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AMERICAN INSTITUTE far ECONOMIC RESEARCH RESEARCH REPORTS Great Harrington, Massachusetts Vol. XLVII No. 43 Published Weekly by 01230 October 27,1980 What About the Libertarian Party? of Americans from foreign enemies. Obviously, the Republican platform is more consistent with these aims than is the Democratic Party's position." Passages of the Republican Party platform certainly display inspiring espousal of the original principles laid down by America's Founding Fathers in the Declaration of Independence and in the Constitution. Americans have good reason to expect, however, that candidates, when elected, disregard campaign promises. In particular, past Republican administrations imposed and continued wageprice controls, abrogated the gold convertibility of trie dollar, perpetuated and enlarged the Social Security fraud, ran large budget deficits, intervened in domestic and foreign trade with subsidies and "bail outs," and took other actions contrary to those avowed by or implicit in the current or earlier Republican platforms. Thus, there are substantial grounds to believe that the election of Ronald Reagan would be no guarantee that the role of Government in the economy will be significantly reduced. However, since the Democratic platform calls explicitly for continued and even more vigorous application of interventionist policies, the re-election of Mr. Carter probably would be a signal to the politicians The Libertarian Party's candidate, Mr. Clark, may gain a noticeable percentage of popular votes, as the result of his party's comprehensive set of proposals to reduce and eliminate the role of Government. If this happens it will be the first time since the emergence of the Socialist Party in the early part of this century that a challenge to the dominance of the two major parties has not relied on the popularity of a single candidate or a single issue. The Socialist Party has long since disappeared, for practical purposes, but its programs of increased Government intervention live on. If the Libertarians receive more than token support at the polls, the major parties may not be long in responding to the sentiments that give rise to that support. In Research Reports for September 15,1980 ("Platforms: Promises and Performance") we concluded, "Our economic research findings over 45 years convincingly demonstrate, in our view, that economic and social progress are achieved only insofar as individual liberty, freedom, and justice are enhanced. The latter implies a strictly limited role for Government, limited to providing a 'fair field with no favor' and to protecting the security Table 1 SELECTED LIBERTARIAN PARTY ECONOMIC PROPOSALS 1. An immediate $180.7 billion tax cut and a $201.4 billion spending cut; a 50% reduction in income tax rates and an immediate end to budget deficits. Eventual revocation of all personal and corporate taxes on income, capital gains, sales, VAT, and property; repeal 16th Amendment and no prosecutions for tax evasion in the meantime. 2. A halt to inflationary monetary policies, abolition of all legal tender laws and all compulsory government units of account; and elimination of all government fiat money, government minted coins, and all restrictions on private minting. 3. Abolition of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Banking System and all similar state and Federal agencies in order to foster free market banking and a free market commodity standard, such as gold coins denominated by units of weight. Pending abolition of the Fed: (a) life branch banking restrictions, (b) repeal all state usury laws, (c) eliminate regulation Q and prohibition of interest on checking accounts, (d) eliminate margin requirements on security purchases, (e) revoke all other selection credit controls. 4. Repeal of all controls on wages, prices, rents, profits, production, interest rates, etc.; repeal of all "anti-trust" laws, including the Robinson-Patman Act (which restricts price discounts), Sherman and Clayton Anti-Trust Acts; abolish FTC and anti-trust division of Dept. of Justice; and elimination of (a) inclusion in laws of incorporation all grants of monopoly special privilege, (b) special limits on corporate liability for damages caused in noncontractual transactions, (c) state or Federal limits on the size of private companies, (d) limits on the right of companies to merge, (e) efforts to expand Federal chartering of corporations as a pretext for government control of business. 5. An end to all government subsidies to business, labor, education, agriculture, science, broadcasting, the arts, sports, and any other special interests; termination of government-created franchise privilege and government monopolies for such things as broadcasting, transportation, garbage collection, fire protection, electricity, natural gas, telephone, and water supplies; and no rate regulation of utilities or curtailment of the right of private companies to offer such services. 6. Abolition of all Federal regulatory agencies, withdrawal from the World Bank and the IMF; liquidation of the Ex-Im Bank and the Commodity Credit Corporation, elimination of all tariffs and quotas, and abolition of the Tariff Commission and the Customs Court. Source: Libertarian Party Platform, Clark Campaign literature. 169 Table 2 SELECTED ECONOMIC PROPOSALS OF THE SOCIALIST PARTY PLATFORM OF 1928 A. Nationalization of our natural resources, beginning with the coal mines and water sites, particularly at Boulder Dam and Muscle Shoals. B. A publicly owned giant power system under which the federal government shall cooperate with the states and municipalities in the distribution of electrical energy to the people at cost. C. National ownership and democratic management of railroads and other means of transportation and communication. D. Loans to states and municipalities without interest for the purpose of carrying on public works and the taking of such other measures as will lessen widespread misery. E. A system of unemployment insurance, and The nation-wide extension of public employment agencies in cooperation with city federations of labor. F. A system of health and accident insurance and of old age pensions as well as unemployment insurance. G. Shortening the workday [and] Securing to every worker a rest period of no less than two days in each week. H. Increase of taxation on high income levels, of corporation taxes and inheritance taxes, the proceeds to be used for old age pensions and other forms of social insurance. Note: In 1928 the highest Federal tax rates were 25 percent on personal income, 12 percent on corporate income, and 20 percent on estates. The present highest rates are, respectively, 70 percent, 48 percent and 70 percent Source: Milton and Rose Friedman, Free to Choose, 1980, Appendix A. that the American public still has not recognized or rejected the spending-inflating-embezzling scheme that has been in force for nearly 50 years and has been so successful in augmenting the power of politicians. As we discussed in our aforementioned "Platforms: Promises and Performance," there is a marked difference between the Democratic and Republican positions on the role of the Federal Government in the economy. Between the two major Presidential candidates, therefore, the economic positions of Ronald Reagan are the more sound by far. However, compared to the Libertarian Party and its candidate, Mr. Ed Clark, the Republican endorsements of a free economy seem only lukewarm. Libertarian Party Economic Proposals The list of proposals in Table 1 speaks for itself. The Libertarian Party economic policy clearly is intended to limit the role of the Federal Government to providing a "fair field with no favor." The Libertarian Party firmly rejects any Government action that itself initiates forceable restraint against private individuals who have not themselves first violated the rights of others in one form or another (by means of fraud, theft, breach of contract, assault, etc.). Government compulsion or intervention, in the viewpoint of Libertarians, is justified only to counter criminal acts by citizens. The proposals in the table reflect strict application of this Libertarian criterion. The Libertarian Party resolutely places the burden of providing the warrant for a particular Government action that would transgress individual liberties on the would-be interventionists. There are no such actions that the Libertarian Party has yet found warranted. This uncompromising stance accounts for the appearance in Table 1 of certain economic proposals that some non-Libertarian but otherwise generally freedom-minded Americans might feel "go a bit too far," such as the plank for eventual abolition of all involuntary taxation. For Libertarians, however, the operative aspect of such a stance is, as mentioned just above, uncompromising adherence to principle. Central to Libertarian thought is the insistence that opening the door for the Government to do to people what it is supposed to prevent, namely the violation of individual rights, is asking for trouble by establishing legal precedents for ever-widening threats to liberty, not to mention cumulative economic distortions. Libertarians cite the present sorry economic state of the country as evidence in support of their views and they probably would agree with economist W. H. Hutt that "While statesmanship demands compromise — wisdom in the recognition of the contemporaneous — it never requires the abandonment of principle." Are the Libertarian economic proposals radical? Undoubtedly. Revolutionary? Avowedly committed to no less than the objectives of our original American Revolution, Libertarian Party members apparently believe, as Barry Goldwater commented in 1964, "extremism in defense of liberty is no vice." So what are we to make of the Libertarian economic policies? As we said in "Priorities for Promoting Progress in America," our Economic Education Bulletin of November 1979, "Today the costs of interventionism in terms of both resources and freedom concern a substantial and growing proportion of the American people. A search is on for a guiding principle pointing the way toward policies having a good chance of restoring progress in America. We believe that history adequately demonstrates that progress is fostered by increased freedom, liberty, and justice. Therefore, policies promoting those conditions probably will be helpful, and policies subverting them can be expected to be harmful." Detailed analysis of the policies listed in Table 1 is beyond the space limitations of this article; consequently, we leave to our readers long familiar with the results of AIER's research to decide whether each of those individual economic proposals would tend to foster or retard America's achievement of liberty and economic prosperity. The Party of Principle? The Libertarian Party's platform is based on a highly structured, tightly woven philosophical system. Although they disagree among themselves about significant policy issues (national security policy and nuclear power are two particularly noteworthy areas of intra-party dissent), the Libertarian Party is unusual for its clear commitment to general principle. Such commitment to principle has not, historically at least, been the formula for success in U.S. politics. U.S. politics have long been dominated by two major parties composed of broad-based coalitions of various interests and whose primary "principles" appear to be little more than getting and holding elected office. By far the majority of our elected officials chose their party affiliation because it offered the best opportunity for advancement at the time they entered politics. Very few elected officials change their party affiliation once they are elected and their views are as likely to reflect those of their constituents as their party affiliation. "Third" parties have come and gone during the past 100 years. Few have achieved any electoral success at all. "Third" parties that managed to win notable support 170 (more than 2 percent of the popular vote for President) at the polls have done so because they were vehicles for a single candidate (such as the "Bull Moose" Party of Theodore Roosevelt or the American Independent Party of George Wallace) or proponents of a single issue (such as the Greenback or the Prohibition Parties). A possible exception was the Socialist Party, whose candidate for President received between 3 and 6 percent of the popular vote for President from 1904 to 1920. Its latter-day standard bearer, Norman Thomas, received the third largest total among Presidential candidates as late as 1944, but it was only a small fraction of 1 percent then. The Socialist Party is now split up into a number of inconsequential squabbling factions, yet it was among the longest lived "third" parties. Among such parties, the Socialists had perhaps the most rigorously thought out view of what they wanted and offered. Socialist views were generally considered "extremist" or "to go a bit too far,' which presumably is the reason for their candidates' failures to be elected. Nevertheless, inspection of Table 2 reveals that many of the Socialists' proposals later were implemented. The Democratic Party did not have a monopoly on such implementation: the construction of Boulder Dam (see Table 2, item A) began under President Hoover and "revenue sharing" (see item D) was an initiative of President Nixon. Major parties have a history of preserving their dominance by eschewing "doctrine" but co-opting the issues that give third parties whatever support they have If, as seems likely, the Libertarian Party proposals to drastically curtail the role of the Federal Government in the U.S. economy (and elsewhere) gain noteworthy "grass roots" support, the major politicians probably will not ignore the issues for long. Inasmuch as our research indicates that Government economic intervention is the major source of, and not the solution to, the Nation's economic problems, we could only regard such developments as encouraging. Since we reported on what has happened to the money supply (Research Reports, August 25, 1980), the shortterm changes in the key monetary aggregate, M-1B (currency in the public's hands, demand deposits at commercial banks and other checkable deposits at all depositary institutions), has continued to increase rapidly. M-1B increased at a 13.8 percent compound annual rate from the 4 weeks ending on May 7 to the 4 weeks ending on October 8. M-1B was 409.7 billion on October 8, 1980. Clearly, this measure of the money stock increased in the short term far above the Federal Reserve's own yearly target of 4-6.5 percent, which was announced early this year. However, from October 10,1979 until October 8, 1980 M-1B increased 6.5 percent, which is exactly at the upper range of the Fed's monetary growth target, and the Fed has defended itself by asserting that the recent "explosive" growth in M-1B has been merely a "catching-up" of this series to the sharp deceleration that occurred during the spring (see Chart 1). However, the compound annual rate of growth of M-1B between January and September of 1980 was 8.2 percent, suggesting that a deceleration will be needed in the fourth quarter, if the yearly target is to be met. Whether the recent 6-month trend is in fact just the Federal Reserve's response to sluggish monetary growth or, as some cynics believe, a monetary boost to the economy in order to help re-elect an incumbent president, is immaterial. In either event, the Fed may not be adhering to its own new operating procedures announced on October 6,1979. At that time, the Federal Reserve Board revealed that it was changing its focus from interest-rate targets to target rates of growth in bank reserves and in the monetary base in order to restrain the growth of the monetary aggregates. During the past 12 months both interest rates and the rate of growth of the monetary aggregates have fluctuated markedly. Although the Fed achieved its monetary (M-1B) target growth rate during the past year, a more important consideration is whether "high-powered money," Federal Reserve Credit and the monetary base — from which the monetary aggregates grow — has been increasing at a lower rate than it was earlier. Since October 1979 the monetary base increased at an 8.2 percent compound annual rate, which is nearly the same rate as that in recent years (see Chart 2). Thus the first test of the Fed's commitment reveals that it has not fulfilled its promise to reduce the growth rate of high-powered money, which has been increasing at historically high rates. THE FED'S MONETARY GOALS The Federal Reserve has pledged to lower the rate of increase in various key monetary series. Since the Fed supposedly instituted its new operating procedures a year ago, the available evidence indicates it may have been partly successful. However, the future trend of the Federal budget may discourage the Fed from decreasing the growth rate in the monetary aggregates. Chart 1 PERCENT CHANGE OF M-1B FROM A YEAR EARLIER +1U -4V +8 +6 «• +4 +2 0 V\ *• f \ 1 "•i I M• • W • •*• •• » -?. I960 r '62 '64 '66 '68 70 171 0 72 74 76 78 '80 Chart 2 ADJUSTED MONETARY BASE (Percent Change from a Year Earlier) +12 1950 '52 '54 '56 '58 '60 '62 The banking system's reserves increase when the Fed engages in open market operations, reduces reserve requirement, or permits member banks to borrow from the discount window. These reserves are percentages of the commercial banks' deposit (both demand and time) liabilities. When the Fed simultaneously increases its assets (usually by buying Treasury securities) and its liabilities (usually by writing a check on itself) it is literally creating "money out of thin air." This monetization of debt is one of the key steps in the inflating process. As the proceeds are relent and deposited in the banking system, this high-powered money serves to support the currency, demand, and time deposits held by the public. The total of such monetization, Federal Reserve Credit (adjusted), is therefore an important indicator of the Fed's monetary policy. For the week ending October 15, Federal Reserve Credit was $142.5 billion, $10.0 billion or 7.5 percent more than the level a year ago. The most recent 12month increase was nearly 2 percentage points less than the rate of increase between November 1, 1978 and October 31, 1979 when this series increased 9-5 percent. In one sense, then, the Fed has reduced the rate at which it acquires assets, which serve as the basis for the multiple expansion of demand deposits. Thus the Fed may be achieving one of its long-term goals by decelerating its acquisition of Treasury and other debt. Although the rate of growth of the monetary base has changed little since last October and the rate of growth '64 '66 '68 70 72 74 76 78 '80 of Federal Reserve Credit has diminished somewhat, a third important indicator, the rate of change of adjusted bank reserves, has increased. This series, which is the monetary base less currency in circulation, is shown in Chart 3, and its upward trend suggests that the effects of the Fed's recent actions have been the opposite of its pronouncements of a year ago. Thus, clear cut evidence that the Fed has fundamentally changed its ways is lacking. Even if the Fed is successful in reducing the rate of inflating over the next 2 to 3 years, the pressure to accelerate monetary expansion probably will increase. The Federal Government's budget is expected to increase substantially over the next few years, the temptation for the administration in office to "pay" for these expenditures by inflating rather than taxing the people will continue to be great. PRICE OF GOLD 1979 1980 Oct. 25 Oct. 16 Oct.23 Final fixing in London $391.80 $674.00 $634.50 Research Reports (ISSN 0034-5407) (USPS 311-190) is published weekly at Great Barrington, Massachusetts 01230 by American Institute for Economic Research, a nonprofit, scientific, educational, and charitable organization. Second class postage paid at Great Barrington, Massachusetts 01230. Sustaining membership: $9 per quarter or $35 per year. Chart 3 ADJUSTED BANK RESERVES (Percent Change from a Year Earlier +16 -8 1950 '52 76 78 '80