October 31, 2011

Would Hayek, A Capitalist Icon, Have Sided With Occupy Wall Street?

The article above suggests Friedrich Hayek would have empathized with the “occupy wall street” protesters. Really? Empathy for a bunch of hippies that when asked what it is they want to accomplish, end up giving incoherent “answers” which have no rational basis. Take a look at this interview to see what I’m talking about. Granted, that’s just one protester’s thought process, but I would assume it is fair to say that most of these protesters are just as clueless. I think what the article is trying to confer is Hayek would vehemently disagree with some of the actions that the government has implemented, such as bailing out failing corporations that should have otherwise filed for Chapter 11. But this notion of thinking is clearly not the same as that of the protesters. How is Wall Street to blame? Am I missing something here, because as far as I am concerned, these protesters should shift their focus to the government, and in particular the FED. It’s the Federal Reserve that bailed out these companies that were supposedly “too big to fail.” That’s the real root of the problem. An analogy: Let’s say a stray cat comes to my doorstep and so I decide to give it some milk. Well what’s going to happen the next day? The cat’s going to come back and expect some more milk. It’s not the cat’s fault for getting a free handout; it’s me for giving it. In relation, these businesses are the cat and the FED is the one providing the milk, so to speak. Who’s not going to take a free bailout when provided with one? Not many, so if people want to protest then they should protest the Federal Reserve. These people on Wall Street are doing nothing more than exercising their rights to act within the free market. And when some of them end up making extraordinary gains, what do we do? We cry foul. The fact is, we live in a country based on capitalism, and in any capitalistic society, there are going to be people who benefit from the system more highly than others. Why else would people take risks if this were not the case? Chastising a businessman/woman for succeeding within the free market makes absolutely no sense to me.

To reiterate, I think the real problem is with the Federal Reserve and not with Wall Street. And to give a word of advice to these protesters; if you want to be taken seriously then you need to implement some form of discipline and/or leadership. Come up with a unified message and deliver that message to the media in a professional manner. Doing this, while also focusing more attention on the inadequacies of the Federal Reserve would, in my opinion, be a much more productive movement. Obviously people are upset with these bailouts, QE protocols, etc. but it’s hard for people to get behind a movement which at the moment carries no validity. I mean honestly, what is a drum circle full of hippies going to accomplish.

Analysing campaigning with Bastiat


    The above mentioned article discusses how one of the current GOP candidates Rick Perry has promised 2.5 million jobs in his ad. I think that the Austrian school would agree that much of what Perry proposes could be beneficial to the current climate of jobs and the like. With ideas like removing certain regulations from energy industries and lowering corporate taxes I think that a reduction in government in these ways falls in line with Bastiat’s ideals expressed in this weeks reading. I think it is interesting to look at an article such as this after reading Bastiat and his call to look at the things unseen in the economy and evaluate every angle.
    I agree that when government opts to use its force to have an effect on the economy it will bog things up and add red tape. However my thoughts had never before gone as far as Bastiat’s thought that if government takes money from its citizens and doesn’t yield results it is essentially the same as a thief coming and taking the same sum out from under the citizen’s nose.
    I asked myself about what things are going on in this article that are difficult for me to see? Furthermore, I questioned how these regulations were imposed on the public and how they are paid for. The most intriguing quote from the article is this:"I'll eliminate President Obama's regulations that hurt other sources of domestic energy, like coal and natural gas," Perry says in the ad. "That will create jobs and reduce our reliance on oil from countries that hate America.
    "I'll eliminate President Obama's regulations that hurt other sources of domestic     energy, like coal and natural gas," Perry says in the ad. "That will create jobs and     reduce our reliance on oil from countries that hate America."
It seems that Perry is advocating the removal of bad policy. The interesting point of view I see is that it is important to remember that these policies are enacted and enforced through the expenditure of our tax dollars. Could it be that the money we give the government is utilized to stifle the market through regulations causing us taxpayers to fund our own detriment?
    I would be a fool if I said that I knew the appropriate level of government involvement in our lives but to think of the two options of where money I earn ends up, in my hands or in the coffers of some government official, I must ask what its being done with my money? Furthermore, do these uses fall in line with how I would personally utilize said money? I cannot know the extent that my money is being utilized by the government in a fashion that runs counter to my own preferences, but I personally would prefer it if my money didn’t contribute to more regulations that add to the companies costs of doing business. I think that if companies did not have to expend their resources on complying with these regulations then they would choose to spend the funds on hiring more workers or developing more capital that would allow for more efficient production. All of these things would inevitably end up benefiting me in addition to me not paying as much for taxes.

This Halloween, Keynes's Zombie Lives On

I read an interesting op-ed by Paul Krugman today in which he criticized what he called "weaponized Keynesians" which he defined as "those who believe that the government does not create jobs when it funds the building of bridges or important research or retrains workers, but when it builds airplanes that are never going to be used in combat, that is of course economic salvation." If the supercommittee does not come up with a plan for deficit reduction by the approaching deadline there will be automatic cuts triggered in the defense budget. Krugman uses the piece to attack House and Senate Republicans for their hypocritical stance on the issue of defense spending. Republicans who so adamantly support cutting government spending to bolster the economy do a complete 180 when it comes to defense and to defend this stance they claim "such cuts would destroy jobs."

Krugman is indeed right to focus on this inconsistency on the part of Republicans who seem inconsistent on how economic prosperity comes about, via the free market or government intervention? He claims that "to admit that public spending on useful projects can create jobs is to admit that such spending can in fact do good..." Much of the evidence Keynesians use to support their economic theories comes from observing the effects of past military buildups. But where Krugman ponders why anyone would choose to spend on bombs as opposed to bridges, I wonder why the Nobel Prize recipient and his conservative opponents in government all still subscribe to the notions of Keynes and his incomplete understanding of the world of human action.

Both ideological groups are wrong to varying degrees in this case. We can have a separate debate on the normative issues of tax policy and where to spend government income. But to think that anyone might still be looking towards the government and further deficit spending to solve our economic woes and create jobs is embarrassing. Increasing the money supply, lowering interest rates, and an all around attitude of fiscal irresponsibility throughout government and financial sector brought about our current recession. Instead of identifying the misallocation of factors of production towards capital goods that easy money causes, Keyensians in both parties believe inadequate consumer demand is the culprit and it only takes a little government spending to boost that demand and jump start the economy. They really seem to believe the jobs they "create" would still be there a year from now when the government stops paying for them.

October 29, 2011

Stimulate demand through more credit

October 23, 2011 Financial Times

Lawrence Summers , former secretary of treasury under Clinton administration, former head of the White House National Economic Council under Obama administration

Article: Why the housing burden stalls America’s economic recovery

“The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.”


October 28, 2001 Interview with Aaron Task (The Daily Ticker)

“Because the reason firms aren’t hiring people is that they don’t have the demand. And the only way they’ll get the demand is to get more spending. And the only way people will be able to spend more if they have access to credit. So, we’ve got to find ways to work through the old debts, to enable people to take on new debts. That’s why people speak of bankruptcy as a cleansing process. But unless we are able to get more demand going, we’re not going to generate incomes that are necessary to have the growth that is going to let us move forward."


Unfortunately, Mr. Summers thinks of the economy as an engine, which has no gasoline (credit) to run properly. Despite the fact that he acknowledged himself that we got into this recession because of too much borrowing, lending and spending, he said that the only way to get out of this recession is to increase borrowing, lending and spending. According to the following quote which has been attributed to more than one person, I conclude that Lawrence Summer is insane: “insanity is doing the same thing over and over and expecting a different result” The problem, however, is that Mr. Summers is not the only insane economist in Washington D.C. This recession was brought about by enormous expansion of the credit, which artificially stimulated the economic growth and bid up prices for factors of production way too high. Then, after the bubble, came the bust, in which we are in right now. However, since depressions and recessions are not allowed to happen, the Fed decided to stimulate the catallaxy (economy) with even more money. The Fed increased the money supply by influx of cash and by lowering the interest rate to its minimum. However, it did not work. Now, the Fed will have to begin paying people for borrowing money to continue to stimulate the demand to create jobs. The fact that the Fed cannot lower interest rate any further makes many people (except Mr. Summers and others like him) to realize that this recession cannot be fixed like other recessions in the past. According to Austrian school of economics believes that

the "depression" is seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers. The depression is the painful but necessary process by which the free market sloughs off the excesses and errors of the boom and reestablishes the market economy in its function of efficient service to the mass of consumers. Since prices of factors of production have been bid too high in the boom, this means that prices of labor and goods in these capital goods industries must be allowed to fall until proper market relations are resumed. ….. The government must not try to inflate again, in order to get out of the depression.

However, Government does not allow natural forces to do its work to liquidate its unsound, uneconomic investments of the boom and to bring down the prices for factors of production. Government is afraid that public will recognize such a healthy process as “depression,” which is unacceptable. However, according to Austrian school of economics, there is no way to avoid this painful, healthy process forever. Sooner or later it will have to take place. The economy can go through the correction (“depression”) phase right now and then grow organically, or, with the help of politicians, it will go through the inflation/stagflation period, due to further money supply expansion, before it will go through the corrective (“depressive”) phase. The only problem is that the longer government reinflates, the greater the magnitude of depression and consequently of the pain will be. Since the government cannot lower interest rates any further, looks like it has chosen to expand money supply through government borrowing and spending.

Unlike Mr. Summer, Mises told that once a depression arrives, a government should do nothing to stimulate the demand, and to stop inflationary policies as soon as possible , to cut its spending, and not to prop up unsound business. We need Margaret Thatcher to help the US government to get back on the fiscally responsible (Austrian) way of running the government. The Catallaxy will fix itself.

October 25, 2011

Money Expansion the Root of all Evils

While looking around for our weekly readings the other week I came across this article on the Mises.org website. It gets it main points from our recent readings on Rothbard and inflation, but it also brings up some interesting points that may not be so obvious. It re establishes the fact that has been brought up in the past readings such as inflation being the cause of boom and bust cycles. It also shows that it has political implications that gives ever more power to a government that actually deters and destroys wealth. It is shown how without inflation programs that redistribute wealth need inflation to "pay" for their programs. Yet they really do not pay but transfer the cost via taxes and indirect taxation otherwise known as inflation. These implications tend to cater to the conservative side of the spectrum as much of Austrian Economics often does.
However in this article there seems to be ideas that would appeal to the progressive or liberal crowd if only it was recognized that there goals require action the opposite of more government control or printing of money. While this may seem an impossible task I think the only explanation needed is how successful government has been so far in delivering these goals. One of the goals left wing tends to seek is reduction in the use of resources or being green. Through Inflation we get increased levels of consumption through increased money/credit, and not enough saving and investment which could lead to a much brighter future with better technologies. Another goal they seem to have is controlling costs so there is better access for all, yet with inflation there will be ever increasing costs in health care and many other industries so this creates a cycle of ever increasing price restrictions. Without inflation there would be a constant cost if not decreasing cost as technology improved from the increasing investment. Lastly yet very importantly the lack of inflation promotes the idea of peace, toward the end of the article Barron mentions how without inflation and in the presence of free trade people in a marketplace result in cooperation rather than confrontation in seeking to better themselves. So without inflation many of the problems that progressives tend to want to alleviate would be lessened if not all together disappear. Austrian economics when viewed through an open mind provides something for all interested in political economy as an alternative to what has been practiced for many years with Neo Classical, and seemed to present ever increasing problems.

October 24, 2011

A Question for Mr. Rothbard

If I may make a brief commentary of Murray N. Rothbard’s Economic Depressions: Their Cause and Cure, I would like to say this, first and foremost. I don’t think that he’s wrong with the things that he says concerning how government interventionism can cause problems to become worse, and the story he weaves about how the government can easily fuel false growth does seem quite plausible. Indeed, if I am remembering my history right, there was a time in the mid to late 1930s that saw artificially boosted prices fall because businesses tried to engage in some competitive actions, rather than the prices that the government had managed to push up. Some more history to back this up: I notice that the essay was originally published in 1969, just a few years before the US economy, still hopping quite well from WWII, finally died down and saw real wages and wealth plateau.

The place that I am having my issue with Rothbard’s logic is in his discussion of what exactly the government intervention does to the economy. As I understand it, wealth comes from the saving and buildup of capital, of tools that enable the entrepreneur and businessman to produce the products that make money and create jobs. What Rothbard says is that the government intervening in the economy will lower rates and cause overinvestment in capital goods, rather than in the production of consumer goods. The specific problem that I have is this: is Rothbard proposing that we consume our capital now rather than keep building it up?

October 17, 2011

So Now Our "Economy" has "Regions"...

In the article posted above the author inquires which of the "regions" of the United States "economy" needs or warrants more quantitative easing. Although I think the idea of quantitative easing is just as effective of a fix as putting a Band-Aid on Louis XVI's neck wound, this is not the point I want to bring up. I want to point to the mindset that the author uses when writing this article. Buttonwood seems to think that he can decided when and where QE would be effective by looking at all of this graphs. Showing correlations between QE, unemployment rate, and projected growth is only slightly more useful than a Colorado weatherman. These numbers that are "projected" and the data that is "collected" are based on a moment's glance. These numbers give us less real information than a stop sign. All of the aggregates and measurables are trying to describe a single moment in time when in reality all the variables that were assumed in those previous calculations have now changed. The dynamic world we live in has changed while the graphs trying to describe what the world looked like 2 months ago are now being published. The author seems to think that his graphs and numbers have something to do with now but in reality things have changed and the graphs haven't, which renders them useless.
My second thought when reading this article is the fact that the author is able to split things up into very nice subsections. The "region" of the "United States economy" that needs a "round" of quantitative easing can be seen through the graphs. From what I know about Austrian economics, however limited that knowledge may be, I do not believe there is such thing as the "United States" economy, much less "regions", because the world is network of exchange. The network of exchange that occurs in the United States is not just contained on our soil. Imagine this; all the exchanges that occur in the world are shown by a line connecting the origins of the interactions, now in order to isolate the "economy" of the United States drawn a line around the area we know as the United States. Look at all the lines you just drew a line around! These lines, or exchanges, are not looked at as part of the United States economy even though economic activity in and around the US depends on those interactions just as much as any interaction. Trying to analyze the United States economy as a separate entity even though it is really just a part of the this huge world network is like trying to view the human body as separate individual parts even though they are all dependent on other parts of the body to function.
The last comment I have to make is that the author uses the term "rounds" to describe a session of QE. Although this policy may only be in effect for a period of time, the economy keeps going. I try to think of the changes in variables that would occur during the QE time, but when the QE stops what will happen? All the variables that the Fed is trying to manipulate will change again and then the outcome of the QE policy will become even more foggy. Buttonwood, the author, clearly sees the economy as his Econo-car where if he puts in a bigger motor it will go faster and gain horsepower. The economy is clearly not a machine because the world wide network is made up of people and we are not machines.

October 2, 2011

I, Prosperity

One of our beloved professor's favorite questions is "Why are we prosperous?" and our discussion last week opened the door, I believed, during our discussion on the rule of law to finding some sort of a path to walk down to find that answer. This weeks reading enlightened me even further, and the pieces of the puzzle are falling into place.....
In this weeks readings by Hayek, I think he makes a PROFOUND argument for liberty that is especially prescient given the blah blah blah on the TV going on between the Republican presidential candidates..but the argument underlines the answer to the our question..'Why do we prosper?" Knowledge....and the freedom to exercise it.....
Hayek wrote in The Use of Knowledge, speaking about economics, but an argument that I believe speaks to a political philosophy as well. He wrote that in society today, it is assumed that those utilizing scientific knowledge and expertise in the area of economic planning are considered virtually sacrosanct in terms of authority on whatever matter is under discussion. "...a body of suitably chosen experts may be in the best position to command all the best knowledge available..." Interestingly, this is EXACTLY what Woodrow Wilson wrote in The Study of Administration, which he published before becoming President. If you are interested, I included a link to the article. This thought process is what the modern Administrative State, the Bureaucracy, was founded on. The Administrative State places limits on the free flow on resources, as well as limits the productivity of those resources within a legal framework the restricts their utilization according to a proscribed course of regulation. Just think....EPA!
Hayek goes on in the next paragraph to write the best argument for liberty I have heard "It is with respect to this that practically every individual has some advantage over all others because he possess unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation"
Sowell wrote "Yet the vastly greater mundane knowledge brought to bear by millions of ordinary people making their own mutual accommodations among themselves almost invariably produced higher economic growth rates and higher standards of living after central planning was jettisoned.......These innumerable interactions and mutual accommodations are what bring the other 99% of knowledge into play - and generate new knowledge in the process of back and forth bids- reflecting changes in supply and demand"
So why do we prosper?...In large part...the knowledge that neither you nor I individually posses, but that combined as a whole, creates an emergent economy that leaves us all better off.

October 1, 2011

The Transparency of the Fed

A common understanding of the economic term inflation is that it is synonymous with a general rise in prices. Closely associated with inflation is the notion of low interest rates. On the Federal Reserve’s website the reader is given the chance to experience a concise and highly ineffective argument for the economy-restoring quality of these low interest rates. According to the website it is important to keep interest rates low when the economy is having trouble. Second, the Federal Reserve should purchase ‘high-quality securities’ to keep long term interest rates low as well. This helps people finance new spending and keeps prices steady. It is the Federal Reserve’s goal to have high employment and prices steady. According to their website, having low interest rates has helped the economy’s situation. The situation could be better. The website informs its reader that the Fed will therefore continue to keep interest rates low.
“Some people mistake this illusory prosperity [early inflation, when people feel richer and spend more than they normally would] for real growth and recommend constant inflation as a means to continuing prosperity. They call their policy “low interest rates.” Since, when the Fed sets rates artificially low, it must increase the money supply to keep them low, it comes to the same thing. But inflation cannot really make society as a whole wealthier. Every transaction that is an income for person A is an expense for person B. If we try to use a rise in prices to universally boost incomes, we must, simply by definition, also universally (and to the same extent) boost expenses.”
This is a quote by Callahan in his book called Economics for Real People. Now consider another quote from a different source, an internet article on CNNMoney. After discussing some of the Federal Bank’s recent actions and relating some different opinions prominent economists have regarding the Fed’s behavior, the author ends with:
“All those policies are geared toward a common goal: reduce interest rates even further than their current historic lows, thereby making borrowing cheaper for businesses, consumers and homebuyers.”
I am probably more likely to borrow $10,000 at a low interest rate than I would be if the interest rate was high. I am also likely to spend that $10,000. If it is the case that an aggregate increase in dollars spent is an increase in aggregate prosperity, then by providing easier access to loans the Federal Reserve has in fact increased prosperity (i.e. productivity or increased standard of living). Unfortunately, a result of increasing the money supply through low interest rates/inflation is higher prices. The purchasing power of money remains the same and there has been no real economic growth. What I found most interesting in the article was that while people disagreed about whether or not the Fed should let the public know that it plans on keeping its interest rates low, no one questioned the initial premise; that low interest rates will increase general prosperity.

Issue Avoided. (Economic Freedom)

I stumbled upon this article while procrastinating of facebook a couple of weeks ago, and at first didn’t think of it for a blog until I read the comments. The article is about a girl who wore a shirt that said ‘Marriage is so Gay’ on it to her public school one day and was forced to change. She went to the news and explained she just wanted to show her support for the gay community. The ACLU got involved, and it became a big deal. Majority of the comments are people explaining how they think that being gay is the equivalent to being a child rapist, somewhere criticizing the school, some criticizing her parents, and other saying that they supported her but felt that the shirt was inappropriate for school.

It was these last kinds of comments that got me to thinking about economic freedom, and freedom of speech and such. Regardless of how you feel on the subject of gay marriage, the real question at hand here has to do with ‘freedom of speech’ or rather it even more so has to do with private property. Many people will say it is her right to wear that shirt because of free speech, other will say it is the right of the students to not be distracted. The question that came up a lot was where do you draw the line? The example used most frequently was what if she had worn a shirt that said ‘Marriage is so Christian’? These people who asked these kinds of questions will probably never realize that they were questioning the entire right to free speech. But as we established in class because there is nowhere to draw the line, the right to free speech is rubbish.

Instead of trying to figure out whether or not this young girl was within her rights to wear the shirt or not, why not just enforce property rights? If the school was privately owned, the owner gets to make the rules, and say yes you can wear that shirt to school or no, you can’t wear that shirt. If the girl and her parents don’t like it, they can go to another school, and the same extends for other students and parents.

Who are you? And why are you saying these terrible things?

I found this blog by some guy that I have never heard of, Graeme Maxton, telling everyone that we are at the end of progress. He says that we no longer follow ‘modern economics’ and how we more or less doomed for failure without some massive revisions. He very obviously bases everything he knows on what Adam Smith had to say are he talks about him frequently, and how he would be disappointed by today. Throughout reading this, all I could think was ‘You’re missing the point’. He even bolds his text when he states “But Smith was also a moral man.” But as we have discovered, moral is not a part of progress.

One of the most impressive things that this Graeme Maxton said (based on Smith’s beliefs) was that profits should not be too high, and the rich should be taxed more than the poor. However, profits should not be too high is the equivalent of saying, you’re doing too well, so we’re going to take some away. This is just bad economic policy. As a waitress I expect to walk out with my tips every night no matter what they are, however if management said, if you make over $100 then you are doing too well and so we will take everything over $100, I would be furious. I would then either quit or I would stop working once I reached $100. This is the same for the idea that the rich should be taxed more than the poor, at some point in time it is no longer worth it to continue working and make more money because you have to pay too much in taxes.

So with an Austrian roar, I say do away with these ideas. These ideas do not make sense. Allow companies to profit as much as they want, and allow the people to make as much money as they want. Morals are not for government to decide, but rather for people to decide among themselves. Perhaps one day we will be able to tell our grandchildren the story of how ‘back in the day’ there was a saying that the only two things for certain in life were death and taxes, and after we explain what taxes are, they will giggle thinking we have made the whole thing up.