Category Archives: Economics

Ron Paul says “The Austrians were right”

In a statement Ron Paul delivered to the United States House of Representatives on November 20, 2008, he made these points:

  1. Our government is “totally influenced by Keynesian economics.”
  2. “At least 90% of the cause for the financial crisis can be laid at the doorstep of the Federal Reserve. It is the manipulation of credit, the money supply, and interest rates that caused the various bubbles to form. ”
  3. The Federal Reserve created this problem. Why do we rely on it to fix the mess it created?
  4. “… the stage is now set for massive nationalization of the financial system and quite likely the means of production.”
  5. “Raising taxes would reveal the true cost of big government, and the people would revolt.”
  6. So the government creates money from thin air to pay for all this.

Read the entire statement at The Austrians Were Right.

New Deal Shouldn’t Be Our Template for Recovery

Can huge government spending programs rescue our economy? Amity Shlaes doesn’t think so:

The New Deal is Mr. Obama’s context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn’t. New Deal spending provided jobs but did not get the country back to where it was before.

(The Krugman Recipe for Depression , November 29, 2008 Wall Street Journal.)

The present danger is that influential economists like Paul Krugman of the New York Times argue that during the New Deal, government spending wasn’t high enough, and that’s why the Great Depression lasted so long.

Pat Buchanan Tallies the Total

The news from Washington over the past few months — $25 billion here, $700 billion there — is hard to keep track of. The amounts themselves are huge, but when added together, the sum is beyond comprehension. Pat Buchanan, in his column Socialist Republic, adds it up:

Thus, we have the $700 billion Bush bank bailout, the $700 billion “stimulus package” Obama wants by inauguration to “jolt this economy back into shape” and the $800 billion fund Hank Paulson created to get consumers borrowing and buying again.

These come on top of Bush $455 billion deficit, the $29 billion bailout of Bear Stearns, the $105 billion in pork to grease the $700 billion bailout, the $100 billion to $200 billion to keep Fannie and Freddie afloat, the $140-billion-and-counting for AIG, the $25 billion for the greening of GM, Ford and Chrysler, the $25 billion more to save the Big Three and the $20 billion for CitiGroup.

Now much of this overlaps, and some will be retrieved. But we are still staring at a deficit that could approach $2 trillion.

Can we sustain this level of spending and borrowing? Of course, not, says Buchanan. The result?

We are headed either for default on our debts and bankruptcy as a nation, or something less honorable: a quiet cheapening of the debts we have incurred by inflating and destroying the dollar, robbing our creditors of what we owe them and robbing our own people of the value of what they have earned. And so it has come to this.

The Austrian Prescription for Today

Murray N. Rothbard, in his book For a New Liberty: The Libertarian Manifesto, wrote a chapter that is highly relevant to the situation we face today. Unfortunately, if Rothbard’s analysis of the business cycle using Austrian economics is correct — and I believe it is — what’s going on presently in Washington, and what president-elect Barack Obama is planning, will do much more harm than good.

The chapter’s title is “Inflation and the Business Cycle: The Collapse of the Keynesian Paradigm.” In it, Rothbard explains the flaws in the Keynesian theory of the business cycle. This theory — in spite of its defects — is pretty much what our present and future administrations are following as they attempt to manage our economy. In fact, Steven Pearlstein’s column in yesterday’s Washington Post is titled Keynes on Steroids, and it contains this whopper: “Nixon’s Keynesian conversion, however, looks positively quaint compared with the fiscal and monetary stimulus that is about to be brought to bear on the U.S. and global economy. I doubt even Keynes himself could have imagined the scale and scope of what’s ahead.”

The Austrian school of economics has a different theory of the business cycle, and a different prescription for what government should do to get the country out of recession. It’s not a prescription that our leaders are likely to follow. In fact, everything they are doing, and are preparing to do, directly contravenes the Austrian prescription. Here’s what Rothbard wrote near the end of chapter 9 of For a New Liberty: The Libertarian Manifesto (I’ve added some emphasis):

What then are the policy conclusions that arise rapidly and easily from the Austrian analysis of the business cycle? They are the precise opposite from those of the Keynesian establishment. For, since the virus of distortion of production and prices stems from inflationary bank credit expansion, the Austrian prescription for the business cycle will be: First, if we are in a boom period, the government and its banks must cease inflating immediately. It is true that this cessation of artificial stimulant will inevitably bring the inflationary boom to an end, and will inaugurate the inevitable recession or depression. But the longer the government delays this process, the harsher the necessary readjustments will have to be. For the sooner the depression readjustment is gotten over with, the better. This also means that the government must never try to delay the depression process; the depression must be allowed to work itself out as quickly as possible, so that real recovery can begin. This means, too, that the government must particularly avoid any of the interventions so dear to Keynesian hearts. It must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. For doing so will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices, especially in the capital goods industries; doing so will prolong and delay indefinitely the completion of the depression adjustment process. It will also cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again in order to get out of the depression. For even if this reinflation succeeds (which is by no means assured), it will only sow greater trouble and more prolonged and renewed depression later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio—when the only thing that could speed up the adjustment process is to lower the consumption/savings ratio so that more of the currently unsound investments will become validated and become economic. The only way the government can aid in this process is to lower its own budget, which will increase the ratio of investment to consumption in the economy (since government spending may be regarded as consumption spending for bureaucrats and politicians).

Thus, what the government should do, according to the Austrian analysis of the depression and the business cycle, is absolutely nothing. It should stop its own inflating, and then it should maintain a strict hands-off, laissez-faire policy. Anything it does will delay and obstruct the adjustment processes of the market; the less it does, the more rapidly will the market adjustment process do its work and sound economic recovery ensue.

Will our government follow Rothbard’s recommendation to do “absolutely nothing”? Absolutely not.

Introducing Economics in One Lesson

In This Book is So Me, Walter Block introduces a book that I’ve quoted from and used extensively: Economics in One Lesson by Henry Hazlitt.

Every widespread economic fallacy embraced by pundits, politicians, editorialists, clergy, academics is given the back of the hand they so richly deserve by this author: that public works promote economic welfare, that unions and union-inspired minimum-wage laws actually raise wages, that free trade creates unemployment, that rent control helps house the poor, that saving hurts the economy, that profits exploit the poverty stricken; the list goes on and on. Exhilarating.

No one who digests this book will ever be the same when it comes to public-policy analysis.

This book is available online at the Foundation for Economic Education, and portions are available in audio format at Economics in One Lesson (Audio) Part 1 and Economics in One Lesson (Audio) Part 2.

Bryan Derreberry and the Chamber’s goals for Wichita

When the head of a chamber of commerce speaks or writes, it pays to listen or read carefully. While chambers are nominally pro-business, that’s a long way from saying they’re pro-liberty. Instead, they increasingly exist to serve a narrow interest. Using words and language like “pride,” “community,” “investment,” and “economic development” — all words that people can agree with, their flowery messages hide their real agenda.

Here’s an example. In the Wichita Eagle on May 12, 2006, president and CEO of the Wichita Metro Chamber of Commerce Bryan Derreberry wrote as follows:

If we are serious about advancing our community, then we have to invest in it and take pride in who we are. The Sedgwick County arena can boost excitement and economic development in Wichita, Sedgwick County and the region.

The arena initiative was a broad-based decision-making effort that offered everyone an opportunity to weigh in with a vote. Sedgwick County is now carrying out what the voters approved with an open and thoughtful process, allowing much input along the way.

There will always be those who resist change and look for ways to impede progress. But we have an obligation to take care of the community we live in today and make it better for those who come after us.

First, Mr. Derreberry is confused about the meaning of the word “investment.” In a recent article, Chris Brown tells us the true meaning of investment: “Investment signifies an accumulation of savings through lower present consumption, which will then be used to achieve (potential) profitable returns in the future.” None of this applies to the downtown Wichita arena. It was funded by transferring money from taxpayers to the government. Then, government has no ability to measure profitability, as it is not subject to the profit and loss system that private business must live by. Besides, how does government generate revenue? Through taxation, of course.

Then, the “broad-based decision-making effort” is certainly a misnomer. The arena passed with 52% of the vote. That’s hardly a mandate. Many people, seeing how the process has been handled since the election, have said they’d change their “yes” vote to “no.”

Finally, Mr. Derreberry slams those who say “no” to what he wants. That’s a mistake arising from the arrogance of those who believe that they know best how people should spend their money. By saying “no” to these government projects we are saying “yes” to entrepreneurship, limited government, and liberty. These goals, evidently, are not valued by Mr. Derreberry and his organization.

Pragmatism must recognize reality

Any editorial that starts with “Karl Marx was right about at least one thing …” deserves close examination, especially when it appears in Kansas’ largest newspaper and is written by that newspaper’s former editor. The thrust of Davis Merritt’s article is that the theory of free markets hasn’t worked: “We’re painfully experiencing right now the unraveling of neat free-market theory.” (Pragmatism needs to trump ideology, November 18, 2008 Wichita Eagle)

Here’s the first problem with Mr. Merritt’s argument: what we live in is anything but a free market society. George Reisman details just how far removed we are from anything resembling free markets in The Myth that Laissez Faire Is Responsible for Our Present Crisis.

Then, Mr. Merritt warns that free market theory is doomed to fail because “perfect theories require perfect people.” I don’t know precisely who he refers to as not perfect, but judging from the tone of the article, I think he’s condemning greedy businesspeople who are the cause of the present financial crisis. In particular, investment bankers. Demonizing these people on general grounds doesn’t help. Instead: Did they steal from their shareholders? Did they commit fraud when they issued sub-prime loans? These acts are illegal, and to the extent they were committed, let’s prosecute them.

Greed — human self-interest — is a constant factor. It’s what drives people to expend tremendous effort to accomplish great things for the betterment of mankind. It can also drive people to accept a sub-prime mortgage loan that they can’t repay in order to buy a house they can’t afford — but, greedily, want nonetheless. It works both ways. So we need good rules that prevent people from using theft, force, and fraud to unjustly enrich themselves. These good rules are easier to create and enforce, and more reliable, than a false hope the people will start behaving “good.”

Besides, couldn’t we also say that good government requires good politicians, bureaucrats, and administrators? I’m surprised that an editor of a newspaper — someone who must have experienced the political process close-up — would have such confidence in government instead of people.

Mr. Merritt cites the “hands-off, no-regulation attitude of the current administration” as bad for people and economic welfare. If we had been experiencing a period of reductions in regulation, we might have evidence for this claim. The Heritage Foundation report Red Tape Rising: Regulatory Trends in the Bush Years debunks the myth that regulation has decreased during the presidency of George W. Bush: “Far from shrinking to dangerously low levels, regulation has actually grown substantially during the Bush years. By almost every measure, regulatory burdens are up.”

Mr. Merritt’s editorial, if its advice is taken, will lead us towards more regulation and reliance on government. That’s not what we need.

Joe Scarborough: Please Stop Saying Laissez-faire

I’m listening to Joe Scarborough on MSNBC, and he says: “Laissez-faire capitalism is a wonderful thing except in this case …”

I’ve heard stuff like this over and over the past few months: A politician says “I’m a big free-market guy, but …”

What’s sad to realize is that these people think that what we have in American is free markets and laissez-faire capitalism. We don’t have these. See my post The Myth that Laissez Faire Is Responsible for Our Present Crisis.

The sooner that we understand that it is largely government that is the cause of the present crisis, we can realize that relying on government for a cure is dangerous and predetermined to fail.

Resources: The Bailout Reader at the Ludwig von Mises Institute and Global Financial Crisis at the Cato Institute.

Bailouts National and Local

A post at the Wichita Eagle Editorial blog titled Either way, taxpayers will pay for failing GM illustrates how when government and business become highly intertwined, a self-sustaining behemoth is created that can’t be slain.

We say an example of this locally this year in Wichita, when a taxpayer subsidy to a development turned out to be underperforming. The solution? Pump more taxpayer money into a failing project. See Wichita and the Old Town Warren Theater Loan.

Why Austrian Economics Matters More Than Ever

Here’s a talk recently delivered by Lew Rockwell, president of the Ludwig von Mises Institute. This organization remains the best place to learn about why our economy is in such trouble. The full speech can be read at Why Austrian Economics Matters More Than Ever. An excerpt:

I report on this not so that we can say “We told you so,” but rather to underscore the need to stick to principle, depart from the crowd, avoid the fashion, and adhere to the truth no matter what. This is what Mises taught us, and if he had done nothing more than be his era’s most tough-minded resister to collectivism of all types, it would be enough to earn him an institute founded in his name.

Pat Buchanan: Comrade Obama?

Pat Buchanan’s recent column Comrade Obama? contains much I agree with, keeping me liking and admiring him, even through I disagree with a few of his positions.

This column accurately describes the current political landscape, and it’s not complimentary to Barack Obama, Democrats, or Republicans. A few excerpts:

Indeed, how do Republicans who call Obama a socialist explain their support for Social Security, Medicare, Medicaid, food stamps, welfare and the Earned Income Tax Credit? …

Since August, the Bush-Paulson team has seized our biggest S&L, Washington Mutual, and largest insurance company, AIG. It has nationalized Fannie and Freddie, pumped scores of billions into our banks, bailed out GM, Ford and Chrysler, and paid the $29 billion dowry for Bear Stearns to enter its shotgun marriage with JPMorgan Chase. And with federal, state and local taxes taking a third of gross domestic product, and government regulating businesses with wage-and-hour laws, civil rights laws, environmental laws, and occupational health and safety laws, what are we living under, if not a mixed socialist-capitalist system?

And then this:

Norman Thomas is said to have quit running for president on the Socialist ticket after six campaigns because the Democratic Party had stolen all his ideas and written them into its platforms.

This is the same Norman Thomas who said “The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened.”

Some Articles Worth Reading

Making Social Security More Harmful. From the Foundation for Economic Education. “Consider first that ever since Social Security was enacted in 1935 Americans have been told that their ‘contributions’ are being deposited into their own account to pay for their retirement benefits. … The other fraudulent claim made about Social Security (again, from the very beginning of the program) is that employees pay only half the cost, with employers paying the other half.”

Banking Without Regulation. Another fine article from FEE. Could banking be done without regulation? It has been done in the past.

The Election Choice: Unions. “Obama’s pro-union agenda is the most ambitious in decades.”

Labor Unions Prolonged the Depression. Obama wants a new Wagner Act. “As Amity Shlaes observed in her recent history of the Great Depression, ‘The Forgotten Man,’ within a few months after the Wagner Act was upheld, industrial production began to plummet and “the jobs started to disappear, with unemployment moving back to 1931 levels,” even as the number of workers under union control was ‘growing astoundingly.'”

Money For Nothing. “The urge to spend lavishly on schools is part of the Democratic Party’s DNA. But fatter budgets would not be balanced by accountability, higher standards or parental choice.”

The Myth that Laissez Faire Is Responsible for Our Present Crisis

Professor George Reisman contributes the excellent (and lengthy) article The Myth that Laissez Faire Is Responsible for Our Present Crisis. I’ve had the distinct honor of attending a number of Professor Reisman’s lectures at the Ludwig von Mises Institute, and I’m slowly working my way through his monumental book Capitalism: A Treatise on Economics. Here’s a few excerpts from this article:

“Laissez-faire capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual’s rights against the initiation of physical force.

Then Professor Reisman lists some of the ways in which our present system is far removed from anything resembling laissez-faire capitalism:

The utter absurdity of statements claiming that the present political-economic environment of the United States in some sense represents laissez-faire capitalism becomes as glaringly obvious as anything can be when one keeps in mind the extremely limited role of government under laissez-faire and then considers the following facts about the present-day United States: 1. Government spending in the United States currently equals more than forty percent of national income … 2. There are presently fifteen federal cabinet departments, nine of which exist for the very purpose of respectively interfering with housing, transportation, healthcare, education, energy, mining, agriculture, labor, and commerce … 3. The economic interference of today’s cabinet departments is reinforced and amplified by more than one hundred federal agencies and commissions … 4. the Federal Register contained fully seventy-three thousand pages of detailed government regulations. This is an increase of more than ten thousand pages since 1978, the very years during which our system, according to one of The New York Times articles quoted above, has been “tilted in favor of business deregulation and against new rules.” 5. And, of course, to all of this must be added the further massive apparatus of laws, departments, agencies, and regulations at the state and local level.

What this brief account has shown is that the politico-economic system of the United States today is so far removed from laissez-faire capitalism that it is closer to the system of a police state. The ability of the media to ignore all of the massive government interference that exists today and to characterize our present economic system as one of laissez faire and economic freedom marks it as, if not profoundly dishonest, then as nothing less than delusional.

Then, under the heading “Government Intervention Actually Responsible for the Crisis:”

Beyond all this is the further fact that the actual responsibility for our financial crisis lies precisely with massive government intervention, above all the intervention of the Federal Reserve System in attempting to create capital out of thin air, in the belief that the mere creation of money and its being made available in the loan market is a substitute for capital created by producing and saving. This is a policy it has pursued since its founding, but with exceptional vigor since 2001, in its efforts to overcome the collapse of the stock market bubble whose creation it had previously inspired.

I could go on for some time with more quotes from this article, but it is well worth reading the entire piece. Please do so at The Myth that Laissez Faire Is Responsible for Our Present Crisis.

Beyond Bailouts Is Recommended

I recommend BeyondBailouts.org as a place to learn about the current situation in our financial markets. From their site:

BeyondBailouts.org is a joint venture of the National Taxpayers Union (NTU) and Competitive Enterprise Institute (CEI). The purpose of the website is to educate about government’s role in our current financial difficulties, suggest reforms that address those root causes, and provide a clearinghouse for the latest analysis of the financial crisis. But most of all, it’s an outlet for Americans to contact their Members of Congress and the Administration to express their frustration.

Earmarks are (not) OK

In a Wichita Eagle letter, writer Prem N. Bajaj of Wichita makes the case that Earmarks are OK. But only by tortured reasoning, in my opinion.

First, he states: “Earmarks finance local projects that the community is unable to support.” I ask Mr. Bajaj this question: Where, if not from community, does money for earmarks come from? If you consider just two parties — your local community and the federal government — earmarks may seem like a great thing. Free money! Who doesn’t want that? But communities across the country lobby for and get earmarks too, and they may be represented by congressmen more skilled at obtaining earmarks than ours.

At best, earmarks might be a wash, where each community receives earmarks equal to what it sends to Washington. But even if this were the case, why have Washington involved at all? Each community could keep its own money and spend it as it sees fit, without subjecting itself to the waste and corruption inherent in the present earmark process.

Then he writes this: “The money comes from the taxpayers, and they are the beneficiaries.” Mr. Bajaj writes as though relying on government, rather than markets and the private sector, leads to greater wealth. In fact, the opposite is true. The incentives that government faces and responds to are not the same as the private sector, where waste and inefficiency are punished. Not to mention failing to supply what consumers really want to buy.

A few quotes from economist Thomas Sowell seem appropriate at this time:

“This was all before politicians gave us the idea that the things we could not afford individually we could somehow afford collectively through the magic of government.”

“If you have been voting for politicians who promise to give you goodies at someone else’s expense, then you have no right to complain when they take your money and give it to someone else, including themselves.”

“Mystical references to ‘society’ and its programs to ‘help’ may warm the hearts of the gullible but what it really means is putting more power in the hands of bureaucrats.”

“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

Are We Angry Only Because We Were Caught?

In his column Welcome to ‘Moral Hazard’, Wall Street Journal editorial writer Daniel Henninger writes:

For behind it all sat Fannie Mae and Freddie Mac, running mortgage liquidity into the nation’s neighborhoods like an open fire hydrant. Several years ago, when the Journal’s editorial board met with Fannie Mae’s top executives and pressed the issue of financial risks, we were told by way of ending the conversation that Fannie was merely fulfilling the “mandate of Congress” to spread home ownership across the land. Congress, of course, is a temple to moral hazard. …

For all the wailing about the high price being paid now of ignoring manifest risk beneath the mortgage crisis, are we angry at bad decisions that must never be repeated, or just upset that it all blew up? Because if it’s the latter, politicians will try to game the system again to get more risk-free benefits.

Which is it?