NYC protestors chant: “What do we want? Dead cops! When do we want it? Now!”

They got what they wanted:

Two police officers in Brooklyn were fatally shot in their patrol car on Saturday in what the police commissioner called a “mindless assassination.”

The commissioner, William J. Bratton, said the suspect had shot his former girlfriend in the stomach in Baltimore earlier in the day and had apparently posted photos on an Instagram account threatening to kill New York City officers.

Mr. Bratton, speaking with Mayor Bill de Blasio at a news conference on Saturday evening, identified the officers as Wenjian Liu, a seven-year veteran of the New York Police Department, and Rafael Ramos, who had been an officer since 2012.

Mr. Bratton said the officers had been shot with “no warning” and “no provocation.”

After the shootings in Brooklyn, the man, whom Mr. Bratton identified as Ismaaiyl Brinsley, 28, then fled to a nearby subway station and fatally shot himself in the head.

The gunman made reference to Michael Brown and Eric Garner in his Instagram message.

Disgusting. Michael Brown was a robber and the best evidence suggests he fought with a police officer over his gun and then rushed the officer. Eric Garner, in my opinion, did not deserve the level of force he experienced, but the police officer whose actions resulted in Garner’s death clearly did not intend that result, and Garner’s poor health obviously contributed to his death.

There is a sickness in society and a hatred of police who are trying to protect the public. Sensible people need to stand up and say: enough.

UPDATE: Here are NYPD cops turning their backs on the mayor. (It’s an autoplay video so no embed. Go here and then come back.)

One of my commenters, Dana (but not the Dana who posts here), responded to my assertion that the Fed has contributed to booms in the stock market and housing sector with the following comment:

Caused by the Fed in what way? If you are saying that the Fed has done so by working to keep interest rates low, I’d agree, at least in part, but the Fed really had little choice in this: the Fed was attempting to help economic growth following the downturns in 1991 and 2001, and there would have been no support at all for raising interest rates at those times. Since economic growth wasn’t as strong as people would have liked, especially following the 2001 recession, all of the pressure was for keeping rates low.

I started to write a response and realized that, with the amount of energy it was going to require, I might as well make it into a post. In June I argued that ending the Fed is a free market solution, and promised future posts on the Austrian theory of the business cycle and related concepts. Now is as good a time as any to continue the project.

The implicit assumption underlying Dana’s comment is twofold, and is held by most mainstream economists: that 1) the proper response to an economic downturn is to lower interest rates, and 2) the Federal Reserve should be entrusted with manipulating interest rates to make macroeconomic corrections in the economy.

I believe both assumptions are misguided. To explain why, I need to explain the Austrian theory of the business cycle.

The Austrian theory of the business cycle, developed by Ludwig von Mises and refined by F. A. Hayek, addresses the following question: why is it that there are times when all entrepreneurs seem to be making bad decisions, all at the same time? The free market, of course, assumes that many entrepreneurs will make bad business decisions — and when they do, their businesses should fail, to make way for better ones. But in this process, entrepreneurs with better foresight should succeed — in other words, the market selects for the very best entrepreneurs. So it seems odd, then, when in a recession or depression, great numbers of these people all make bad decisions, all at the same time. What explains that? Why would all the very best entrepreneurs all make bad decisions at once?

The answer lies in banks, especially central banks, engaging in artificial credit expansion and (worst of all) manipulation of interest rates.

Imagine a world with no Federal Reserve setting interest rates. In this hypothetical Shangri-La, the market would set interest rates. So: what would cause interest rates to go up and down? The conclusion is simple if you think of credit as a good, like any other good, subject to the laws of supply and demand. The more credit is available, the cheaper it will be — and the less credit is available, the more expensive it will be. If banks have a lot of money to lend, they will have to compete with one another to get people to borrow from them — and that means lower interest rates. If banks have very little money to lend, then demand will increase relative to supply, and borrowers will have to compete for that limited credit by offering higher interest rates. Easy enough so far, right?

Now, when do banks have a lot of money to lend? If you take the Federal Reserve out of the picture, the answer is: banks have a lot of money to lend when a lot of people are putting money in the bank. Consumers are usually in one of two modes: either they are spending a lot, or they are saving a lot. When they are saving a lot, two things happen: 1) banks have more money to lend, and interest rates naturally should go down, and 2) there is less demand for consumer products, because consumers are spending less.

Businesses, like consumers, go through natural cycles. Sometimes they are focused on long-term expansion — things that are not going to pay off today, but which will increase production capacity years into the future. This includes activities like research and development, or building factories. Conversely, sometimes businesses are concerned with providing more consumer goods right now, and put long-term expansion on the back burner.

At this point we need to take a small step back and provide a couple of necessary definitions. (Don’t worry: it’s very simple stuff.) Even the simplest good has an entire production structure behind it. For example, Milton Friedman popularized Leonard Read’s example of the lengthy production process involved in manufacturing a pencil in his series “Free to Choose”:

Look at this lead pencil. There’s not a single person in the world who could make this pencil. Remarkable statement? Not at all. The wood from which it is made, for all I know, comes from a tree that was cut down in the state of Washington. To cut down that tree, it took a saw. To make the saw, it took steel. To make steel, it took iron ore. This black center—we call it lead but it’s really graphite, compressed graphite—I’m not sure where it comes from, but I think it comes from some mines in South America. This red top up here, this eraser, a bit of rubber, probably comes from Malaya, where the rubber tree isn’t even native! It was imported from South America by some businessmen with the help of the British government. This brass ferrule? [Self-effacing laughter.] I haven’t the slightest idea where it came from. Or the yellow paint! Or the paint that made the black lines. Or the glue that holds it together. Literally thousands of people co-operated to make this pencil.

The process to deliver that pencil involves multiple stages. Those stages of production that are closer in time to the point of sale — such as the transportation of the pencils in trucks to the store — are called “lower-order” stages of production. The parts of production that are further removed from the point of sale — such as planting the trees that will eventually be chopped down for the wood, or mining the iron ore to make the steel to make the saws that cut down the trees — are “higher-order” stages. Investment in the higher-order stages will have the eventual benefit of making the production process more efficient, and making the product cost less . . . but it may take years for that investment to pay off. Conversely, investment in lower-order stages (the store needs more pencils! Hire more trucks to deliver them!) is unlikely to lower the cost of the good, but it will ensure delivery of a sufficient supply in the immediate future.

The key here is time preference. If it is important to deliver more consumer goods right now, a business will tend to invest more in the lower-order stages of production (hire more trucks now!). So investment in lower-order stages is good when consumer demand is high right now. Conversely, if consumer demand is low, it may be a good time for a business to engage in things like research and development, or investment in other higher-order stages of production — things that won’t pay off today, but that will ensure efficient production in the future.

Here’s the thing: long-term investments in higher-order stages of production typically require a business to borrow money. The longer the period of time it will take for the investment to pay off, the longer the period of the loan. The longer the period of the loan, the more important it is for the interest rate to be low — because long-term loans are very sensitive to interest rate changes. Businesses (and individuals too, of course) are far more likely to take out long-term loans when the interest rate is low, because the longer the loan, the more money they save. That means that borrowing for investment in higher-order stages of production typically happens when interest rates are low.

When interest rates are allowed to fluctuate with the free market, all this works in harmony. When consumer demand is low, people save more. The interest rate is lower, causing businesses to invest in higher-order stages of production. Times of low interest rates are a good time for businesses to make such investments, because the need to provide great numbers of consumer goods is not great when people aren’t buying them in great quantities.

By contrast, when demand for consumer goods increases, people are saving less. Interest rates rise, and businesses divert their profits into investment in lower-order stages of production, the better to deliver greater amounts of consumer goods to the public in a short time span.

Now consider what happens when a central bank artificially lowers interest rates. Businesses are incentivized to invest in higher-order stages of production. However, this action is not balanced by a lowering of consumer demand, and there is no increase in savings. Consequently, there is unexpected competition for the same resources. For example, when consumer demand is low, the trucking business takes resources away from delivering consumer goods, and moves them into delivering materials for, say, factory building. But when consumer demand is still high, trucks are in demand for delivery of consumer goods and for delivery of raw materials to build factories. The competition for resources drives up prices of inputs into production, and the long-term projects end up being more expensive than the businesses anticipated. Businesses start to fail, and a recession or depression hits.

The central observation here is that central planning never works in a complicated market economy. To some extent, people have internalized this lesson when it comes to prices of goods. At least a significant segment of the public understands that when the government sets prices, through price controls or otherwise, this introduces distortions into the market economy and makes it less efficient. But for whatever reason, we seem to have a tolerance for central planning when it comes to setting price controls for credit. Interest rates, after all, are nothing more than the price of credit. Why do we think it’s a good idea to allow a central authority to set that price, any more than we should tolerate central planning for any price in a free market?

To come back to Dana’s question, then: lowering interest rates when the economy is not doing well is a bad idea. Recessions/depressions are caused by malinvestment by businesses responding to manipulation of the price of credit. The proper response is to let the economy readjust, and keep government out of the way. This is what the U.S. did in 1920-1921, and that recession disappeared right away. Conversely, Hoover and then FDR monkeyed with the economy after the onset of the Great Depression, and with their actions they extended the misery unnecessarily for years.

Let’s put a stop to central planning. It didn’t work when Josef Stalin did it, and it doesn’t work any better when Janet Yellin does it.

[guest post by Dana]

In today’s perceived racial outrage, Brittney Cooper, who teaches Women’s and Gender Studies and African Studies at Rutgers is upset that a man – a *white* man of privilege, no less – moved her computer bag on the subway seat next to the one she was occupying in order to have a seat for himself. Because racism.

On Friday, I was on the train to New York to do a teach-in on Ferguson at NYU. Beats headphones on, lost in thought, peering out the window, I suddenly saw a white hand shoving my work carry-on toward me. Startled, I looked up to see the hand belonged to a white guy, who was haphazardly handling my open bag, with my laptop perched just inside to make space for himself on the seat next to me.

That he wanted the seat on the now full train was not the problem. That he assumed the prerogative to place his hands on my bag, grab it, shove it at me, all while my computer was unsecured and peaking out, infuriated me. I said to him, “Never put your hands on my property.”

His reply: “Well, you should listen when I talk to you.” That line there, the command that when he, whoever he was, spoke, I should automatically listen encapsulates the breadth of the battle against racism we have to fight in this country.

Buoyed by his own entitlement, his own sense of white male somebodiness, this passenger never even considered that he might simply try harder to get my attention before putting his hands on my stuff. His own need to control space, his own sense of entitlement to move anything in his way even if it held something of value to another person, his belief that he had the right to do whatever he needed to do to make the environment conform to his will are all hallmarks of white privilege.

Dear Brittany, I’ve ridden the trains numerous times and here’s a way to keep it simple: If you have an empty seat next to you on a full train, put your bags on the floor between your legs. Leaving the seat open from the get-go is not only a no-brainer, but a gracious move. Problem solved. And if you have your Beats on, lost in the music, then either expect someone to move your bag or tap you on the shoulder to get your attention. (Personally, I prefer the latter, but let’s consider how you would perceive and later describe that white man of privilege touching you.)

Further, Brittany, what if it was you who went to grab a seat and saw a white man of privilege sitting there with his Beats on, lost in the music and his computer bag occupying the empty seat next to him? I think it’s safe to say that you would not respond the same way, and that you would automatically assume in your narrow, myopic view of people, that the white man in the seat – by default – would be exerting his white privilege and “somebodiness” believing he deserved to have two seats to himself. This way, you would be able to justify your claim that “[B]lack women are rarely entitled to the courtesies proffered to white women, and black people never presume they are entitled to occupy interracial spaces so aggressively.” In your world, there is no way that he could be the same as you saw yourself on the train: an innocuous traveler, lost in the music, daydreaming, unaware. Sadly, Brittany, your presuppositions about white males and their privilege do not permit you to experience the sublimely delicious freedom to judge individuals on the content of their character, but instead, you have willfully chosen to walk the narrow path of constraint, thereby condemning yourself to judging others by the color of their skin.

–Dana

Eugene Volokh has a long and typically sensible post about “conversations on race” at his Washington Post blog, titled Let’s have a national conversation about race — so we can figure out whom to fire. The springboard for his post is the firing of a North Carolina fire investigator for writing, on her personal Facebook page, that Michael Brown was a “thug” — and criticizing the Obama administration for sending representatives to Brown’s funeral. Volokh writes that he thinks she is “likely to prevail” in the lawsuit she is contemplating against her government employers. Volokh then quotes at length from a 2010 post he wrote about the legal pitfalls of engaging in one of those “conversations about race” around the water cooler.

At the end, Eugene has an update:

UPDATE: Commenter MDJ23 writes:

I think you are taking the national conversation or water cooler suggestion too literally. The point is that those who have suffered racial discrimination should speak out, not that those who have not should speak out — the latter’s role should mostly be to listen. Some might call that a lecture; I’d call it an education.

Oh, that’s the “conversation” that people are contemplating — this helps explain things.

Heh. Well, of course that’s the conversation they want — and Eugene knows that. He’s just making his point with a rhetorical flourish of extreme understatement, which is both safe and effective (sounds like the properties of a good over-the-counter medication, doesn’t it?).

The one side doesn’t really want to hear from the other. They want to talk at us — lecture, “educate,” or whatever — and they want us to shut up and listen.

I myself have expressed in the past a desire to not have a national conversation on race. Here are a couple of examples of why.

Last year, when a black columnist wrote a column about “rules” for engaging in such a conversation, it turned out that her “rules” addressed only how to talk to black people. (She described her column as “even-handed” because it told both whites and blacks how to talk to black people about race.) I asked her if she had any rules for talking to white people, and she told me to write them myself and then blocked me on Twitter. (Hooray for “conversations”!)

I was called a “racist” in 2009 when I described Henry Louis Gates as a “high-on-himself Harvard professor” based on the arresting officer’s statement:

Gates then turned to me and told me that I had no idea who I was ‘messing’ with and that I had not heard the last of it.

I have had the delightful experience of having people complain to my employer that I am a racist. This has happened on more than one occasion. Fortunately, my employers have been more sensible than the employers of the fire investigator in North Carolina.

When we reform our legal system so that conversations on race are not an invitation to frivolous lawsuits, let me know, and maybe I’ll engage. Until then, I’ll pass, thanks.