It is as though the Fed were riding on the back of a double-headed monster. It cannot hang on forever, but it cannot dismount the beast without being devoured. As it is, the U.S. Treasury depends on ZIRP to fund America’s ballooning debt. When investors flee an enfeebled dollar the Fed is likely to be the “buyer of first resort” so that the price of Treasurys does not fall, pushing up interest rates. (So far Treasurys with low yields are still in high demand.) So with the Fed insisting that short-term interest rates will remain near zero “for an extended period,” a phrase used for the past two years, a new round of QE is almost inevitable.

For its part, QE involves flooding financial institutions with excess liquidity to try to flatten out the yield curve and depress long-term interest rates in hopes of sparking a recovery. But QE has created a massive overhang of excess reserves in the banking system that constitute repressed price inflation. And the sums involved are truly staggering: The Fed has injected at least $2.3 trillion into the financial system since Lehman Brothers collapsed in September 2008.

From late 2008 through March 2010 the Fed bought longer-term securities worth $1.7 trillion (QE1). This included purchases of $500 billion in mortgage securities and $100 billion in agency debentures with a target of $1.25 trillion for mortgage debt. Purchasing mortgage-backed securities and bailing out AIG and Bear Stearns, as well as buying other securities, led to a 140 percent increase in the monetary base.

In November 2010 the Fed began QE2 by buying an additional $600 billion in longer-term Treasury securities, a program that officially expired at the end of June. Yet the Fed has indicated it will continue buying Treasurys using proceeds from maturing debt it already owns.

Stealth Easing

With over $112 billion of the Fed’s government bond holdings maturing over the coming 12 months, replacement alone would involve purchasing over $9 billion of Treasurys each month. It also has more than $914 billion of mortgage-backed debt and $118 billion of debentures issued by government-sponsored enterprises (Fannie Mae and Freddie Mac). As such this is a “stealth” continuation of QE with only a limited, if any, decrease in the money-creation process.

For all the fanfare about QE, it must be said that it constitutes a last-gasp step and admission of the failure of other monetary policy tools. Consider the case of Japan. Its central bank, the Bank of Japan (BoJ), began asset purchases under QE to offset deflation and stimulate its ailing economy in early 2001. After nearly a decade of setting interest rates near zero the BoJ realized it had been unable to conjure up an economic recovery. Then after five years of gradually expanding its bond purchases, the BoJ exercised an exit strategy from QE in 2006, only to begin again.

Last March the BoJ increased its QE program from ¥5 trillion to ¥10 trillion (about $130 billion) scheduled until the end of 2012. Recently it announced another expansion to ¥15 trillion ($183 billion).

Incentives vs. Growth

A child untutored in economics might think it makes no sense to continue massive increases of liquidity into the economy that have been ineffective for so long. But most central bankers and many economists argue that previous amounts were too little and more is needed.

The incentives that QE and ZIRP create for commercial banks make it easy to see why these policies cannot promote economic growth. On the one hand, low interest rates reduce the cost of borrowing, which should encourage more investment spending. But on the other, commercial banks pay almost nothing to borrow yet receive interest payments from the Fed to hold excess reserves, making them unlikely to extend new loans.

A sufficiently high interest rate paid on bank reserves will induce banks to choose a risk-free interest-bearing asset rather than lending to private-sector borrowers. And so it is that commercial banks are earning record profits while making very few new loans.

Exit Strategy?

The question of whether the Fed or the BoJ has an effective “exit strategy” from monetary expansion using near-zero interest rates and quantitative easing remains open. One possibility for the Fed is to engage in repurchase agreements (repos) to remove some of the excess liquidity that it pumped into the financial system.

These repos involve selling securities to commercial banks with the Fed agreeing to buy them back at a higher price at a later date. But once again commercial banks will find holding risk-free interest-bearing assets a much better bet than issuing new commercial loans.

In the end both QE and ZIRP have been ineffective in restoring economic vitality while also creating a massive overhang of repressed inflation. Most economists view business startups, especially small and medium-sized enterprises, as the key to economic recovery and growth. Yet QE and associated central-bank policies are diverting credit away from newly forming firms.

The Fed has now announced it will continue the “exceptionally” low short-term interest rates until the middle of 2013. This indicates that U.S. central bankers are unconvinced of the errors of their ways in their policy choices. That they are unwilling or unable to change course means the U.S. and Japanese economies are doomed to painfully slow economic growth for the foreseeable future.

Despite assertions that it has ended its policy of quantitative easing (QE), the Fed is unlikely to be able to do so until it also ends its zero-interest-rate policy (ZIRP). This deadly policy duo has had terrible consequences for the American economy and every country using U.S. dollars, which continue to depreciate.

It is as though the Fed were riding on the back of a double-headed monster. It cannot hang on forever, but it cannot dismount the beast without being devoured. As it is, the U.S. Treasury depends on ZIRP to fund America’s ballooning debt. As investors flee an enfeebled dollar and ponder S&P’s downgrade, the Fed is likely to be the “buyer of first resort” so that the price of Treasuries does not fall, pushing up interest rates. So with the Fed insisting that short-term interest rates will remain near zero “for an extended period,” a phrase used for the past two years, a new round of QE is almost inevitable.

Excess Liquidity

For its part, QE involves flooding financial institutions with excess liquidity to try to flatten out the yield curve and depress long-term interest rates in hopes of sparking a recovery. But QE has created a massive overhang of excess reserves in the banking system that constitute repressed price inflation. And the sums involved are truly staggering with the Fed having injected at least $2.3 trillion into the financial system since Lehman Brothers collapsed in September 2008.

From late 2008 through March 2010, the Fed bought longer-term securities worth $1.7 trillion (QE1). This included purchases of $500 billion of mortgage securities and $100 billion of agency debentures with a target of $1.25 trillion for mortgage debt. purchasing mortgage-backed securities and bailing out AIG and Bear Stearns, as well as buying other securities, led to an increase in the monetary base of 140 percent.

In November 2010 the Fed began QE2 by buying an additional $600 billion in longer-term Treasury securities, a program that officially expired at the end of June. Yet the Fed has indicated it will continue buying Treasuries using proceeds from maturing debt it already owns, allowing it to engage in continuing quantitative easing by another name.

With over $112 billion of the Fed’s government bond holdings maturing over the coming 12 months, replacement alone would involve purchases of Treasurys of over $9 billion each month. It also has more than $914 billion of mortgage-backed debt and $118 billion of debentures issued by government-sponsored enterprises (Fannie Mae and Freddie Mac). As such, this is a “stealth” continuation of QE with only a limited, if any, decrease in the money-creation process.

Last Gasp

For all the fanfare about QE, it must be said that it constitutes a last-gasp step and admission of failure of other monetary policy tools. Consider the case of Japan. Its central bank, the Bank of Japan (BoJ), began asset purchases under QE to offset deflation and stimulate its ailing economy in early 2001.

After nearly a decade of setting interest rates near zero, the BoJ realized it had been unable to conjure up an economic recovery. Then after five years of gradually expanding its bond purchases, the BOJ exercised an exit strategy from QE in 2006, only to begin again.

Last March the BoJ increased its QE program from ¥5 trillion to ¥10 trillion (about $130 billion) scheduled until the end of 2012. Recently, it announced another expansion to ¥15 trillion ($183 billion).

A child untutored in economics might think it makes no sense to continue massive increases of liquidity into the economy that have been ineffective for so long. But most central bankers and many economists demur that previous amounts were too little and more is needed.

No Growth

But the incentives that QE and ZIRP create for commercial banks make it easy to see why these policies cannot promote economic growth. On the one hand, low interest rates reduce the cost of borrowing, which should encourage more investment spending. But on the other, commercial banks pay almost nothing to borrow yet receive interest payments from the Fed to hold excess reserves, making them unlikely to extend new loans.

A sufficiently high interest rate paid on bank reserves will induce banks to choose a risk-free, interest-bearing asset rather than lending to private-sector borrowers. And so it is that commercial banks are earning record profits while making very few new loans.

The question of whether the Fed or the BoJ have an effective “exit strategy” from their policies of monetary expansion using near-zero interest rates and quantitative easing remains open. One possibility for the Fed is to engage in repurchase agreements (reverse repos) to remove some of the excess liquidity that it pumped into the financial system.

These reverse repos involve selling securities to commercial banks with the Fed agreeing to buy them back at a higher price at a later date. But once again, commercial banks will find the choice between holding risk-free, interest-bearing assets a much better bet than issuing new commercial loans.

Repressed Inflation

In the end both QE and ZIRP have been ineffective in restoring economic vitality while also creating a massive overhang of repressed inflation. Most economists view business startups, especially small- and medium-sized enterprises, as the key to economic recovery and growth. Yet QE and associated central-bank policies are diverting credit away from newly forming firms.

The Fed has now announced it will continue the “exceptionally” low short-term interest rates until the middle of 2013! This indicates that U.S. central bankers are unconvinced of the errors of their ways in their policy choices. That they are unwilling and unable to change course means that the U.S. and Japanese economies are doomed to painfully slow economic growth for the foreseeable future.

The U.S. government has defaulted at least twice before: once in 1933 when it reneged on redemption of gold certificates and in 1971 when it stopped redeeming dollars for gold.

One certainty is that the outcome of this debate will have a lot to do with the course of the U.S. economy and the global status of the dollar. The bottom line is that a continued increase in America’s government debt, aided by a higher debt ceiling, will lead to more quantitative easing (QE). And that the monetary pumping associated with QE will almost certainly lead to a nasty bout of consumer price inflation that will sweep the globe.

Overpaying for Assets

Central bankers use QE as a scheme to prop up deteriorating asset prices by overpaying for them. In the United States an initial round (QE1) pumped in new money to support the prices of so-called toxic assets; this was followed by QE2, which aimed principally to support Treasury bonds.

While the primary goal of QE was to offset deflation, it also supported an unprecedented spending binge by the U.S. government. Despite claims of independence, the Fed shifted from being “lender of last resort” for the U.S. financial sector to become the “buyer of first resort” for government debt. Fed purchases have amounted to 85 percent of all U.S. government debt sold by the Treasury since QE2 began in November 2010.

This means that the Federal Reserve monetized about half the federal budget deficit for FY2011 with QE2 and reinvestment returns from asset purchases of QE1.

While raising the debt ceiling may avert a conventional notion of default on U.S. government debt, it will only work if the Fed steps up when historical buyers for Treasuries shun dollar-based debt.  And that will require more quantitative easing and interest rates kept artificially near zero – which will build more instability into the U.S. economy and beyond.

Ignorance or Disregard?

Arguments for QE reveal either fundamental misunderstanding or wanton disregard for the impact of monetary policy on the real economy in the United States and elsewhere. It starts with central bankers primarily focusing on how monetary policy impacts price levels, usually measured by consumer price indices (CPIs). If consumer prices rise within a “targeted” range, there is no reason to alter monetary policy.

Based on low reported rates of increase in consumer prices, the Fed refuses to budge from an unprecedented growth of money and credit with historically low interest rates. Nor is it in a hurry to stop ramping up asset prices  or propping up real estate prices.

An inflated money supply finds its way into the economy in other ways. These include higher commodity prices, rising bond prices, a weakened currency, or a distortion in production from changes in relative prices.

Consider the nature of supposedly benign changes in the CPI, which almost certainly understate the impact of excess liquidity from the Fed’s expansionary monetary policy. Technological progress and China’s depressive effect on product prices should have caused a deflationary trend in consumer prices.  Even a zero rate of increase implies that that they have actually been rising. To be sure, however, the Fed’s payment of interest to banks on idle reserves since 2008 has muted CPI increases, no matter how it is measured.

Dollar Down

As the Fed purchases Treasury bonds or other such assets, it creates new dollars that tend to undermine the currency’s foreign exchange value. Indeed, the dollar is more than 9 percent lower against a broad basket of currencies than it was a year ago, the lowest point since 2008 and down more than 40 percent against the same basket over six years. Federal Reserve data indicate that when adjusted for inflation, the dollar is at its lowest value against major trading partners’ currencies since it began fluctuating in January 1973.

The impact of the glut of global liquidity from QE and artificially cheap credit has also pushed up asset and commodity prices. In April, gold and silver set records due to hedging against a weakening dollar, with the price of gold up by 32 percent in the past year and the silver price more than doubling.

Other financial assets are bubbling up. After the initial announcement for QE2 of $1.5 trillion of purchases of government debt in August 2010, investors moved towards riskier investments, leading to a rally in corporate bonds. Since then Standard & Poor’s 500 stock index gained 28 percent, and prices of generally riskier shares listed on the small-company Russell 2000 Index went up 41 percent. Even subprime mortgage securities are back in demand!

Given that many polls show that a majority of Americans oppose any increase in the debt limit, it would be a smart political move not to raise it. But more important, it would be a wise economic move to decrease federal spending since it will lead to significant improvement in economic activity by removing the impetus for more QE. And the end of QE will lead to a stronger dollar, an improved balance sheet for the federal government, and less uncertainty about future price increases.

Portraying the IMF as a bastion of laissez-faire principles is usually the rant of people who have no understanding of markets. For my money, that is an apt depiction of Professor Stiglitz. A Clinton White House insider who was a member and then chairman of the President’s Council of Economic Advisers, he later became chief economist at the World Bank. After he resigned that post, he shared the Nobel Prize in economics with a pair of scholars. Their contributions related to their observations that the real world was different from the perfectly competitive model that specifies economic agents acting on perfect information. Their contention was that when information is imperfect, or “asymmetric”—that is, some people know more than others—markets may not function, especially if buyers don’t trust sellers.

While the efforts that led to the Nobel Prize may have been technically impressive, most problems in markets are caused by extensive intervention, often inspired by bright chaps like Stiglitz who lack sufficient humility to understand the damage they cause.

In this new book, which purports to be a history of the economy of the 1990s, the author broadens his identification of global villains and goes beyond the IMF to include Wall Street interests along with big business generally. Among their sins, Stiglitz lists the following: demanding deregulation of electricity, providing stock options, messing up on pensions, using bogus accounting, and an irrational mania for mergers. It’s all a thin conventional gruel from someone who is supposed to be a world-class economist. Stiglitz also ventures beyond the 1990s to excoriate President George W. Bush for the recent budget deficits, which were caused, of course, by tax cuts.

Stiglitz’s main conclusion is that the economic debacles of the 1990s arose from “misregulation” and “underregulation” of markets. In that regard, he seems to suffer from a “fatal conceit” (to borrow from Hayek) that blinds him to the same failings in himself that afflict mere mortals. In a way, Stiglitz is like Lord Keynes, a “rational constructivist” who believes he can bring about order from the “chaos” of messy markets. Stiglitz similarly overestimates the ability of government planners to direct markets efficiently, while at the same time overlooking the enormous inefficiencies they cause.

The only praise our author seems to offer is for himself, since all his would-be fellow travelers cannot hold steady. While he heaps scorn on Republicans, he deeply resents betrayal by Democrats who cave in to their own craven instincts or pressures from Wall Street. The narcissistic streak in the book is not appealing.

In one of many instances where he is right for the wrong reason, he points out that deficit reduction did not cause the boom of the 1990s. Although he does not seem to understand this, the 1990s were like almost all booms in history. There was an illusion of rising prosperity promoted by hyperactive monetary policy. However, the author’s description of the 1990s boom as “hyperactivity” caused by false hopes and lies shows his profound lack of understanding of the role of monetary policy in business cycles.

Stiglitz displays exceptional rhetorical skills, as well as an inclination toward character assassination. However, nothing in The Roaring Nineties demonstrates that he deserves the wide acclaim that identifies him as an outstanding economist. One might hope that he would turn to studying how markets work and thus become a better economist. But since that would require him to abandon his true comparative advantage and pleasure from engaging in political battles and mudslinging, that hope is probably forlorn.

Perhaps these protesters have poor powers of observation or simply lack fertile imaginations to seek out some new symbol of protest. It does seem curious that there are no known complaints about the global reach of karaoke or the invasions of Asian cuisines that have swept the world.

Surely, there are more karaoke bars in more cities around the globe than there are McDonald’s restaurants. And what about the scourge of Latino songs that have stormed the music world like wildfire? Or things Korean that charm a growing number of admirers among Asians? And who accounts for the sins of Sony and Mercedes?

As it is, would-be activists have cut their teeth on breaking into or tearing down structures adorned with the Golden Arches. Jean Bove, a self-styled French farmer who spends more time on the barricades than on his fantasized farm, was catapulted into stardom by vandalizing one of those hamburger joints. Ironically, no one paid attention to the fact that his act destroyed job opportunities in a rather depressed part of France.

Now McDonald’s has become the target of choice of those who would express outrage against the U.S. retaliatory actions for terrorism directed at the Taliban, Afghanistan’s wannbe government. In neighboring Pakistan, unruly crowds trashed McDonald’s in Islamabad and Karachi. Demonstrators in Indonesia have been slightly more tame with outlets in various cities being cordoned. As if to show their resolve and to make up for their tempered rage, protesters also set upon Pizza Hut outlets and implored diners to stay away.

Although multinational corporations make an easier target for registering complaints about globalization, ubiquitous brands certainly are not limited to the United States. As suggested above, it is simply wrong to portray globalization as a form of cultural imperialism by America or the West. (The favorite target of the predecessors of modern anti-globalists was the Swiss company Nestlé.) Indeed, globalization involves a more complex process of modernization combined with internationalization. Those who would pretend it is otherwise are playing a dangerous game.

Attempts to mischaracterize globalization as an American or Western conspiracy resonate of social theories that supported ruinous economic policies in much of the postwar period. Generations of Latin American dictators, African despots, and communist commissars condemned their countries to grinding poverty by thinking along these lines.

Causing generations to suffer from economic stagnation is bad enough. Now their modern-day fellow-travelers are encouraging a divisive view of the world that is inhabited by a virtuous “us” and an evil “them.” Under this banner, the downtrodden victims are acting righteously in tilting against the windmills of multinational corporations. Unwittingly perhaps, this fuels the fire that burns in the gut of terrorists.

Granted, there is an apparent convergence toward certain norms or rules that are common to Western cultures, especially as they relate to economic transactions. However, this convergence is the outcome of a natural and evolutionary procedure that arises from voluntary choices by citizens and their governments to engage in worldwide markets. Most of these individual or collective choices are made with the aim of promoting greater prosperity. Consequently, as more countries have opened their economies to global markets, they have found a need to establish certain legal arrangements that oversee contractual agreements.

Part of this trend should be welcome to those who oppose authoritarianism. For there is an unmistakable movement toward institutions that protect individuals and away from authority-based institutions that protect state power. Critiques of globalization are little more than another round in the struggle between conservatism and modernism.

Biggest Losers

If protests and vandalism are successful in undermining global branding, the biggest losers will be consumers, especially those in poorer countries. Whatever the complaints against corporations with global reach, the presence of these brands benefits consumers by lowering information costs. Wishing to protect brands, companies will insure a high level of standardized quality and nondiscriminatory treatment of customers.

The good news is that larger multinationals are unlikely to withdraw completely even from the most threatened markets. They can buy up or into local brands or diversify into products with names that may not indicate the geographic origin of the company.

In all events, the success of branding has spawned imitators in developing countries. In the Philippines, a local burger brand named Jolly Bee bested McDonald’s sales before moving into regional markets and a few outlets in California. Another fast-food franchise operation in Guatemala based on chicken products, Pollo Campero, outsells all competitors despite the presence of all the major chains.

It is a gross misrepresentation to depict globalization as the outcome of a conspiracy of anonymous and mysterious foreign forces. The globalizing impulse is to a large degree the result of preferences for imported products or services that are better or cheaper than what is produced locally.

In this sense, globalization is not merely benign. It reflects an expanding freedom of expression for citizens acting as consumers. Those who oppose these results reveal their own elitist loathing for their fellow citizens and their right to express their choices.

Message to anti-globalists: Your distaste for Big Macs or American policies gives you neither the right nor obligation to stop others from enjoying their Happy Meals. Especially when it causes someone else to lose his job.

As such, the number of severely poor Americans grew by 26 percent from 2000 to 2005, so that 16 million Americans were living in deep, or severe, poverty. This is defined as a family of four with two children and an annual income of less than $9,903, or one-half the federal poverty line.

On their face, these figures sound ominous and suggest that the U.S. government and the American people have turned their backs on the weakest citizens. But truth and reality are much more complex than the raw data suggest.

As it is, the U.S. government has spent close to $10 trillion (current dollars) on domestic welfare programs since President Lyndon Johnson launched the “War on Poverty” in 1965. These include Aid to Families with Dependent Children (now Temporary Assistance to Needy Families—TANF); food stamps; Medicaid; the Special Supplemental Food Program for Women, Infants, and Children (WIC); utilities assistance under the Low-Income Home Energy Assistance Program (LIHEAP); housing assistance under a variety of programs, including public housing and Section 8 rental assistance; and the free commodities program. And then state and local governments engage in welfare spending that includes free medical care for the impoverished through charity hospitals.

Spending on all social programs is up by 22 percent (inflation-adjusted) since 2000. In 2004 total government spending on low-income families was $129 billion, or $9,058 per poor family.

Besides all this public-sector spending, private charities and religious organizations offer considerable aid to the indigent, ranging from soup kitchens to housing and so forth.

Now let’s look at the official poverty rate for the United States as estimated by the Census Bureau from data on poverty and income collected in an annual survey and defined according to household size and makeup. For example, the average poverty threshold for a family of four was $18,392 in annual income in 2002.

The official rate combines the money income of individuals and families before taxes with cash assistance received from government programs. That is compared with established poverty thresholds. These thresholds vary according to the size of the family and are adjusted annually to account for the effects of inflation.

But this official estimate does not include noncash government benefits like public housing, Medicaid, free or subsidized medical care, or food stamps.

In all events, the financial resources of the “poor” in the United States tend to be undercounted. For example, the poor tend to underreport income to the Census, perhaps because they fear it will be reported to the IRS. Consequently, Census figures on income relative to spending indicate that the poor spend $1.94 for every dollar of reported income.

Moreover, poverty measures ignore the value of household assets like housing. Data from 1995 indicate that 41 percent of all “poor” households owned their own homes, with an average size of three bedrooms and one-and-a-half bathrooms—and most had a garage and a porch or patio. Among the poor, three-quarters of a million owned homes worth over $150,000.

The average “poor” American lives with one-third more living space than the average Japanese, 25 percent more than the average Frenchman, 40 percent more than the average Greek, and four times more than the average Russian. In America 70 percent of “poor” households owned a car and 27 percent had two or more cars.

If absolute poverty is considered to be the lack of access to sufficient resources to satisfy basic needs, there is not much of this in the United States. As in most countries, relative poverty is a bigger issue.

But relative poverty can never be fully resolved without implementing an incentive-destroying policy of equal income regardless of effort or talent. History provides little evidence that forced income redistribution through taxation can alleviate mass poverty.

And so it is that despite massive amounts of spending by governments, poverty remains at a high rate in the United States. Or perhaps it is better said that public-sector welfare and other aid programs are causing poverty since the poor become dependent on handouts instead of looking for work or starting a business. (See Charles Johnson’s article on page 12 to understand why the poor have trouble starting businesses.)

Government officials who spend so much of other people’s money have weak incentives to see that it is spent well. Indeed, the so-called war on poverty has been no more effective than the war on drugs and probably less so than the war in Iraq.

Perhaps a better response to poverty would be to reduce the reliance on governments. The slack could be made up by elements of civil society, such as private charities, that are more effective than welfare programs in serving the poor.

As it is, 85 million American households give a total of $250 billion to charities each year. Interestingly, private Americans gave more to the victims of the Asian tsunami than the federal government did.

Giving is not limited to the very rich. The working poor give as large a percentage of their incomes as do the rich and a lot more than does the American middle class.

Were it not for so many public policies that undermine private giving, this amount would almost certainly be larger. For example, private foundations face punitive regulation, and government subsidies to nonprofits crowd out charity. On the one hand, subsidies reduce the incentive for those groups to seek voluntary contributions, and on the other they reduce the incentive for individuals to donate since they already “gave at the office” when taxes were withheld from their paychecks. Moreover, many policies reduce disposable incomes of major donors.

It is important to know what lies behind the data on the extent of poverty and giving in America. It is wrong to think that Americans are shirking their obligations to needy neighbors or that the U.S. government should do more.

Many developing and emerging market economies are struggling to keep their economic growth rates high enough to raise local standards of living. Moreover, many governments responded to lagging economic conditions by promoting export-led growth, evident in their obsession with restraining the appreciation of their currencies. While China will immediately come to mind in this regard, it is joined by many others, including Japan, South Korea, and Taiwan, to name a few.

The simple logic behind export-led growth is that higher foreign demand for domestic goods and services will boost local economic activity and bring higher rates of long-term growth. Underlying this logic is a technical notion that economists refer to as an “expenditure multiplier.”

Multipliers are explained by tracing the effect of new spending through the economy as it supposedly passes through many hands. For example, assume that most Taiwanese consume 80 percent of each additional dollar they earn while saving the rest. Under these conditions, a rise in the earnings of exporters by $10 billion would induce them to spend $8 billion. As they buy more inputs or expand their production capacity, those who receive payments from that round of spending will consume 80 percent of the $8 billion of their increased income. Adding up this continuous series of spending rounds supposedly generates $200 billion.

And, voilà! More spending begets more spending, so the slump ends. And we all live happily ever after. Wouldst that real life were as simple as it is in such fairy tales.

As it turns out, expenditure multipliers are the stuff of fanciful fiction. Despite many empirical studies to seek them out, they remain elusive beasts and when sighted have been of small and disputable consequence. As such, multipliers are rather like Elvis. In all events, without the supporting argument of multipliers, export-led growth becomes a hollow concept.

It turns out that the demand by foreigners is not the source of greater wealth, nor for that matter does greater wealth depend on domestic consumption. Instead, the direction of causation is the reverse. Wealth depends on production being made possible through increased investments in capital goods that depend on more funds being made available through savings.

Increased demand for exports cannot have a multiplier effect since each economic activity requires a funding source. But the competition for scarce funds means that spending more on one good or service has to come at the expense of another. This logical limit on the nature of economic activity and spending means that the multiplier effect cannot function as predicted.

It would seem plausible that the multiplier effect might work if a country were able to divert buyers for its exports from other countries. In a static framework this would be a rearrangement of global spending that might be offset by declines in spending by foreigners on some other country’s domestic production. In reality, spending “multipliers” are a Keynesian phantom. The only way to have multiple advances in wealth is for there to be a sustainable increase in wealth to support an increase in overall production.

Another logical flaw in the notion that rising export demand can boost the production of wealth is the implicit suggestion that demand is the determinant of supply. Yet it is impossible to consider demand as being independent of the production of goods and services. Demand can only be satisfied if preceded by production.

The ideology behind export-led growth is contradicted by economic theory and reality. The notion that the advantages from trade come from exporting was the basis of mercantilism, a creed discredited several centuries ago. Adam Smith pointed out that the real advantages of trade come from allowing producers and consumers to buy from least-cost providers, regardless of their national origins.

And so it is that increasing imports is a better way to boost growth since enhanced economic efficiency and increasing real purchasing power are what benefit people.

For one thing, foreign competition provides domestic producers with an incentive to become more innovative and efficient in their local operations. When such improvements lead to gains in labor productivity, higher wages will allow household incomes to rise so that there can be more consumption and savings.

Increasing productivity will also lead to higher profits due to declining per-unit production costs. This will also enhance shareholders’ wealth to allow more consumption and savings.

And then the benefits begin to extend to the international sector of the economy. Allowing export sectors to import inputs or intermediate goods will lower operating costs. Falling costs and rising productivity will enhance their ability to export. Rising profits allow domestic multinational enterprises to shop around for overseas production facilities and better sources of raw materials.

Recently Taipei announced plans to relax restrictions on inward-bound investment capital by ending the qualified foreign institutional-investor scheme. This opening of the capital market is certainly a sensible step in the right direction.

The Market That Never Sleeps since global capital does not sleep will continuously seek out those countries with the most hospitable economic structures. Those with weaknesses will experience net capital outflows and economic slowdown. Economies with healthy and open domestic sectors will perform the best.

So why were people misled into thinking that export-led growth was the best model for emerging economies? Much of the confusion comes from believing that increasing demand can bring higher economic growth. The perpetuation of the expenditure multiplier continues to interfere with the formulation of sensible economic policy.

In all events, it turns out that much of the growth associated with the years before 1997–98 in the “miracle” performance of some East Asian economies turned out to be illusory. But this fact seems to be overlooked by promoters of export-oriented growth.

Instead of muddying up the policy waters with confusion sown by a dependence on exports, political leaders in developing economies should push for more competitive and flexible domestic markets for goods, services, labor, and other resources. Then a sharp rise in imports could set the path for their economies to embark on a higher long-term growth trajectory.

It is widely believed that humans exert a harmful impact on the natural environment, especially when it comes to releasing greenhouse gases into the atmosphere. And so there is some alarm that the amount of carbon dioxide (CO2) in the atmosphere has risen by 25–30 percent in the last 200 years.

One viewpoint has become known as the “CO2-induced global warming extinction hypothesis,” which projects greater extinction of species. The combination of global warming and an increase in atmospheric CO2 will supposedly cause plants and animals that cannot escape the stress from rising temperatures to become extinct.

In January a study published in the journal Nature projected that 15–37 percent of species will become extinct by the middle of the century at current rates of global warming. The study came under immediate criticism. An earlier examination of this hypothesis was conducted by the Marshall Institute in partnership with the Center for the Study of Carbon Dioxide and Global Change.

The study, “The Specter of Species Extinction: Will Global Warming Decimate Earth’s Biosphere?,” concluded that claims of mass extinctions arising out of climate change are unsupported by facts.¹ The extinction hypothesis ignored the fact that CO2 enrichment tends to offset the negative effects of rising temperatures on vegetation.

The findings contradict claims that manmade climate change can cause significant increases in the rate of species extinction. First, they point out that there is a lack of definitive knowledge on how many species exist and what the rate of natural extinction might be. Further, it is not known how many species are becoming extinct because of other human or nonhuman causes.

If we accept the worst-case scenario that the earth is getting warmer and CO2 concentrations are increasing, most species would  respond by adapting, acclimatizing, or migrating. In the case of plant life, increasing the amount of CO2 will induce changes that make them better adapted to warmer conditions. Indeed, more CO2 allows them to grow better at almost all temperatures, especially at higher temperatures. And so, elevated CO2 content improves the ability of plants to resist heat stress and also raises the optimum temperature for growth.

In other words, a rise in atmospheric temperature combined with a higher CO2 concentration makes it easier for plants to adapt. Since the range of adaptation of most plants will likely expand if the planet warms, extinctions will become less likely than they are at present.

Additional evidence of this was reported in Science.² According to climatic and satellite data gathered since 1982, global plant productivity has increased by 6 percent with the largest gains in tropical ecosystems. Part of the rise in plant growth was due to diminished cloud cover leading to a rise in solar radiation in the tropics.

Since rising plant productivity sucks in carbon dioxide from the atmosphere, “carbon sinks,” such as large forested areas, can offset the production of rising carbon gases. This means that increased concentrations of CO2 are more likely to cause temperatures to go down rather than go up.

Animals can be expected to react similarly to simultaneous increases in atmospheric temperature and CO2 concentration by migrating toward the poles or higher altitudes. By increasing the boundaries of their ranges, most species will increase the probability of survival.

If we succeed in curtailing manmade CO2 emissions, our actions might actually impose a greater challenge to life forms in the biosphere. This is because a sudden stop in the increase of CO2 content in the air would block the physiological transformation of plants that provides them with protection against heat stress.

Do Human Beings Cause Climate Change?

But it looks unlikely that curbing the impacts of human activity on global warming will alter the general pattern being claimed. A study covering the period from 1856 to 2002 looked at the relationship of solar-flare activity to statistical fluctuations in the earth’s near-surface air temperature.³ It revealed a stronger physical connection between climate and solar activity than was previously thought by most scientists. These results imply that variations in global temperatures are beyond human control because they are mostly determined by the sun.

Even the threat of climbing temperatures alone need not be a cause for alarm. While a consensus points to an increase in temperature of about half a degree centigrade over the last 100 years, this is no surprise since global temperature averages always change. History is replete with periods of global cooling and global warming; periods of rising temperature give way to periods of falling temperatures.

Richard Lindzen, an atmospheric scientist at MIT and a contributor to the report issued by the UN Intergovernmental Panel on Climate Change (IPCC), points out that most climate models do not take into account how clouds behave. Such neglect exaggerates estimates of warming since climate sensitivity becomes impossible to predict. This is because the response measured by the models depends primarily on water vapor and clouds.

Research Lindzen performed with NASA scientists revealed that clouds over the tropics act like a thermostat and will limit warming.⁴ In warm regions clouds react to rising temperatures by contracting to release heat, and falling temperatures by expanding and trapping it. They expect that warming would be not much more than one degree centigrade, but probably less, by 2100.

Most of the information above contradicts the conventional wisdom that blankets the mainstream media. Citizens with limited technical knowledge about the environment should find reassurance in divergent scientific viewpoints.

Notes

1. www.co2science.org/reports/extinction/mr1toc.htm.
2. Ramakrishna R. Nemani, et al., “Climate-Driven Increases in Global Terrestrial Net Primary Production from 1982 to 1999,” Science, June 6, 2003, pp. 1560–63.
3. Nicola Scafetta and Bruce J. West, “Solar Flare Intermittency in the Earth Temperature Anomalies,” Physical Review Letters, June 17, 2003, p. 248701.
4. Richard S. Lindzen, Ming-Dah Chou, and Arthur Y. Hou, “Does the Earth Have an Adaptive Infrared Iris?” Bulletin of the American Meteorological Society,vol. 82, no. 3, 2001, pp. 417–32.

Extreme weather is making headlines. Record summer temperatures in Europe and a large number of heat-related deaths in India joined news about severe flooding in Bangladesh, China, and Sri Lanka. And an unusual number of tornados in the United States have been reported.

For its part the UN World Meteorological Organization (WMO) suggests that global warming is linked to these events. It also declared that extremes in weather and climate are setting new records and the number of such extreme events has been rising. (The Bush administration plans to spend $103 million to study global climate change.)

But these reports raise many questions. As the director of the WMO admitted, the results reflect the fact that monitoring and communication of weather conditions are better than ever before. It turns out that the only certainty is that reporting of extremes is more common, even if the extremes are not.

As it is, little attention is paid to the fact that some of the vulnerability to extreme weather arises from changing human population patterns. Over the years, foreign aid and emergency disaster relief encouraged the building of slums or suburban housing in flood plains. Similarly, air conditioning allows more people to live comfortably in areas subject to hurricanes and cyclones.

In its report, the WMO notes that global averages for land and sea surface temperatures in May are the second highest since records began in 1880. However, temperatures in the upper atmosphere were not reported. This is no slight oversight. For global warming to be truly global, atmospheric temperatures would also have to be rising. But there is no evidence that air temperatures have risen to match the reports of rising ground temperatures.

Consider the fact that surface temperatures have been increasingly recorded in urban areas or airports that have much more concrete and asphalt than they had even a few decades back. All other things constant, it would be surprising if temperatures taken in such “hot spots” did not increase.

Such alternative explanations tend to be ignored. And so it has become an article of faith that burning fossil fuels increases greenhouse gases (GHG) that lock in heat and cause global warming.

Contrary to conventional wisdom, scientific understanding of climate change remains quite unsettled. In particular, it is not clear that observed global warming trends are significant or relevant to the long-term survival of life on earth. Nor is it clear that attempts to reduce greenhouse gases will offset other factors that influence climate. Indeed, there is a strong correlation between sunspot activity and temperature variations.

In all events, GHGs are not the only possible source of warming trends and not necessarily the most important. Weather and climate patterns depend on influences from oceans and other water systems, the variability of solar radiation, volcanic aerosols, and greenhouse gas emissions, as well as clouds and water vapor, just to name a few.

The UN Intergovernmental Panel on Climate Change (IPCC) considers at least 12 conditions that could change climate. Of these, only greenhouse gases have come under the close scrutiny of the scientific community. Uncertainty over the influence of the other conditions means that they could worsen the warming trend or reduce it or cancel it out completely.

A report released by the United Nations identified a two-mile-thick “Asian Brown Cloud” that is blamed partly on greenhouse gases. However, an examination of the effects of this enormous blanket of haze found that it counteracts global warming by shading land areas that it covers. So, it turns out that sometimes GHGs can induce cooling.

This is not the only beneficial property of GHGs. It is also overlooked that CO2, one of the most infamous carbon-based GHGs, is actually plant food that is converted into oxygen.

Certain Harm, Uncertain Benefits

Meanwhile, most economic analyses indicate that mandating reductions in greenhouse gases will cause significant harm of which we can be certain, in exchange for uncertain benefits. Our incomplete understanding of the climate system raises questions over the effectiveness of local or regional responses to perceptions about global climate change.

Since global climate history reveals wide fluctuations over the earth’s life, it is important to choose an appropriate time frame for reference to allow for reasonable comparisons. Most climate models used by the IPCC cover the last 1,000 years of climate variation. However, most of the data are estimates because surface temperature data have been recorded for only about 150 years. And weather balloon readings have been collected for 30 years, while satellite readings span less than 20 years.

It turns out that greenhouse politics suffers from a tendency to exaggerate. Environmental activists use worst-case scenarios that reflect their own biases to raise funds to support their causes. Politicians have a vested interest in citizens’ believing in catastrophic scenarios that make it easier to levy new taxes, since guilt or uncertain risks make them more willing to surrender more of their income.

While the perceptions of the general public are influenced by these biases, rising incomes also lead to increased demand for higher environmental quality. Politicians and bureaucrats have tended to respond by imposing stricter environmental regulations, with violations receiving ever wider media coverage. In turn, there has been a misperception that environmental quality is worsening when it may actually be improving or perhaps remaining unchanged.

Even if global temperatures are rising, we do not really understand why. Neither do we know if nor how soon the worst-case scenarios might occur. Even their ultimate consequences remain uncertain.

New Delhi, India—It has become an article of faith that economic progress depends on having an educated citizenry. A corollary is often attached, requiring governments to provide resources to meet this end. However, like so many self-evident truths, there may be less than meets the eye.

Let’s look at this conventional wisdom. Amartya Sen, Nobel Laureate in economics, insists that India’s plague of poverty will be best remedied through massive additional state spending on education. Naturally, politicians and state-employed educationists eagerly embrace any idea that lets them acquire more power and gain access to ever more tax money, especially when where there is little accountability for corruption and nonfeasance.

There are several problems with assigning so much importance to education as the basis for a community’s prosperity. On the one hand, formal education is neither necessary nor sufficient for either an individual or a community to be prosperous. On the other, proposals to increase public spending on education ignore extensive theory and endless examples of the failures of government provision of goods and services.

What of the effect of education on material success? At the individual level, numerous self-made tycoons succeeded with limited formal education. For example, a Balinese friend of mine never attended school. He learned English and enough of several other European languages to sell curios on the beach. As he grew up, he expanded into handling local art work and then eventually built an art gallery. He plowed some of his money into property that is now worth several million dollars.

Moreover, formal education is not sufficient for economic progress. Consider Cuba and Zimbabwe, countries that are at the top of the charts when it comes to literacy. Obviously, that is no guarantee of success.

What about tax funding for schools? A good place to start is with the numerous failures associated with government provision of education. An Indian government-sponsored “Probe Report” revealed that serious “malfunctioning” of government schools causes harm to low-income families. During unannounced visits researchers found “teaching activity” in only 53 percent of the schools, while the head teacher was absent in 33 percent.

Those problems were not found in private schools serving the poor. Random visits revealed “feverish classroom activity.”

Thus it is no surprise that despite desperate economic conditions, many of the poor abandon state-funded schools to place their children in private schools. Government schools offer free tuition, books, and even lunches. Yet in Hyderabad, India, for example, official figures indicate that 61 percent of all students attend schools in the private, unaided sector. This ratio is probably higher since government schools overstate the number of their students to insure more funding.

Private schools are driven by a commercial logic instead of depending on handouts from the state or charities. Despite charging low fees, the private schools in urban ghettos of India make reasonable profits, which are reinvested. Ironically, most private-sector teachers receive about one-fourth of what is earned in government schools because teachers unions have succeeded in detaching wages from performance.

It turns out that the principal reason for the difference between the two kinds of schools is the lack of accountability for government teachers. Private schools provided stronger incentives for teachers to perform well and for administrators to insure that they offer quality education. Teachers can be dismissed by the administrators and parents can “fire” the school by withdrawing their children. No similar incentives operate within government schools, where teachers have jobs for life. Such security leads to complacency instead of inspiring them to be better teachers.

Even though the poor choose private schools, educational entrepreneurs in the slums face hostility from government officials and official barriers to offering their services. One estimate for India suggests that before a private school can be opened, at least 35 different requirements must be satisfied.

The private sector in India, as elsewhere, is ready and able to fill the needs of the people by providing education at all levels. Lessons can be learned from the behavior of many of India’s poor, who know that private schools offer better services than government-funded schools.