, perhaps the dragnet includes facial recognition software and target tracking that passably identifies the whereabouts of everyone at all times they are in public.

I think it takes not just millions, but billions of dollars to deploy this surveillance architecture everywhere a terrorist act might occur. And for all this spending and cost in obscurity lost to law-abiding people, apprehension of suspects might improve by a few hours.

Such a program fails cost-benefit analysis. It is bad policy on the merits—unreasonable, in a word. And to the extent it is a search of things protected by the Fourth Amendment (not a given, though I’ve been toying with privacy in public since August 2001), it is unconstitutional.

The latest attack makes no case for racial or ethnic profiling. It has added literal Caucasians to the list of ethnicities involved in U.S. terror attacks, according to public consciousness. What profile algorithm turns up two Kazakhs and an American as abettors after-the-fact? Of course, terrorists come in all hues, including some of the most pale.

Most recent terror attacks in the United States have come from people claiming Islam as their religion. This fact is as undeniable as it is unhelpful in discovering terrorists. Knowing the correlation narrows the search for (our current, most concerning) terrorists down to one-fifth of the world’s population.

Profiling based on ethnicity or religion is a rather obvious statistical error that wastes the time and resources of law enforcement while it invades the interests, and sometimes rights, of the law-abiding. Even without considering equal protection or the right to practice one’s religion, the unreasoned nature of racial or religious profiling makes it a candidate for unconstitutionality if it results in a constitutional search or seizure. Claims of religious motivation can complete the picture, of course, when they inform an otherwise well-founded investigation and prosecution.

The right to have means and ends matched up in at least a plausible way is a right under the Fourth Amendment when it affects Americans’ security from government in their persons, houses, papers, and effects. That’s just a different expression of the right against unreasonable searches and seizures. This right is nonnegotiable, I think, and it is not a product of timidity about addressing terrorism. The government should not act incoherently in reaction to threats against the public, and I don’t think Professor Epstein would want it to.

On Monday, I reported here and on the Wash​ing​ton​Watch​.com blog how Congress was trying to push through a bill that hadn’t been passed in the same form by both the House and Senate.

Well, the Senate solved the problem by lying. It said that the Secretary of the Senate had erred in engrossing the bill–preparing it for transmittal to the House.

There was no error on the part of the Secretary of the Senate. The Senate passed a bill that used only the word “account” and the House-passed bill said “accounts.” The bills weren’t identical, but the Senate is calling it the Secretary’s error.

The “fixed” bill now includes a quite non-grammatical sentence. I detailed that in a new Wash​ing​ton​Watch​.com post entitled: “From Farce to Tragedy.” But who needs precision when you’re moving a mere quarter-billion dollars around?

Were he to enforce it, President Obama’s Sunlight Before Signing promise would require more careful deliberation than this. The public would have five days to review legislation, exposing errors like this and bringing disrepute on those responsible. But the president received the bill on Tuesday and signed it on Wednesday.

President Bush imposed a so-called stimulus plan in 2008 and President Obama imposed an even bigger “stimulus” in 2009. Based upon the economy’s performance over the past five-plus years, those plans didn’t work.

Japan has spent the past 20-plus years imposing one Keynesian scheme after another, and the net effect is economic stagnation and record debt.

Going back further in time, Presidents Hoover and Roosevelt dramatically increased the burden of government spending, mostly financed with borrowing, and a recession became a Great Depression.

That’s not exactly a successful track record, but Paul Krugman thinks the evidence is on his side and that it’s time to declare victory for Keynesian economics.

Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.

But Krugman doesn’t just want to declare victory. He also spikes the football and does a dance in the end zone.

I’m always right while the people who disagree with me are always wrong. And not just wrong, they’re often knaves or fools. …look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I’m Krugtron the Invincible!

So why does Krugman feel so confident about his position, notwithstanding the evidence? Veronique de Rugy has a concise and fair assessment of the Keynesian rationale. Simply stated, no matter how bad the results, the Keynesians think the economy would have been in even worse shape in the absence of supposed stimulus.

…the country’s economic performance of the last four or five years can hardly be described has a rousing success for Keynesian economics, at least as implemented by the administration. In fact, measured by the unemployment rate, it hasn’t been a success by the administration’s own standards. To that, Krugman says that the stimulus implemented by the administration wasn’t big enough and, as such, that Keynesian economics hasn’t been tried yet.

Veronique, by the way, points out why this argument is utterly unpersuasive by using the same logic to declare victory for markets.

But by this logic, free-market economics is doing pretty well, too: I think we can all agree that free-market economics wasn’t tried. The economy hasn’t really recovered properly. This must mean free-market economics has won.

But I think the best part of Veronique’s article is the section explaining that not all austerity is created equal. Simply stated, why expect better economic performance if “austerity” means that taxes go up and the burden of government spending stays the same?

Here’s some of what Veronique wrote on this issue.

…austerity, as defined by economists, represents the measures implemented by a government in order to reduce the debt-to-GDP ratio. Unlike Keynesians, I do not think that debt is good for economic growth, but I would prefer the word “austerity” to describe the measures implemented to shrink the size and scope of government… In other words, the important question about austerity has less to do with the size of the austerity package than what type of austerity measures are implemented. …when governments try to reduce the debt by raising taxes, it is likely to result in deep and pronounced recessions, possibly making the fiscal adjustment counterproductive. …austerity measures implemented in Europe are not the kind of austerity we actually need. In fact, the data shows that it has mostly consisted in raising taxes.

Since I’ve repeatedly made these same points, you can understand why I’m a big fan of her analysis.

Moreover, I think this gives us some insight into why Krugman may actually think he has prevailed. Simply stated, he’s comparing Keynesianism to the IMF/​European version of austerity.

But that type of “austerity” — as you can see from one of Veronique’s charts — is overwhelmingly comprised of tax hikes.

Yet is anybody surprised that we haven’t seen much — if any — growth in tax-happy nations such as Greece, Portugal, Italy, Ireland, Spain, and the United Kingdom?

What we really need are examples of nations that have reduced the burden of government spending. Then we can compare those results with nations that have tried Keynesianism and nations that have tried tax increases.

Sadly, we only have a few examples of this smaller-government approach. But we get very positive results.

The burden of government spending was reduced during the Reagan years and Clinton years, for instance, and the economy enjoyed good growth in both periods.

Canada was even more aggressive about reducing the size of the state during the 1990s. Their economy also did quite well, notwithstanding Keynesian dogma.

I suspect Keynesians would respond to these examples by asserting it’s okay — at least in theory — to restrain spending if the economy isn’t in recession.*

But then how do they respond to the experience of the Baltic nations? When the financial crisis hit a few years ago, those governments imposed genuine spending cuts and largely avoided the big tax hikes that have plagued other European nations.

Now Estonia, Lithuania, and Latvia are enjoying impressive growth while the nations that raised taxes seem stuck in perpetual recession.**

So let’s recap. When nations try Keynesianism, they get bad results because more government spending isn’t conducive to growth.

When nations raise taxes, they get bad results because you don’t get more growth by penalizing work, saving, investment, and entrepreneurship.

But when nations reduce the burden of government spending and leave more resources in the productive sector, the economy recovers.

Seems like one side can declare victory and spike the football, but it’s not Paul Krugman and the Keynesians.

*I’m guessing one would be hard pressed to find any examples of modern-day Keynesians ever supporting fiscal restraint.

**Krugman tried to undermine the Baltic model of fiscal restraint by attacking Estonia, but wound up with egg on his face.

Have you heard all the banter about a U.S. manufacturing renaissance? Numerous media reports in recent months have breathlessly described a return of manufacturing investment from foreign shores, mostly attributing the trend to rising wages in China and the natural gas boom in the United States, both of which have rendered manufacturing state-side more competitive. Today’s Washington Post includes a whole feature section titled “U.S. Manufacturing: A Special Report,” devoted entirely to the proposition that the manufacturing sector is back!

The myth of manufacturing decline begets the myth of manufacturing renaissance. This new mantra raises a question: How can there be a manufacturing renaissance if there was never a manufacturing “Dark Ages”?

Contrary to countless tales of its demise, U.S. manufacturing has always been strong relative to its own past and relative to other countries’ manufacturing sectors. With the exception of a handful of post-WWII recession years, U.S. manufacturing has achieved new records, year after year, with respect to output, value-added, revenues, return on investment, exports, imports, profits (usually), and numerous other metrics appropriate for evaluating the performance of the sector. The notion of U.S. manufacturing decline is simply one of the most pervasive economic myths of our time, sold to you by those who might benefit from manufacturing-friendly industrial policies with the abiding assistance of a media that sometimes struggles to distill fact from K Street speak.

The myth of U.S. manufacturing decline has long been advanced by policymakers and interested parties as a predicate for industrial policy or trade barriers. “Because U.S. manufacturing has fallen behind,” the argument goes, “we need to match the efforts of other governments in supporting our factories,” or “because U.S. manufacturing has been hobbled by predatory foreigners we need to erect tariffs to level the playing field,” or “because our industrial base is in ruins, U.S. national security is threatened without subsidies to rebuild manufacturing.”

The assertion that “U.S. manufacturing is in decline” is usually presented as holy writ, without allowance for examination or dissent, before those dubious policy solutions are pitched as our only salvation. Fortunately, the more open-minded and genuinely inquisitive insist upon closely evaluating premises before considering the “therefore-we-musts.” 

As the nearby chart confirms, U.S. manufacturing value-added (the metric most comparable to GDP, which equals the value of manufactured output minus the cost of intermediate goods), in both nominal and real terms, has been trending upward since the end of the World War II. Nominal manufacturing value-added declined on a year-to-year basis only eight times in the past 64 years. Manufacturing value-added took a hit during the Great Recession, as did the rest of the economy, but it plainly defies the data to suggest that U.S. manufacturing is – or has been at anytime – in decline.

As a share of the U.S. economy (the green bars on the chart), manufacturing has declined from a 1953 peak of 28 percent to 11.5 percent in 2011. But that is testament to the growth of U.S. services sectors, not to a decline in manufacturing, which (as you see) has been growing nearly continuously in absolute terms.

Yet some insist that these particular figures don’t tell the real story, which can be found in the manufacturing employment figures. Ah, well. Manufacturing employment has certainly been on a downward trajectory for three decades, after peaking at 19.4 million workers in 1979. Despite increases of about 500,000 workers over the past couple of years, manufacturing employment stands at about 11.8 million today. But manufacturing employment is not a barometer of the health of the sector. If the objective of economics is to make the best use of scarce resources, U.S. manufacturing – with its historic productivity gains in recent decades – has done an excellent job. It is not a reflection of manufacturing weakness that those scarce resources (apparently not so scarce) have not been redeployed elsewhere in the economy. Nevertheless, most of the “manufacturing-in-decline” narrative is the result of conflating the meanings of manufacturing value-added and manufacturing employment.

What the media are today characterizing as a manufacturing renaissance is better understood as a surge. Things aren’t being turned around; they are accelerating in the same direction.

Plenty of manufacturing and manufacturing-related activities have been occurring and growing in the United States for several years. Rising wages in China and the domestic gas boom change the mix of relatively viable manufacturing activities, but they are just two of dozens of considerations that factor into thousands upon thousands of decisions about where to develop, test, manufacture, assemble, package, sell, and perform every other function in a products supply chain from its conception to its consumption. A confluence of considerations from worker skills, total labor costs, degree of risk aversion, desire to produce within a tariff wall, interest in influencing political decisions, infrastructure quality, proximity to lucrative markets, proximity to supply chain locations, the stability of the political and business climates, corruption, the rule of law, access to capital, taxes, regulations, and dozens more all factor into the ultimate decision about where to perform a specific manufacturing activity.

The implication that the shrinking disparity in U.S. and Chinese wages or the growing disparity between U.S. and world natural gas prices recently have surpassed magic benchmarks that will open the flood gates to foreign and returning domestic investment is an oversimplification that erroneously homogenizes manufacturing. In fact, the sector is diverse in its requirements, and thus in the weighting of factors that affect its location decisions. Every business – even in the same industry – considers different factors and weights them differently.

What matters, though, is that direct investment in the U.S. economy – whether from foreign or domestic companies – is something to celebrate. Attracting investment in manufacturing and in other sectors is essential for economic growth. Unlike previous decades when the United States was easily the destination of choice for direct investment, nowadays there is much greater competition, particularly from emerging economies. In fact, the U.S. share of the world’s foreign direct investment stock has dropped significantly from 41 percent in 1999 to 17 percent in 2011.

So rather than observe the migration of some activities back to the United States and assume that a trend is in the making, a better use of the media’s resources would be to take inventory of the factors that encourage direct investment in the United States and spotlight for the public how U.S. policies can encourage, and not deter, an investment renaissance in United States.

Today, the nation’s top health economists released a study that throws a huge “STOP” sign in front of ObamaCare’s Medicaid expansion.

The Oregon Health Insurance Experiment, or OHIE, may be the most important study ever conducted on health insurance. Oregon officials randomly assigned thousands of low-income Medicaid applicants — basically, the most vulnerable portion of the group that would receive coverage under ObamaCare’s Medicaid expansion — either to receive Medicaid coverage, or nothing. Health economists then compared the people who got Medicaid to the people who didn’t. The OHIE is the only randomized, controlled study ever conducted on the effects of having health insurance versus no health insurance. Randomized, controlled studies are the gold standard of such research.

Consistent with lackluster results from the first year, the OHIE’s second-year results found no evidence that Medicaid improves the physical health of enrollees. There were some modest improvements in depression and financial strain–but it is likely those gains could be achieved at a much lower cost than through an extremely expensive program like Medicaid. Here are the study’s results and conclusions:

We found no significant effect of Medicaid coverage on the prevalence or diagnosis of hypertension or high cholesterol levels or on the use of medication for these conditions. Medicaid coverage significantly increased the probability of a diagnosis of diabetes and the use of diabetes medication, but we observed no significant effect on average glycated hemoglobin levels or on the percentage of participants with levels of 6.5% or higher. Medicaid coverage decreased the probability of a positive screening for depression [by 30 percent], increased the use of many preventive services, and nearly eliminated catastrophic out-of-pocket medical expenditures…

This randomized, controlled study showed that Medicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years, but it did increase use of health care services, raise rates of diabetes detection and management, lower rates of depression, and reduce financial strain.

As one of the study’s authors explained to me, it did not find any effect on mortality because the sample size is too small. Mortality rates among the targeted population – able-bodied adults 19–64 below 100 percent of poverty who aren’t already eligible for government health insurance programs – are already very low. So even if expanding Medicaid reduces mortality among this group, and there is ample room for doubt, the effect would be so small that this study would be unable to detect it. That too is reason not to implement the Medicaid expansion. This is not a population that is going to start dying in droves if states decline to participate.

There is no way to spin these results as anything but a rebuke to those who are pushing states to expand Medicaid. The Obama administration has been trying to convince states to throw more than a trillion additional taxpayer dollars at Medicaid by participating in the expansion, when the best-designed research available cannot find any evidence that it improves the physical health of enrollees. The OHIE even studied the most vulnerable part of the Medicaid-expansion population — those below 100 percent of the federal poverty level — yet still found no improvements in physical health.

If Medicaid partisans are still determined to do something, the only responsible route is to launch similar experiments in other states, with an even larger sample size, to determine if there is anything the OHIE might have missed. Or they could design smaller, lower-cost, more targeted efforts to reduce depression and financial strain among the poor. (I propose deregulating health care.) This study shows there is absolutely no warrant to expand Medicaid at all.

It is challenging to calculate the industrial output for post-socialist transition economies. However, through meticulous work based on internationally recognized statistical standards over two decades, two Russian economists currently associated with the Higher School of Economics in Moscow, Eduard Baranov and Vladimir Bessonov, were able to produce a statistical time-series for the main branches of Russian industry and for the industrial sector as a whole.

The table below summarizes their findings on the physical volume of industrial output in Russia from January 1990 until March 2013. January 1990 marked the end of economic growth in the territory of contemporary Russia (when Russia was still part of the former USSR) as well as the beginning of the late Soviet Union’s economic crisis. March 2013 is the most recent month for which data is available.

Source: Eduard Baranov and Vladimir Bessonov, 2013

No word describes these numbers better than “catastrophe”. As the data shows, the current level of Russian industrial output is still almost a quarter lower than it was in the time of the Soviet Union.

The only major sector that was able to increase its output over the last 23 years is the gas industry (by 17.1%). The output in every other major industrial sector has decreased. The size of the machine-building sector was reduced by 16.4%. The output in the chemical industry fell roughly by half. And light industry essentially ceased to exist.

Nor has this poor performance been only a recent phenomenon. As the graph below shows, with the exception of gas, industrial output in all major sectors has been dismal since the fall of the Soviet Union.

Possible explanations for the Russian industrial catastrophe might be grounded in a number of entirely reasonable arguments – such as the necessity to reduce the production of unnecessary, uncompetitive products manufactured en masse in the former USSR; to the inevitable changes in the structure of domestic and international demand since the opening of the Russian economy to the world market; or the tough competition from fast-growing emerging economies like China.

But those conditions were also faced by other post-Soviet countries, some of which managed to grow and increase industrial output over the past two decades. The main cause of Russia’s “Great Depression” has been its extensive interventionist and often arbitrary policies. Successive Russian administrations pursued policies that both destroyed substantial portions of the Soviet economic heritage and were unable to fully unlock the entrepreneurial resources and energy of the market economy, introduced in the late 1980s and early 1990s.