As California goes, so goes the nation

May 31, 2009

If you want to see where the nation is heading, look no further than California.

The state of California employs some two-and-a-quarter million people, includes almost 400 state agencies, oversees 29 different legal codes, administers a tax code that runs to more than 60,000 clauses or sections and spends more than $100 billion a year.

California is a bureaucratic nightmare.  It is impossible, or close to it, to do business in the state.  People are leaving in droves.  

Any wonder why:

Even discounting for the impact of global recession, the most populous state’s ills are unique and self-inflicted — and avoidable. In the last three decades, California expanded the public sector and regulation to Europe-like dimensions. Schools, state employees, health care, even dog kennels, benefited from largesse in flush times. Government workers got 16 official holidays, everyone else six. The state dabbled with universal health care and adopted strict environmental standards. In short, California went where our new president and Nancy Pelosi of San Francisco want America to go.

And how goes the nation?

USA TODAY used federal data to compute all government liabilities, from Treasury bonds to Medicare to military pensions.

Bottom line: The government took on $6.8 trillion in new obligations in 2008, pushing the total owed to a record $63.8 trillion.

The numbers measure what’s needed today — set aside in a lump sum, earning interest — to pay benefits that won’t be covered by future taxes.

We’ve become a nation with nothing but states as vassals to the federal government.  This is just perfect:

Welcome to the State of New Hampshire’s Office of Economic Stimulus and thank you for your interest in New Hampshire’s efforts to implement the American Recovery and Reinvestment Act of 2009.

I want to ensure that New Hampshire and its citizens receive maximum benefits from the federal recovery legislation, and that the federal funds we receive are used to create jobs and protect essential services here in New Hampshire.

I created the Office of Economic Stimulus to ensure state agencies are coordinating their efforts and that New Hampshire complies with all requirements of the federal law. This Web site will provide you with important information on state government’s work to implement the Recovery Act.

So the state waits to receive largesse from the federal government as long as it complies with all requirements under federal law.  California waits with baited breath for a bailout.  

The republic is dead.  Perhaps it died long ago.  We’re so deeply in debt, the fed has thoroughly debased our currency, and the federal government has taken over GM.  In doing so, it broke the most basic rules of contractual law, violated ever tenet of limited government, and is setting its sights on the financial and health care sectors.  

Dead broke.  California is there, the nation soon to follow.


An answer in a single sentence

May 30, 2009

Arnold Kling answers in a single sentence exactly why the “stimulus” will not work:

This is all based on a Keynesian type of macro analysis. 

Because, capital is fixed and homogenous, labor is the only factor of production, we can ignore international trade (except for the fact that it creates war), division of labor is a bad thing, as is saving, and of course, the piece de resistance: wars are good for an economy.

If Obama was really smart (or whoever puts the words into the teleprompter), he’d just have the fed print tons of money (okay, that’s already been done), then hire a bunch of people to fill bottles with the cash (gee, look at all the jobs!!) then have people bury them (oh, wait, better make sure fillers and diggers are different.  Union rules you know.  But would that be division of labor?  Oh, nevermind…).  When the time is right, like before the next election perhaps, send out the masses to dig them up.  

Problem solved.


Hmmm…You don’t say

May 27, 2009

http://online.wsj.com/article/SB124303024230548323.html

Mr. Fisher has led the Dallas Fed since 2005 and has developed a reputation as the Federal Open Market Committee’s (FOMC) lead inflation worrywart. In September he told a New York audience that “rates held too low, for too long during the previous Fed regime were an accomplice to [the] reckless behavior” that brought about the economic troubles we are now living through. He also warned that the Treasury’s $700 billion plan to buy toxic assets from financial institutions would be “one more straw on the back of the frightfully encumbered camel that is the federal government ledger.”

Gee, you think so???

 

This is doubtless why, with Washington taking on a larger role in the American economy every day, the worries linger. On the wall behind his desk is a 1907 gouache painting by Antonio De Simone of the American steam sailing vessel Varuna plowing through stormy seas. Just like most everything else on the walls, bookshelves and table tops around his office — and even the dollar-sign cuff links he wears to work — it represents something.
He says that he has had this painting behind his desk for the past 30 years as a reminder of the importance of purpose and duty in rough seas. “The ship,” he explains, “has to maintain its integrity.” What is more, “no mathematical model can steer you through the kind of seas in that picture there. In the end someone has the wheel.” He adds: “On monetary policy it’s the Federal Reserve.”

This is doubtless why, with Washington taking on a larger role in the American economy every day, the worries linger. On the wall behind his desk is a 1907 gouache painting by Antonio De Simone of the American steam sailing vessel Varuna plowing through stormy seas. Just like most everything else on the walls, bookshelves and table tops around his office — and even the dollar-sign cuff links he wears to work — it represents something.

He says that he has had this painting behind his desk for the past 30 years as a reminder of the importance of purpose and duty in rough seas. “The ship,” he explains, “has to maintain its integrity.” What is more, “no mathematical model can steer you through the kind of seas in that picture there. In the end someone has the wheel.” He adds: “On monetary policy it’s the Federal Reserve.

We’re doomed.


Right so often, but wrong this time

May 23, 2009

I have always admired Thomas Sowell.  He’s an amazingly brilliant economist, a true scholar, and a believer in free markets.  He’s alway spoken his mind, and been astute to all the interventionist fallacies.  But sometimes even brilliant men get things wrong.

Interviewed by Reason about his new book “Housing Boom and Bust”, he has this to say about Fed policy:

reason: How much weight do you place on the notion that Federal Reserve expansionary money and credit policies primed the bubble, and bust, in housing?

Sowell: I find it hard to accept. I’m sure if the interest rates had been at 8 percent the boom would not have gone as far and the bust would not have been as big. I’m not saying monetary policy had no effect. But I am struck by the fact that Federal Reserve policy is nationwide, and in places like Dallas the increase in housing prices was in single digits and the decrease has been in single digits. So while Fed policy undoubtedly aggravated circumstances, it can’t be the fundamental cause because the defaults were so heavily concentrated. 60 percent of all defaults nationwide were in five states, and I suspect if you broke down the data even more you’d find specific regions in those five states very heavily implicated in defaults.

Oh, how I wish he would review a little ABCT.  Let us look back to this graph I posted a few days back:res_v_nonres

This graph so clearly shows that regardless the state concentration, the massive redirection of investment away from non-residential (i.e. productive) investment towards residential (i.e. non-productive) investment, was the housing bubble.  Surely Sowell is aware that capital is mobile, and that investment capital would be diverted to the highest rates of return.  

It matters not at all that the malinvestment was concentrated in several states nor does it matter that other markets saw little appreciation in housing prices.  The problem was that the vast increase in money created created market distortions and mistimed resource allocations.  This much is certain.

What this specifically means, in simpler terms, is that while money is, or at least it seemed to be, infinite, resources most certainly aren’t.  Thus, this means that resources were diverted away from less attractive markets (such as Dallas) and redirected to more attractive, for instance California.  More importantl, it means the resources were diverted away from productive to non-productive investments.  This is clear from the graph above.

Necessarily, as demand for resources grew, so too did their price, thus the opportunity cost of investment.  

ppi

Let’s look at this graph for a moment.  We see modest increases in the PPI for capital equipment, which is of course very technologically sensitive, but massive increases increases in intermediate materials, far less technologically sensitive.

This huge increase (and precipitous drop) coincides with the housing bubble.  It is precisely these goods that housing development needs, while the non-residential investment requires more capital goods.  

Yes Professor Sowell, it WAS the Fed.

But this is perfect.

Sowell: The presumption that Obama knows how all these industries ought to be operating better than people who have spent lives in those industries, and a general cockiness going back till before he was president, and the fact that he has no experience whatever in managing anything. Only someone who has never had the responsibility for managing anything could believe he could manage just about everything.

As is this:

Sowell: I would hope not, but I certainly do think very seriou s consequences are likely to follow from all this, and they aren’t really discussed much. The ease with which we are now throwing the word “trillion”—I remember when billion was a shock word. To talk about trillions as though they are nickels and dimes, it’s a classic example of doing something that sounds good at the moment whose repercussions are beyond the horizon. When bad effects of his policies come, will people connect the dots? Or will Obama be able to get away with it like FDR did, blaming it all on his predecessor?

I think we all know the answer to that one.

I know, you’re the Milton and Rose Friedman fellow at Hoover.  But please, refer to this:

m2_90-09

I think it speaks for itself.


Anything but capitalism

May 22, 2009
This guy cannot be serious.
Contrary to what many pundits claim, the Obama administration’s approach to the auto industry is not anticapitalist.
Without a drastic restructuring neither Chrysler nor GM would have a chance for long-term success. Not only would thousands of workers lose their jobs, but the government would lose tens of billions of taxpayers’ dollars. So rather than simply writing a check to the auto industry — the policy of the previous administration — the Obama team is focused on fundamentally restructuring these two businesses.
So far, the auto task force has done an admirable job of refusing to rubber stamp the industry’s proposals. It’s used rigorous analysis to make tough decisions. These decisions include “right sizing” industry capacity by cutting many union and white-collar jobs and closing numerous manufacturing plants and dealerships; making the unions accept lower wages and benefits so that these companies can compete; and cutting the debt crushing these companies by forcing many of the stakeholders — workers, retirees and creditors (including the government) — to take equity rather than cash for their obligations.
Capitalism is anything but this.  Capitalism specifically entails that those companies that can not produce goods and services that are desired must fail.  
As Mises wrote in Economic Freedom and Interventionism
There is today practically no limit to the peoples’ and their rulers’ pro-statist or, as one says today, pro-socialist enthusiasm. Hardly anybody is courageous enough to raise objections if some expansion of state power?popularly styled the “public sector of the economy”?is suggested. What slows down and in most fields almost stops the progress toward more socialization of business enterprises is the manifest financial failure of almost all nationalization and municipalization ventures.
The social and political ideal of our age is planning. No longer should the individuals have the right and the opportunity of choosing the mode of their integration into the system of social cooperation. Everybody will have to comply with the orders issued by society’s, i.e., the state’s, the police-power’s, supreme office. From the cradle to the coffin everybody will be forced to behave precisely as he is ordered to behave by the makers of the “plan.” These orders will determine his training and the place and the kind of his work as well as the wages he will receive. He will not be in a position to raise any objections against the orders received; according to the philosophy underlying the system, the planning authority alone is in a position to know whether or not the order is or is not in accordance with its plan for the “socially” most desirable conduct of affairs.
Thus is anyone surprised by the author’s use of the word “force”?  

 

http://online.wsj.com/article/SB124268985129632443.html

This guy cannot be serious.

Contrary to what many pundits claim, the Obama administration’s approach to the auto industry is not anticapitalist.

Without a drastic restructuring neither Chrysler nor GM would have a chance for long-term success. Not only would thousands of workers lose their jobs, but the government would lose tens of billions of taxpayers’ dollars. So rather than simply writing a check to the auto industry — the policy of the previous administration — the Obama team is focused on fundamentally restructuring these two businesses.

So far, the auto task force has done an admirable job of refusing to rubber stamp the industry’s proposals. It’s used rigorous analysis to make tough decisions. These decisions include “right sizing” industry capacity by cutting many union and white-collar jobs and closing numerous manufacturing plants and dealerships; making the unions accept lower wages and benefits so that these companies can compete; and cutting the debt crushing these companies by forcing many of the stakeholders — workers, retirees and creditors (including the government) — to take equity rather than cash for their obligations.

Capitalism is anything but this.  Capitalism specifically entails that those companies that can not produce goods and services that are desired must fail.  

Chrysler has already stopped production (free subscription required) and it doesn’t appear the auto industry has collapsed.  The other manufacturers will pick up the production, or they won’t.  And those resources will be diverted elsewhere.  If we aren’t demanding Chrysler cars, why are we building them?

Monthly unit production at Ford and Toyota Motor Sales U.S.A. will surpass last year’s numbers as soon as August, IHS analysts Haig Stoddard and Tracy Handler said. But that will not mean stable U.S. production, they said.

“Other manufacturers can make up some of the extra demand from inventory,” they said last week. “We’ve increased production for most other manufacturers, just not enough to make up for declines at GM and Chrysler.”

So, we’re supposed to throw tax dollars at a bad company and be forced to buy or at least subsidize products we don’t want.  And it should be obvious that producing Chryslers necessarily limits Ford and Toyota from producing.

Hope and change!!!

As Mises wrote in Economic Freedom and Interventionism

There is today practically no limit to the peoples’ and their rulers’ pro-statist or, as one says today, pro-socialist enthusiasm. Hardly anybody is courageous enough to raise objections if some expansion of state power?popularly styled the “public sector of the economy”?is suggested. What slows down and in most fields almost stops the progress toward more socialization of business enterprises is the manifest financial failure of almost all nationalization and municipalization ventures.

The social and political ideal of our age is planning. No longer should the individuals have the right and the opportunity of choosing the mode of their integration into the system of social cooperation. Everybody will have to comply with the orders issued by society’s, i.e., the state’s, the police-power’s, supreme office. From the cradle to the coffin everybody will be forced to behave precisely as he is ordered to behave by the makers of the “plan.” These orders will determine his training and the place and the kind of his work as well as the wages he will receive. He will not be in a position to raise any objections against the orders received; according to the philosophy underlying the system, the planning authority alone is in a position to know whether or not the order is or is not in accordance with its plan for the “socially” most desirable conduct of affairs.

Is anyone surprised by the author’s use of the word “force”?  Is anyone surprised by the administrations actions: to the bondholders, to the creditors, to the public?  The only question remaining is “who’s next?”.


My Path to Austria

May 22, 2009

What brought me to Austria 

Not really a Road to Damascus story, but nevertheless, I think it’s important to explain what brought me to the Austrian school.

I had always been “conservative”, even in my early youth.  I remember vividly working (though sadly too young to vote) in the 1980 Reagan campaign.  I worked alongside my parents and went to many campaign activities.  It was an amazing experience.

I’d almost liken it, though I feel horrible in making the comparison, to the hoopla over the current president.  Except that there wasn’t the religiousness nor the blind devotion to an individual.  Reagan was a man of ideas, and he was but a spokesman for those great and noble ideals of freedom, capitalism, and America.  This is quite unlike the current pretender who is devoid of ideas, save old, discredited and disastrous ones.

Nothing was more persuasive than the line from Reagan’s first inaugural, that government is not the solution, but the problem.  And it was as true then as it is true now.  In fact, it is far truer today.

I went to college and ended up majoring in economics.  Long story really, but I was fortunate to have many wonderful professors, who, despite their Keyensian views, were nevertheless thoroughly professional and fair.  Yes, they forced me to confront and challenge my beliefs, but out of academic inquiry and intellectual honesty, not out of coercion or fear.  (Maybe they weren’t Keyensian after all!!)

I picked up two books, Milton Friedman’s “Free to Choose” and Frederick Hayek’s “Road to Serfdom”.  Both were so clear and perfect explanations about why freedom and capitalism works, always, everywhere, and wonderfully, and why intereventionism fails, always, everywhere, and miserably.

I was heavily influenced by the supply side theorists as well as the monetarists.  I remember doing a senior research paper on the effects of money supply and GDP.  It clearly demonstrated the power that the money supply has on the economy (yes, at the time it was heavily monetarist in theory) and the complete lack of influence fiscal policy has. 

Now, it is true that both monetary and fiscal policy end up with ruinous results.  No doubt the intervention from both the government and the fed create massive distortions in the economy, which the Austrians have so clearly shown.  Unfortunately, I was not exposed to Austrian theory and sans the internet, resources were scarce.

But it is important to recall that I went to school in the mid to late 80’s, a time when Keyensian thought had been thoroughly discredited (would that were the case today!!) by rampant inflation and stagflation.  It is also the time when the supply siders and the monetarists began their rise to prominence.  It also coincided with massive economic growth with low inflation.  So it appeared, at least to this undergraduate, that those two schools were on to something.

What was obvious, and I believe is consistent with the Austrian school, is the agreement that markets, capitalism, and free trade and exchange work.  All those schools were thoroughly anti-Keyensian, at least as far as the interventionist and the silly demand driven theories go.  They also believed it necessary to increase investment and production.  So, given the current economic situation, it was wholly understandable that I would find myself, not in one camp or the other per se, but accepting the overall general view or free markets, capitalism, and investment/production driven economies.

Politically I had always been a Republican with very strong libertarian leanings.  Having been so thoroughly upset with the first President Bush (gee, like father like son) for raising taxes, I re-registered as a Libertarian.  However, I ended up returning to the Republican party after the election of Bill Clinton.  I was enthused by the Republicans re-embrace of federalism and limited government.  I was had hope (long before, well, you know!!) that the Contract with America would help us return to a more (little r) republican society.

Republicans supported the balanced budget and the line item veto amendments.  Okay, perhaps that pesky separation of powers thing nixed the latter and the former at least became if not law, accepted in practice.  Budgets were balanced, even to the point where, mirabile dictu, surpluses occurred.  Welfare reform was passed as well.

Well now, perhaps we were heading in the right direction.  No, it wasn’t perfect by any stretch, but at least “the era of big government” was over, or so we were told.

But as always happens, Republicans end up just like democrats, and once “in power”, they were consumed with leviathan.  Somebody really ought to explain the difference between the two parties.  I think it is simply this: both parties lust power and will do everything to achieve it; and once acquired, everything to maintain it; one party makes no pretensions while the other feigns disdain. 

So, having become thoroughly disgusted with the Republicans, I re-registered as an independent.  This was also about the time that I stopped blogging.  It became harder and harder to defend “conservative” politicians and ideas.  I was happy with much of what I was writing, and thought it rather thoughtful and insightful, but more and more, found less and less to write about.  Thus, it became a chore and I simply lost interest. 

In the meantime, I undertook to reading extensively on a variety of subjects, from ancient history to philosophy. 

This still doesn’t necessarily explain my path to Austria, but rather that I have always very libertarian.

A few years ago, I taught an online economics class at my high school.  In my search for resources that the students could use online, I stumbled across Professor Roger Garrison’s website at the University of Auburn.  Well, besides being a treasure trove of outstanding resources, I began to read some of his essays.  But what I noticed was a link to the LvMI.  Once I clicked, my “conversion” was complete.

First though, I must say this about Professor Garrison.  Before I would use any of his materials, I emailed him and asked for permission.  Not only did he give me permission, but also told me to check back often as he would update the resources and provide newer and improved resources.  Talk about generosity. 

So, from searching for resources that took me to his website, that led me to the LvMI, the journey was complete.  Here I found not only a vast library of resources to expand my knowledge, but a most magnanimous and friendly collection of scholars and individuals dedicated to liberty.  I have emailed many of the contributors and received replies almost always.  This despite the fact that they must all be very busy. 

So, did I become a convert or did I just find an intellectual home?  Well, that’s rather easy to answer.  What I also discovered was far more than just simply an ideological counterpart, but much more importantly, the only truly accurate and prescient economic analysis.

So, the past few years have been spent not only keeping current on the latest Austrian insights, but studying Austrian economic theory.  Needless to say, the last few years have been some of the most exciting and stimulating intellectually. 

However, there are some issues where I find some disagreements.  I am not wholly convinced that non-interventionist foreign policy is a safe path.  There are too many dangerous parts of the world, and today, more than ever, those threats around the world will not remain there.  And yes, this is a major concern for libertarians, and one not all libertarians agree upon.  But we’ll just leave that as a point that we agree to disagree.


Hamilton’s Curse and Meltdown

May 20, 2009

These are two must read books recently available from the scholars at the Mises Institute.  

Thomas DiLorenzo explodes the myth of Hamilton and presents him for what he truly was: a man opposed to the ideas of liberty and freedom.  He served as Washington’s aide during the Revolutionary war and later was one of the three authors of the Federalist papers.  Sadly, the former did nothing to quell his lust of monarchies and the latter were a collection of bald faced lies.  Had he written what he truly felt, then it is perhaps inconceivable that the Constitution would have passed.

Alexander Hamilton wrote in Federalist #83:

Having now seen that the maxims relied upon will not bear the use made of them, let us endeavor to ascertain their proper use and true meaning. This will be best done by examples. The plan of the convention declares that the power of Congress, or, in other words, of the NATIONAL LEGISLATURE, shall extend to certain enumerated cases. This specification of particulars evidently excludes all pretension to a general legislative authority, because an affirmative grant of special powers would be absurd, as well as useless, if a general authority was intended.

That should make it quite clear that the power of the national legislature (i.e. Congress) shall extend ONLY to the enumerated cases (Article I, Section 8 ) and that there is no general, or unlimited, grant of powers. 

However, nothing that he might have said precluded him from pursuing his goal of a powerful central government with the states as vassals.  Neither did it prevent him from using that same government to extract taxes and levies of all sorts, nor did his time alongside Washington dissuade him from leading an army to collect taxes from Pennsylvania farmers. 

Hamilton thought of Aaron Burr as the Cataline of America, a man [as quoted by Ron Chernow] “sanguine enough to hope everything, daring enough to attempt everything, wicked enough to scruple nothing”.  Apparently he learned best from those he most despised.

Hamilton’s influence can be seen most vividly in one of his admirers, John Marshall.  Nowhere in the constitution are the courts empowered to review legislation, yet this mythical role, one which every school age child learns, was created whole cloth by Hamilton’s acolyte.  That so much power could rest in so few hands is not only tyrrany, but Hamilton’s dream. 

Baron de Montequieu was perhaps the most important influence on the Constitution.  He wrote in the Spirit of the Laws, Book 11, that:

Again, there is no liberty, if the judiciary power be not separated from the legislative and executive. Were it joined with the legislative, the life and liberty of the subject would be exposed to arbitrary control; for the judge would be then the legislator. Were it joined to the executive power, the judge might behave with violence and oppression.

The judiciary power ought not to be given to a standing senate; it should be exercised by persons taken from the body of the people at certain times of the year, and consistently with a form and manner prescribed by law, in order to erect a tribunal that should last only so long as necessity requires.

By this method the judicial power, so terrible to mankind, not being annexed to any particular state or profession, becomes, as it were, invisible. People have not then the judges continually present to their view; they fear the office, but not the magistrate

And today?  Is there any area of society that does not feel, or fear, the power of judiciary.  Worse still, are there not groups whose sole purpose is to use the courts to exact their political agenda, contrary to public will and or welfare?  

Just imagine, an invisible judiciary…

Consistent with Austrian economic theory, the greatest act of malfeasance Hamilton foisted upon the public is the national bank.  Manipulating currency is the most dangerous and deceitful act any government can do.  It is the central bank that has given us the boom and bust cycles and the inflation that is robbing us of our wealth and prosperity. 

Professor DiLorenzo presents an excellent analysis of the legacy of Hamilton.  Our country was forged with the words of Jefferson, but the Republic usurped with the ideas of Hamilton.  Where Jefferson was a believer in free trade, capitalism, and sound money, Hamilton was a mercantilist, favoring tariffs, regulations, and debt.  Where Jefferson saw the government as being one of few, limited, powers, Hamilton saw one where if not prohibited, then powers exist. 

Nowhere is the difference of views more evident than our current federal budgets.  Congress engages in a multitude of unconstitutional acts, from allotting money for everything from farm subsidies and education, to taking billions from the states and dispensing it only upon oaths of fealty.  

The end of the book offers hope, but one has to wonder what chances there are.  Currently the numbers of tax recipients (i.e. those that receive monies from taxation) is close to the number of tax contributors.  And, if the Obama administration succeeds with its current schemes, then surely the latter will far outnumber the former.  Thus, “change” would be “hope”less.

Only two points that I feel Professor DiLorenzo missed.  One, the most egregious of Hamiltonian/Mashallian-style edicts from the court was the 1942 Wickard v. Filburn decision, that has done enormous harm to liberty, which is also to say nothing has done more to empower the state.  Under the guise of the commerce clause, everything from minimum wage laws, environmental protection regulations (and if one doubts this, as of the time of writing this, Obama is considering making California’s highest in the nation fuel efficiency standard, the national standard) and even gun control laws have all been “justified”.  Of course, any mention of the commerce clause abuses would be incomplete without the war on drugs.  That this particularly pernicious decision was left out I would argue is a significant omission.

The other omission, which again falls under judicial tyrrany, was the Kelo decision.  Under this, states may now confiscate private property and turn it over to private developers.  All this is of course to be done under guise of the public good, which takes us back to the beginning of the book and the assessment of Hamilton as the Rousseau of the Right.  The “public” or “general” interest was a common Hamiltonian theme, one that has been used with egregious effect by dictators right and left alike.

Thomas Woods Meltdown begins with an analysis of the housing crisis.  Unlike any other commentator/analyst (save other Austrian economists) he nails the problem perfectly.  His list of culprits all lead back to the same source: the federal government.  The list reads like one of those “don’t try this at home” warnings one sees before some television show.  Freddie and Fannie, CRA, tax policies, the Federal Reserve, and political interference all contributed to an unmitigated disaster. 

Many people seem to believe that libertarians, and conservatives (whatever that moniker applies to nowadays, I’ve no idea) are all in love with big business, corporations, and favoritism for them at the expense of “the little guy”.  Nothing could be further from the truth, at least about libertarians.  

The myth that somehow government policy that favors one group, even if it is business, is somehow “free market capitalism” is ludicrous.  In fact, the truth is that it is anything BUT capitalism.  Woods destroys this myth, and many others, in his description of the bailouts now being undertaken.  (One must wonder what the outrage would be if the Bush administration were doing all of this.)  No business, absolutely none, is “too big to fail”.  Quite the opposite is actually true.  Firms that can no longer efficiently utilize resources must be allowed to fail.  In fact, they are only in that predicament in the first place by government intrusion into the marketplace.

No greater service could ever be done for the nation, and the future of liberty and prosperity in general, than that of exposing the truth about the depression and FDR.  Here Mr. Woods does yeoman’s work.  The depression was not the failure of capitalism but a sad example of fed credit expansion and the terrible effects it has.  Hoover was not a laissez faire president, but a Keyensian well before that awful treatise was published.  He raised taxes, increased spending, ran huge deficits (which oddly enough FDR campaigned against), passed wage and price controls (keeping them artificially high in the insane belief that high wages and prices were necessary), not to mention signed the tariff bill basically shut off trade.  All of this combined to prevent the economy from recovering.  And FDR only furthered the problem, making it far worse.

In addition, it was not World War 2 that got the US out of the depression.  In fact, massive spending cuts followed the war, and the predicted depression never materialized.  If nothing else, the book exposes the lies and for that, we should all be grateful.  

Few, even those who should know, are aware of the deep recession of 1920-21.  And because of this, none are aware that the Harding administration’s response, cutting spending, and the Fed’s, raising interest rates, were the exact right policy.  And, because of such, the recession, though deep, was brief and once the malinvestment cleared, paved the way for a long period of growth and prosperity.  Thus, doing absolutely nothing (other than less) to interfere with the economy adjusting is, was, and will always be the correct approach.

Mr. Woods reserves special treatment for the federal reserve, especially the leadership of Alan Greenspan and Ben Bernanke.  The artificial creation of trillions of dollars in money and credit along with the “Greenspan put” created market distortions and lowered the moral hazard allowing the massive bubble to form.

Had there been none of the Keynesian style interference, mercantilist policies, nor monetary distortions, than all that came to pass would have been avoided long before.  Banks and other lending institutions all the way down to consumers were duped into believing that such simple things like scarcity no longer existed.  Worse, they were tricked into believing that worthless pieces of paper (be they stocks or bills with dead presidents) constitute real wealth. 

Woods attacks and destroys the notion that deregulation was the problem.  Volumes upon volumes of federal code and tax law exist specifically regulating the industries that are now coming hat in hand to the government.  Yet, a few changes at the margin and we’re supposed to buy the lie that those changes alone were the cause.  And now we’re supposed to buy the even bigger lie that more regulation will solve our problems.

Who exactly is going to regulate?  Is it going to be the wise men and women in Congress, who themselves were recipients of millions of dollars in campaign contributions then fought to keep the regulators at bay?  Or will it be our wise leaders picked by the chosen one, whose cabinet is filled with tax cheats?

The second half of the book is a very concise yet clear and thorough explanation of the Austrian business cycle theory.  Personally, I have only in the last few years come to the Austrian school and not because of any particular persuasion from the professional economic community.  I have come to the school for the simplest reason of all: they alone were completely accurate. 

Mr. Woods explains in terms that anyone can easily understand how federal reserve monetary distortions skew the economy.  The money supply, with a commodity based currency such as gold, regulates cash holdings and investment via the mechanism of the interest rate.  This is perhaps the most essential and vital component for people to understand.

The interest rate is the price of money, and in the field of economics, referred to as the opportunity cost of money.  In other words, to hold cash one forgoes the interest.  So, to save more, the interest rate must increase.  This of course increases the pool of funds available to invest.  As this pool increases, the price (interest rate) will lower.  Likewise, the rate of return on investment must be greater than the prevailing interest rate.  As the interest rate decreases, the cost of investment decreases.  It is in this manner that the interest rate has affects investment, being the mechanism which regulates and brings into balance the amount of funds demanded and supplied.

However, when the fed artificially pushes interest below what would otherwise be the prevailing market rate, it distorts investment.  This is particularly true in time sensitive investment, i.e. long term investments, in things such as housing.

The current schools of economic thought (primarily Keynesian, however Keynesian thought has invaded and corrupted most schools, cf. Milton Friedman’s “we’re all Keynesians now”) see savings as a negative [“it is not a substitution of future consumption-demand for present consumption-but a net diminution of such demand”], a drain on economic growth.  This sort of thinking is at the heart of our current, both short and long term, problems.

Savings is future spending, and savings are what funds investment.  The more savings, the more the desire to consume in the future and thus, a lower interest rate.  (The lower interest rate comes about as there is more money in bank reserves.)  This is the signal to businesses to invest in longer term projects, as the lower price makes the more delayed return possible.  In this manner, future production attempts to time up with future expenditures.  However, fed injections of credit and artificially low interest rates distort this delicate balance.  More longer term, future oriented projects are undertaken to sync with future spending, yet the future spending will be lower.  

Businesses mistake this increase in funds as an increase in real savings. When the investment reaches completion there needs to be savings necessary to convert into cash holdings to purchase.  Those savings are not present, the consumer demand is absent, and those investments fail.  The low interest rates mask the current consumption and confuse the investment plans.  This is the classic Austrian boom/bust cycle.  It is only much later when the investments which were perceived as worthwhile at the time are realized as being poor.

This over investment and expansion is the boom, where things are (appear to be) going very well.  Everyone is happy, the future looks bright.  But two sinister things are happening which will not only make this view wrong, but the future very painful.  One, resources are finite, and greater future oriented investment puts upward pressure on resource prices, which makes those investments more expensive.  And two, those investments, which were perceived as worthwhile, actually take away from true worthwhile investment.  This is called malinvestment.  And when the interest rates begin to get pushed upwards, as indeed was (and will be) the case, the distortions become painfully, extremely one might add, clear. 

Thus, the bust comes as those malinvestments are recognized and now need to clear, at much reduced prices.  However, it also requires a readjustment of resources.  Both of these will take time and much discomfort.  Nothing the government attempts to alleviate the pain will work, instead it will only exacerbate and extend the problem.  The current administration’s takeovers of the financial sector, the auto industry, and whatever else they can get their hands on (heaven help the sick if they ever get control of health care) will only lead us to a prolonged recession and diminished wealth. 

Like Professor DiLorenzo, Mr. Woods ends with a prescription for the future.  However, in today’s current environment, limiting the size and scope of the government, returning to a gold standard, and relying on the power of the free market and not the modern equivalent of Plato’s guardians, might be just too much to hope for.

In today’s climate of complexity, where everything requires thousands of analysts and myriads of experts,  where the problems are “too big” or “too important”, something as simple as doing nothing at all, just leaving the market alone, will never be the option.

One can always remain hopeful though.  Perhaps these two books might be lights along the long and difficult path towards recovery, wealth, prosperity, and ultimately, to liberty.


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