Download Research Reports - 1980, No. 43 - American Institute for Economic

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
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+8
+6
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+4
+2
0
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1
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70
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0
72
74
76
78
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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
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Institute for Economic Research, a nonprofit, scientific, educational, and charitable organization. Second class postage paid at
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Chart 3
ADJUSTED BANK RESERVES
(Percent Change from a Year Earlier
+16
-8
1950
'52
76
78
'80