Deep Thoughts

“What would you think of someone who said, ‘I would like to have a cat provided it barked?’ Yet your statement that you favor an FDA provided it behaves as you believe desirable is precisely equivalent. The biological laws that specify the characteristics of cats are no more rigid than the political laws that specify the behavior of governmental agencies once they are established. The way the FDA now behaves, and the adverse consequences, are not an accident, not a result of some easily corrected human mistake, but a consequence of its constitution in precisely the same way that a meow is related to the constitution of a cat. As a natural scientist, you recognize that you cannot assign characteristics at will to chemical and biological entities, cannot demand that cats bark or water burn. Why do you suppose the situation is different in the social sciences?” - Milton Friedman

“One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary.” - Ayn Rand

“No statute enacted by man can repeal the inexorable laws of nature. Our most dangerous tendency is to expect too much of government.” - Warren G. Harding

“We’ve never heard of a man who had 100 ounces of gold who was poor. On the other hand, we’ve read about millions of people with stacks of paper money who couldn’t afford a cup of coffee.” – Bill Bonner

“Federal legislators and administrators apparently cannot free themselves from the spell of Keynesianism. It has such a compelling attraction because it elevates to good economics the thing they like to do most — spend other people’s money.” – Hans Sennholz

“Any people, anywhere, being inclined and having the power, have the right to rise up and shake off the existing government, and form a new one that suits them better. This is a most valuable, a most sacred right, a right which we hope and believe is to liberate the world.” – Abraham Lincoln

“Peace will come to earth when the people have more to do with each other and governments less.” – Richard Cobden

“Nevertheless the theory of output as a whole, which is what [The General Theory] purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire. – John Maynard Keynes

“The President does not have power under the Constitution to unilaterally authorize a military attack in a situation that does not involve stopping an actual or imminent threat to the nation.” – Barack Obama

No Silver Lining

One of the difficulties with maintaining a blog like this one is the nagging feeling that I’m constantly repeating myself. After all, how many times do I have to go over the broken window fallacy in light of yet another news article that focuses solely on what is seen, while ignoring what is unseen?

At least once more, I guess.

We all knew this was coming, of course. Anytime there’s a disaster anywhere in the world, some halfwit starts yammering about how, in the long run, this latest tragedy will actually be good for the economy. As far as I can tell, Larry Summers was the first halfwit to weigh in on the earthquake and tsunami in Japan.

Unfortunately, he wasn’t the last.

On Wednesday, the team over at Liberty on the Rocks tweeted about a Huffington Post article by Nathan Gardels titled “The Silver Lining of Japan’s Quake.” Read the complete article at your own risk. It’s difficult to stomach on a number of levels. At its most superficial, it’s just really bad Keynesian economics (pardon the redundancy). At a more fundamental level, it illustrates the callousness toward individual human suffering that seems to be part and parcel of collectivist economic theories.

He starts off the article with the usual disclaimer, saying no one would minimize the grief, suffering and disruption caused by the disaster in Japan. And then he segues immediately into thirteen paragraphs in which he minimizes the grief, suffering, and disruption caused by the disaster in Japan.

Here are the lowlights:

“But if one can look past the devastation, there is a silver lining. The need to rebuild a large swath of Japan will create huge opportunities for domestic economic growth, particularly in energy-efficient technologies, while also stimulating global demand and hastening the integration of East Asia.”

There is no silver lining. Thousands of people are dead. The need to rebuild does not constitute economic growth. It may generate business for people in certain industries as Japan works to replace that which has been destroyed, but this is not growth. This activity will not be directed at expanding the country’s productive capacity. Rather, it will be directed at returning the country to the level of productivity it enjoyed prior to the disaster.

“Japan has been wallowing in stagnation for years despite massive government stimulus programs and zero-interest rates because, simply put, in such an advanced, mature economy there was too little demand to generate sufficient returns to attract private investment.”

Japan has been wallowing in stagnation for years because of massive government stimulus programs and zero-interest rates. The underconsumption theory of the business cycle was dispelled by James Mill and J.B. Say almost two hundred years ago, and is as relevant to economics today as alchemy is to chemical engineering.

“By taking Japan’s mature economy down a notch, Mother Nature has accomplished what fiscal policy and the central bank could not.”

So here we have a tacit admission that the Keynesian fiscal and monetary policies that the Japanese government has pursued lo these many years were actually intended to destroy the country. Why this is considered a laudable public policy goal is beyond me.

“Now there are more bridges to somewhere to be built than one can count. Entire cities and regions need to be reconstructed in toto, from housing and commercial buildings to roads, rail lines, information networks, the energy grid and even the tsunami warning system that must be digitally revamped…The result of all the new wealth creation will be money in the pockets of Japanese to buy global goods and services.”

The inescapable conclusion of this article is that destruction is good. So according to the Keynesian “logic” displayed by Mr. Gardels, we should immediately start dismantling our own cities and towns, and then watch how wealthy we all become as we rebuild all that we have destroyed.

Has there ever been a clearer (or more nauseating) example of the broken window fallacy?

So once again with feeling, so that even people like Larry Summers and Nathan Gardels can understand – DESTROYING WEALTH DOES NOT MAKE PEOPLE WEALTHY! Destruction, as the term would imply to anyone other than a Keynesian, destroys productive resources. It makes us poorer.

Granted, once the dust settles, there will be a flurry of business activity as Japan rebuilds. And after this long and bitter period of reconstruction, Japan will once again have what it had prior to the disaster. This will be seen. Japan will not, however, have all that is unseen – all the additional wealth that the people of Japan would have been able to create and enjoy had they not suffered a massive earthquake, tsunami, and nuclear catastrophe.

But the most important unseen consequence will be the loss of all that those who died would have created had they lived. We are all made poorer for that.

Same As It Ever Was

In a recent post titled “Same As It Ever Was,” Paul Krugman displayed the results of a 1937 Gallup poll that showed an overwhelming majority of Americans at the time opposed the idea that “the government should start spending again to help get business out of its present slump.”

Just to recap, 1937 was the eighth year of the Great Depression. And as every good Keynesian knows, getting out of an economic depression is easy. The government just has to spend boatloads of money it doesn’t have, and the debt incurred by the public sector creates working capital where none had existed before. This in turn increases business activity in the private sector, thus restoring the economy to full employment. That Americans of the day opposed such an obviously effective central plan goes to show Mr. Krugman just how stupid they were back then – and still are today. He writes,

“If you’re in despair over the state of our economic debate, it’s probably worth noting that it was ever thus. But in a way, that’s what’s so depressing: 75 years of economic research have apparently had no impact on perceptions, either among the public or among the political elite.”

Perhaps if I had Paul Krugman’s Ivy League education I too would immediately understand how spending borrowed money wantonly can make one rich, but I confess it doesn’t make a lot of sense to me at the moment. It must be one of those counterintuitive things that can be proven by empirical data, because everyone knows that FDR’s deficit spending is what got the US out of the Great Depression, right? Here’s the proof*:

Year Deficit Unemployed Percentage of

(billions) (millions) Unemployment

1931 $ .5 8.0 15.9

1932 2.7 12.1 23.6

1933 2.6 12.8 24.9

1934 3.6 11.3 21.7

1935 2.8 10.6 20.1

1936 4.4 9.0 16.9

1937 2.8 7.7 14.3

1938 1.2 10.4 19.0

1939 3.9 9.5 17.2

1940 3.9 8.1 14.6

As you can clearly see, the US government had been running deficits ever since 1931, two years after the stock market crash. By 1937, the unemployment rate was virtually unchanged. This fact only supports the Keynesian argument that even more deficit spending was needed, of course. So despite the overwhelming opposition at the time to such an eminently reasonable policy, the US government continued deficit spending into 1940, when unemployment reached the low, low rate of 14.6%. See, Keynesianism worked like a charm! Q.E.D.

Wait a minute. If my admittedly non-Ivy League math serves, 14.6% in 1940 is actually higher than 14.3% in 1937, when the poll Mr. Krugman refers to in his post was taken. But the whole point of deficit spending in Keynesian theory is to lower the unemployment rate, not raise it. So it would appear that Keynesianism fails both logically and empirically, yet Mr. Krugman thinks the ones who oppose it are the idiots?

In his post Krugman laments that “75 years of economic research” (referring to the publication of The General Theory) have failed to convince the ignorant masses that spending money they don’t have is the way to cure all their financial problems. That the knuckle draggers in flyover country haven’t yet embraced Mr. Krugman’s wisdom is a minor offense. Why should he care what they think anyway? It’s just their money, after all. The real tragedy here is that, in Krugman’s view, Keynesianism has not yet taken root among the political elite.

Seriously?

What aspect of American fiscal and monetary policy is not Keynesian? What does Paul Krugman think the Bush stimulus packages were? What does he think QE1, QE2, Cash for Clunkers, and the American Recovery and Reinvestment Act were? What does he think a $1.5 trillion annual deficit is, exactly? Rothbardian anarcho-capitalism?

Krugman derides all those who opposed additional stimulus spending back in 1937, and all those who oppose additional stimulus spending today. But what does the historical record show? The average deficit in the ten-year period from 1931 through 1940 was $2.8 billion, which was 3.6% of GDP at the time. Unemployment remained persistently high throughout the entire period, averaging 18.6% of the workforce.

Flash forward to 2011. Deficit spending has been a truly bipartisan affair, with both the Bush and Obama administrations making good on their threats to revive the economy through government intervention. The annual budget deficit of $1.5 trillion is roughly 10% of today’s GDP – almost a 300% increase over comparable efforts made by the government in the 1930s to “boost aggregate demand,” and yet unemployment hovers stubbornly around 9%.

And this is the policy Paul Krugman would have us pursue further? Why? The record is clear - Keynesian theory was a failure then, and it’s a failure now. Same as it ever was.

* Data from Henry Hazlitt, The Failure of the New Economics.

How Much Would You Pay?

What kind of libertarian blogger would I be if I allowed tax season to pass without comment? Once again I have been informed that I “owe” people in the Federal government even more of my money than the amount to which they have already helped themselves over the past twelve months.

The circumstances of my indebtedness to these individuals are still a bit murky as I do not recall ever contracting for their services. Perhaps I’ve simply forgotten signing on the dotted line, but for the life of me I can’t imagine why I would ever choose to buy what they’re selling. From what I can tell, the offer I can’t refuse is as follows:

• We will tell you with whom you may or may not associate.
• We will tell you what you may or may not buy.
• We will destroy your life savings by inflating the currency.
• We will impose a crushing debt burden on you and multiple generations to come through reckless spending designed to transfer your wealth to our preferred interest groups.
• We will interfere with the domestic policies of other countries, engendering hatred that may be directed at you and your family at any time.
• We will tell you what foods or substances you may or may not put into your body.
• We will tell you what medical treatments you may or may not undergo.
• We will tell you how much of your property you are allowed to keep, and how you may use what little remains. We will also take your property and give it to someone else (who will presumably pay us more to use it) if we wish.
• We will force you to participate in our Ponzi schemes.
• We will invade your privacy at every conceivable opportunity. This includes monitoring your communications, scrutinizing your financial transactions, and even electronically strip-searching you. (If you object to being strip-searched, you may choose instead to be sexually assaulted – it’s your call).
• We will alter the terms of this agreement, including the price we charge for these services, at any time, for any reason, in any way we deem necessary (or politically expedient).
• We will use your money to fund projects that you may find idiotic, useless, or morally repugnant.
• We will claim to protect you while denying any legal responsibility to do so.
• We will not refund your money if you are in any way unsatisfied with our service.
• We will fine, imprison, or kill you (depending on how we’re feeling that day) if you fail to pay us the amount we unilaterally determine that you owe us.
• If you have a problem with any of the above, you may sue us in the court system that we run. (If we choose to allow you to sue us, that is). Good luck with that.

So what do you think the free-market price for a package deal like that would be? I’m sure I don’t know, but whatever it is, it’s a lot less than what I’m being charged now. But since I do not wish to go to jail, I will of course pay the amount promptly and in full. But before I do, I just thought I’d point out a couple of items that jumped out at me when I had my taxes prepared this year:

Jury duty is taxable income. Think about that for a minute. You’re drafted into jury duty, for which the government pays you less than its own mandated minimum wage, and then it charges you tax on the paltry sum it paid you.

Interest income on government bonds is taxable income. A person buys a government bond and in so doing loans his money to the government for a certain period of time. In return for this service, the government owes that individual interest on his money. Then the government taxes him on the money they owe him. Then again, if you’re dumb enough to loan the government money in the first place, you probably deserve what you get.

There’s an IRS compliance fee. Simply doing your taxes on time is no longer enough. The IRS now charges professional tax preparation firms a fee to comply with their rules.

So with all this, how much do you think I contributed to the “Presidential Election Fund?”

21st-Century Writs of Assistance