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February 23, 2018Will the Swiss adopt 100% reserve banking?
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Frequently Asked Questions
Robert Murphy, who is one of the heavy hitters for Econlib, interviewed me by email last month and it's out in the Lara-Murphy Report. The report is by paid subscription but Bob gave me permission to post the whole interview here. I think it answers some questions people have had about how I ended up in the Reagan administration, how I became such a non-interventionist, and what is my connection to Austrian economics. Here it is. (Because of the large cost and small benefit, I have not gone through and italicized all the titles of books, journals, and magazines.)
David R. Henderson is an Emeritus Professor of Economics at the Naval Postgraduate School in Monterey, California, a Research Fellow with the Hoover Institution at Stanford University, and a Senior Fellow with the Fraser Institute in Vancouver, Canada. He was previously a senior economist for health policy and for energy policy with President Reagan's Council of Economic Advisers.
David is the editor of The Concise Encyclopedia of Economics, the only reader-friendly encyclopedia of economics. His book, The Joy of Freedom: An Economist's Odyssey has been translated into Chinese. His book Making Great Decisions in Business and Life, co-authored with Charles L. Hooper, has been translated into Korean.
He has written over 300 articles for such popular publications as the Wall Street Journal, New York Times, Barron's, Fortune, Los Angeles Times, Washington Post, The Hill, USA Today, Chicago Tribune, Public Interest, National Review, Red Herring, and Reason. He has also written scholarly articles for such journals as: Journal of Policy Analysis and Management, Independent Review, Cato Journal, Regulation, Contemporary Policy Issues, Defense & Security Analysis, Eastern European Economics, Econ Journal Watch, and Energy Journal.
He has testified before the House Ways and Means Committee, the Senate Armed Services Committee, and the Senate Committee on Labor and Human Resources. He has also appeared on C-SPAN, CNN, the Jim Lehrer Newshour, the John Stossel show, the O'Reilly Factor, and MSNBC, RT, NPR, CBC, and the BBC.
Born and raised in Canada, he moved to the United States in 1972 to earn his Ph.D. in economics at UCLA. He proudly became a U.S. citizen in April 1986.
Lara-Murphy Report: We know you are eclectic and don't subscribe to any one label, but can you share with our readers your early experience with the Austrian School?
David R. Henderson:
After I graduated from college in May 1970, I took a year off to learn economics on my own. Harold Demsetz of the University of Chicago had come to our school in February 1970 and given 3 great talks on economics that caused me to think, with some encouragement from him, that I might want to study economics as a graduate student. He suggested that I buy all the back issues of the Journal of Law and Economics and work my way through them. That was good advice. But it was during that year that I also read Ludwig von Mises's Human Action from cover to cover. I liked it a lot, but not as much as I liked Hayek. I found his tone at times offputting. But also I didn't buy, to the extent Mises did, the a priori nature of economics. Some of it is; some of it isn't.
I found striking, though, how little academic economists knew about Mises and Hayek. That was a disappointment to me. In February 1972, when I was at the University of Western Ontario to take a year of advanced undergrad and one graduate class in economics, I was accepted with a reasonable money offer to UCLA. Shortly after, Armen Alchian wrote me to tell me why I should come to UCLA. I felt honored but also felt confident enough, in my letter back to him, to tell him that one thing I was looking for at graduate school was a place where Austrian economics was taken seriously. I still remember how I put it in my letter: "I want, when I mention Mises, not to have my listener think I'm mispronouncing the name of a childhood disease." I don't think Armen answered, but I did end up going to UCLA and it was a good decision. Unfortunately, there was scant mention of Austrian economics except for one thing: In many of the syllabi the first year, one of the readings was Hayek's "The Use of Knowledge in Society."
In the spring of 1974, I was invited to the first Austrian conference in South Royalton, Vermont. There I interacted with Murray Rothbard, Henry and Francis Hazlitt, Israel Kirzner, Milton and Rose Friedman (who crashed the party before the opening dinner), William Hutt, Svetozar Pejovich, and many young fellow economics graduate students such as Mario Rizzo, Randy Holcombe, Roger Garrison, Richard Ebeling, and a number of others. That deepened my interest in Austrian economics and I decided to learn more. (Incidentally, one of the few pieces of bad advice I was given by my mentor, Harold Demsetz, was not to go. I'm glad I went against his advice.)
In my last year at UCLA, 1974-75, when I was supposed to be working on my dissertation, the intellectual experience that I enjoyed most was the meetings of our Austrian study group at George Smith's apartment. The regular attendees were George Smith, who had written a book on atheism, Tom Palmer, John McCarthy, fellow Canadian and UCLA econ graduate student Harry Watson, the late Dianne Peterson, and I. We started with Mises' Theory of Money and Credit, with each person being responsible for preparing a presentation on a chapter and the rest of us being responsible for reading the chapter carefully. That's when I first became impressed with Mises as a giant of an economist. I especially liked the tone of the material written in 1911, which was most of it. He treated those he disagreed with as smart economists who had made errors. I think one could do worse than use Theory of Money and Credit today as the main text in a graduate monetary theory course, supplemented, of course, with many modern articles.
After we finished Mises, we went on to Hayek's Prices and Production. That book made sense to me as an analysis of business cycles only if one rejected the idea of "rational expectations," an idea that I was starting to find compelling. In June 1975, when I attended the second Austrian conference in Hartford, Connecticut, I went up to Hayek, who was attending, and said to him, "Professor Hayek, your analysis in Prices and Production makes sense to me only if we reject rational expectations. Do you agree?" He winced and went on to disagree but I still don't understand what he said. (By the way, when Hayek's cab pulled up on the Sunday afternoon before the conference started and the driver pulled Hayek's large suitcase out of the cab, I looked at a group of fellow graduate students who were more into Austrian economics than I was, figuring one of them would offer to carry his suitcase up the narrow stairs. None of them did, and so I went up and offered to do so. Hayek accepted gracefully. That suitcase was heavy. On the way up the stairs, I said, maybe a little too impudently, "This is heavy; what have you got in here." Hayek chuckled and answered, "Books.")
My bottom line is that I have learned a lot from the Austrian school but I wouldn't call myself an Austrian, just as I've learned a lot from the neoclassical economists, but would not call myself a neoclassical. My friend Jeff Hummel put it well: "When I talk to Austrian economists, I feel like a neoclassical; when I talk to neoclassical economists, I feel like an Austrian." That's my view too.
LMR: Among your list of accomplishments, you often write the Wall Street Journal article when a new Nobel winner is announced in economics. How did that happen?
I thought that in many of those cases I could do an article that was almost as good as, or occasionally better than, the one by the bona fide economist. I had written a few op/eds for the Journal and so I approached one of the editors of that page with whom I had dealt (this was just before I began using email and so I think I wrote him) and made the following offer: I will get up at 4:00 a.m. Pacific time, turn on CNN, and see who won the prize. Then I will contact you by 5:00 a.m. (8:00 a.m. Eastern time) and tell you whether I can do it. I won't mislead you. If I can't do it, I will tell you. Then I will have it done by 3:00 p.m. Eastern time.
The editor accepted. That started in 1996. That year the prize went to James H. Mirrlees and William H. Vickrey. I was elated. I remembered that I had read Mirrlees's finding that even a redistributionist-minded government should set the top marginal tax rate at about 20 percent and I had a textbook by Vickrey in which he had advocated, many years earlier, tolls for roads that varied with time of day and even envisioned something thought silly at the time, little meters in your car that could communicate with transmitters and receivers at the toll booths so that you wouldn't have to line up to pay your toll. So I knew I had my article. I contacted the editor before 5:00 a.m. to say I was in. I went to my office at the Naval Postgraduate School to get my Vickrey book and then headed to the downtown Monterey office I rented to find the Mirrlees material and start writing. My wife is a professional editor and so, after finishing the article at around 11:00 a.m., I faxed it to her and had her edit before 11:30 a.m.
That started a long tradition. I have done it 17 out of the last 22 years. In three of the years I missed, 1999, 2000, and 2002, I was traveling in Europe. In the other two years I missed, 1998 and 2007, I didn't know enough about the economists' work.
Three main things have changed in the last 15 years: (1) the announcement time, (2) the Journal's deadline, and (3) access to information on the web.
The announcement time was gradually made earlier; it is now about 2:45 a.m. Pacific time. So I set my alarm for about 3:30 because I will know within an hour of waking whether I can do it and even on New York time the Journal editor is not functioning at 7:30 a.m. Also, because of the increasing importance of the European edition of the Journal, the editors like to get the article by 11:00 a.m. Pacific time rather than noon. Finally, the information on the Nobel site, plus information from that encyclopedia known as Tyler Cowen, as well as information from Alex Tabarrok (both on the economics blog Marginal Revolution) have made my job easier. Indeed, a tradition that I started about 5 or 6 years ago was to send an early draft of my piece to Alex Tabarrok, who always gets back to me within half an hour and always with good suggestions for improvements.
One interesting story from 2014 involves Alex. That was the year that Jean Tirole was awarded the prize. I watched the explanation of the Nobel committee guy live on line. He emphasized Jean Tirole's work on reining in large firms. A friend who noticed that I was on Facebook messaged me to say that if I was doing the piece this year, he had some thoughts to share on Tirole's work in which Tirole comes off as a central planner. After reading Tyler Cowen's and Alex Tabarrok's excellent, and almost immediate, posts on Tirole, I decided that I didn't know enough about Tirole to write the piece. Here's how I decide: the bar for me to write a negative piece is higher than the bar for me to write a positive piece. If I'm criticizing someone on "his day," I'd better know the work pretty thoroughly. That's why I didn't write the piece on Amartya Sen when he won. I had never been impressed by his work, and my piece would have been very critical; but I thought I might have left something positive and important out.
I called Alex Tabarrok and discussed the idea, and told him that if he wanted, I would bow out and recommend him. Alex didn't feel comfortable enough either. I then called my editor at the Journal and told him my thinking. His thinking was similar to mine: if you're going to say it was a bad pick, you had better really know the work.
Two minutes after I called my Journal editor, Alex sent me a 2003 article by Tirole and Jean-Charles Rochet that turned around my thinking on Tirole. It's the one I quote in my Journal piece. I looked back at everything I had seen that morning and realized that it was the Nobel Committee, with its emphasis on reining in big business, that had colored my view of Tirole. That wasn't fair to Tirole. But it also gave me my angle: contrast Tirole's cautiousness with the Committee's aggressiveness. I e-mailed the two Journal editors I was dealing with, titling the e-mail "HALT." I made my case. The Journal accepted.
The other major influence on my foreign policy thinking was David Friedman's book The Machinery of Freedom. His chapters on foreign policy convinced me that even if it was important for the U.S. government to intervene to head off nasty governments, the odds that government officials would do it well were slim.
So when I entered the Reagan administration in 1982, I was already pretty much a non-interventionist. That didn't matter much for my work because I was dealing with almost solely domestic economic policy. Working under Martin Feldstein and the late Bill Niskanen at the President's Council of Economic Advisers, I was the Senior Economist for health policy from 1982 to 1984 and the Senior Economist for energy policy from 1983 to 1984. Incidentally, I think Bob Murphy will find it interesting that in my first year there I had as colleagues his favorite economist, Paul Krugman, as well as Larry Summers, Greg Mankiw, and John Cochrane. The closest I came to foreign policy was in concluding, when I had the energy slot, that because oil is fungible, the oil weapon was a dud. Indeed, that thinking and some estimates I put to it, were behind my most influential article in the Wall Street Journal, the one in August 1990 that said that, contrary to Henry Kissinger, Secretary of State James Baker, and President George H.W. Bush, Saddam Hussein could not cause a huge loss in U.S. GNP. Richard Harwood, an editorial writer for the Washingon Post, wrote an editorial a few days later giving me credit for creating quite a stir in D.C.
To give you an idea how focused I was on the job at the Council and not paying attention to foreign policy, one of my best friends called me one day to complain about CIA chief William Casey mining the harbor of Managua, Nicaragua. I replied, "He did?" I literally didn't follow it, figuring my best strategy was, kind of like McGruff the crime dog, to do my best each day to take a bite out of government.
How did I get to the Naval Postgraduate School? That's not an obvious move for someone with my views on foreign policy. It has to do with my marriage. I got married in August 1983, halfway through my time at the Council, and my wife badly wanted to move back to the San Francisco area, where we had met two years earlier. I told her that I would interview for every plausible job between Marin County in the north and Carmel in the south, but I would also need a Plan B in case no good job in that area came through. I happened to mention to a friend who was a Commander in the Navy, for whom I had done a favor when I was on the faculty at the University of Rochester, that I wanted a job in that area. He told me about the Naval Postgraduate School. I contacted the chairman of the department that contained the economics group and my friend had already called him. The chairman was gung-ho on hiring me, and, as I learned later, was one of the few votes in my favor. So, I realized pretty quickly after getting there, that, with a baby on the way in a few months, I should try to win them over. I did.
I've never regretted my choice. I have met so many fine people in the U.S. military and in foreign militaries who are naturally curious and relatively easy to teach. I still get letters from people who were my students, one, three, five, ten, and twenty years ago in which they tell me how much they appreciate what I taught. One of my favorites was from an officer on a U.S. Navy ship who told me he was doing everything in his power not to start a war.
On the draft, my opposition to the draft started when I was 17 and read Milton Friedman's Capitalism and Freedom, and followed up with other articles and books, including the volume edited by Sol Tax that contained the papers and conference transcript from the famous conference on the draft held at the University of Chicago in 1966. (I had found a used copy for about a dollar at Coles' Books, a discount bookstore in Winnipeg.) I found the argument that the draft was a form of slavery instantly persuasive and, beyond that, found the economic argument that the draft is more costly than an all-volunteer force of the same size both clever and powerful.
Pretty much all of my experiences when I was between 18 and 19 reinforced my views. One was at a weeklong Intercollegiate Studies Institute conference at Rockford College in Illinois in August 1969 that I attended after having worked that summer in an underground nickel mine in northern Canada. The 9 libertarian students, out of about 60 who attended (the rest were conservatives), quickly bonded and two of them expressed their worry about being drafted and sent to Vietnam. That made it very real for me. Another major experience was an interaction I had with a young soldier based at Fort Lewis, whom I met in the Shelter Half, an antiwar coffeehouse in Tacoma, Washington in June 1970. His name was David Henderson. I told him he looked scared and he said he was: he was heading to Vietnam the next day. As we talked, I learned that he had grown up in a small town in North Dakota that I knew well: it was 29 miles south of the town I had grown up in in Manitoba; when I was young, our family drove down to his town to see movies on Sunday nights. That brought the draft home to me more powerfully. By the way, I was working in the Reagan White House when the Vietnam War Memorial was opened in November 1982. Almost immediately I headed over to see if his name was on the wall. Fortunately, it wasn't.
When Senator Sam Nunn tried to bring back the draft in May 1979, I testified against it before the Senate Armed Services Committee. I also spoke at some anti-draft rallies, one at Carnegie-Mellon University in May and one at UC Berkeley in October. Incidentally, the Students for a Libertarian Society paid my airfare from Rochester to Pittsburgh, and they paid it out of a generous gift from Charles Koch. There, I've said it.
In the summer of 1980, after Ronald Reagan had come out against the new draft registration law that Jimmy Carter had signed earlier that year, I wrote an economist's statement against the draft, and got various prominent economists, including Milton Friedman, Alan Greenspan (whom I had been on a panel with at the American Economic Association meetings in Denver in early September--he representing Reagan and me representing Libertarian Party presidential candidate Ed Clark), and Murray Rothbard, to sign. When it was published as a full-page ad in Inquiry, Libertarian Review, and The Progressive in the fall of 1980, it had about 140 signers. I later got about another 140.
In short, I've been against the draft for over 49 years. I doubt that that's a view I will change. I've also written and spoken about the important role that Martin Anderson, Milton Friedman, Walter Oi, and William H. Meckling (my boss at the University of Rochester) played in getting rid of the draft.
LMR: Now that you are recently retired from teaching, we understand that you have a philosophy when it comes to investing for the later years?
There are some obvious steps: pay off your credit cards every month. If that's hard to do, then come up with an aggressive plan to pay them off as soon as possible, focusing the biggest payments on the highest-interest credit cards.
Once you've done that, save as high a percent of your income as you can manage in tax-advantaged funds--401(k)s, 403(b)s, SEP-IRAs, Roth IRAs, etc.--and invest a very large percent of those funds in funds like Vanguard's Total Market Index. What if, starting out, you can handle saving only 5 percent of your income? Then do it. But every time you get a raise, even just a cost-of-living adjustment, add some of that raise to the percent you save. So, for example, if you get a 3-percent raise, then increase the percentage you save from 5 percent to 6 or 7 percent. Do that over a few years and, within 6 or so years, you're saving close to 15 percent of your gross income. Do that for 30 years and the odds are that, by your standards, you will be rich.
Two cautions. First, if you invest in individual stocks, treat that like going to Vegas. Don't put any of that 5 or 10 or 15 percent that you're saving annually, into individual stocks. You may think you can identify the next Microsoft or Apple. The odds are higher that you'll invest in the next eToys. Second, don't try to be a market timer. Invest your funds and keep them there. You might occasionally want to rebalance the mix of your portfolio between domestic stocks, foreign stocks, and bonds, but do that to rebalance, not to time.
LMR: Finally, what are your thoughts on the tax package that the Republicans have passed?
The part of the bill I disliked most was the child tax credit and its "refundability" feature, which in itself is a misuse of language: you can't refund something that was never taken in the first place. The other part I dislike is that Congress didn't include more cuts in spending to keep the cumulative deficit over 10 years well under $1 trillion.
Also, the tax bill changes the way tax brackets are adjusted for inflation. Tax brackets for most people will rise slightly over time. Given that the Congress did that, I think it should have applied the same chain indexing to how Social Security benefits are adjusted for inflation over time. That will be very hard to achieve now. I'm guessing that the various players figured, maybe correctly, that they couldn't get enough Republican votes for such a measure because Republicans were worried that a large percent of their base is elderly Social Security recipients.
I was surprised, and a little disappointed, that not one Democrat in Congress voted for the bill. My reasoning as an economist tells me that some Democrats will regret their choice, especially when over half their constituents see higher after-tax pay as early as February. My reasoning as an economist who understands political incentives tells me that maybe there's something in these Democratic politicians' calculus that I've failed to take account of.