The Austrian Economists

New Paper on the Political Economy of Transition and Reconstruction

Chris Coyne and I have a paper in the new issue of the Journal of Institutional Economics 5 (1) 2009: 1-23, entitled "The Problem of Credible Commitment in Reconstruction."

You can find the link to the paper on Chris's research page. 

Herbert Clark Obama Raises Taxes to Cure a Recession

For all the comparisons of Obama to FDR, the latest budget proposal contains at least one really important analogy to a Depression-era President.  It's not FDR though, it's Hoover.  In 1932, Hoover pushed for and Congress passed the Revenue Act of 1932 that raised taxes significantly as part of Hoover's push to balance the budget.  Obama is proposing over a trillion dollars in new taxes over the next decade as part of his budget proposal recently released.

Hoover's Revenue Act of 1932 was, at that point, the largest peacetime tax increase in US history.  It revived a number of excise taxes that were in place in World War I, it imposed a variety of sales taxes, and it raised/added a number of taxes on financial market dealings.  Of course it raised income taxes significantly:  almost doubling the basic income tax rate, reducing personal exemptions, and raising the maximum rate (surtax) from 25% to 63%.  It also increased the corporate tax rate as well as estate and gift tax rates.

There's no need to discuss what followed and it was hardly recovery.  How much those tax increases contributed to the deepening/lengthening of the Great Depression remains a matter of debate, but there's no doubt that they did not help and the real debate is over how much they undermined the private sector's attempts to recover. 

Raising taxes during a recession is, shall we say, a dangerous business.  And even if the first of Obama's new taxes don't kick in until 2011, the reaction of investors today is what matters and they know those higher taxes mean trouble and that will mean a recovery sooner is that much less likely.

So the next time someone invokes the ghost of Hoover to explain why we must, as the President said the other night, do "whatever proves necessary. Because we cannot consign our nation to an open-ended recession," you can feel free to point to ol' Herbert Clark Hoover as your example of "doing whatever proves necessary" and how the President is imitating that example at his and our peril as he raises taxes $1.3 trillion over the next decade.  The ghost of Hoover is alive and well, but not among those of us saying that the economy needs to heal itself.  It's walking the halls of the White House and Congress as the new Administration repeats the errors of the past.

Obamanian Logic, or Lack Thereof

Tad DeHaven at Cato gets it right:  how can it be that the huge deficits it "inherited" are the cause of our current problems because they lower economic growth yet also be true that more spending and larger deficits are the way to generate the growth that will solve said problems?

Tad asks the multi-trillion dollar question: 

And the solution to the economic downturn caused in part by too much spending and debt is to increase deficit spending and further run up the national debt?  By the administration’s own logic, shouldn’t we be experiencing economic growth with all the deficit spending it “inherited?”

Congratulations Dr Martin

Please join me and congratulating Dr. Adam Martin, who just successfully defended his PhD thesis -- "The Use of Knowledge in Comparative Economic Systems."

Adam is as philosophically astute as any student to come through our PhD program at GMU.  Adam came to us after studying with Sam Bostaph at the University of Dallas, and throughout his graduate student career Adam has pursued the history of ideas, methodology and philosophy of science as well as modern political economy.  Adam took advantage of opportunities to think deeply about social cooperation with not only his close study of Mises and Hayek, but his close examination of the experimental research on personal and impersonal exchange by Vernon Smith and his colleagues, and the constitutional political economy of James Buchanan and Gordon Tullock.  Adam made a particular effort to study Frank Knight's epistemology and economics.  Finally, Adam was able to earn a pre-doctoral fellowship to study at Cambridge University with the social ontology group.

Adam is currently a post-doc fellow at the Center for the History of Political Economy at Duke University.

Welcome to the academic club Dr. Martin --- job well done.  Now saturate the journals with your articles.

Go Forth And Multiply

The simplest of simple Keynesian economics on a napkin:

Let 0<b<1, where b is a constant, the marginal propensity to consume.  Specifically, let b = 0.9

The government spending multiplier is 1/(1-b), therefore = 10

The tax multiplier, -b/(1-b) is therefore = -9

For ease, break the current stimulus policy down to $450 billion in new government spending, and $300 billion in new tax cuts.  Using our multipliers, and other things constant, then the stimulus package would, in the limit, generate an additional

$4.5 trillion + 2.7 trillion = $7.2 trillion dollars.

Stones into bread.  Some $750 billion stimulus package can increase aggregate demand up to $7.2 trillion.

2008 nominal GDP was $14.3 trillion.  The administration's Keynesian economists are acting as if, without the stimulus, 2009 nominal GDP would fall 50%.

But, with the intervention, our economy should be on track by the end of the year.

So, Congressmen and women, go forth and multiply.

 

Interview on Wal-Mart and Katrina Research

Last week I was the guest of the Center for Ethics and Entrepreneurship at Rockford College in Illinois where I spoke on my research on Wal-Mart's role in the response to Hurricane Katrina.  As part of my visit, they videotaped a 12 minute interview with me that is now available on their website.

(Yes, I know there's glare off my head :) ).

A Way to Protest Obama's Economic Plan

I'm watching the President's address to Congress.  Or I was anyway.  I've had enough.  But after listening to him butcher economics for the last half hour, I have an idea for a little mass action that will both protest the ignorance of his plan and educate those who need it most in the process:  Readers of this blog should email the office of their elected officials, and enclose the following link:

http://www.econlib.org/library/Bastiat/basEss1.html

That link is to "The Seen and the Unseen" by Bastiat.  It is quite clear after listening to Obama's talk tonight that he, and those who applauded him wildly, have no clue as to this fundamental point in political economy.  Not once in all of his talk of what government would do did he ever even come close to acknowledging that what government spends on the one hand must be taken from the private spending stream on the other.  In fact, at one point he touted his "transparency" plan by saying that it would enable "taxpayers to see how government money is being spent helping other taxpayers."  Maybe so, but he glosses over the fact that the money being spent came from those same taxpayers and would have been spent on other things, without the waste of the transfer, were it not for government's intervention.  Robbing Peter to "help" Paul only damages both in the process, and certainly stimulates no economic activity.

So let's start our own little form of mass action and protest.  Take a few minutes and email your elected officials (and members of the media!) a copy of Bastiat's essay.  And then you should spread the word to your friends and family and ask them to do the same.  Feel free to enclose a note to the politicians and talking heads explaining why they should read it. It can't hurt and it can only help.  And wouldn't it be great if this spread and members of Congress and the media (and the White House!) got deluged with dozens or hundreds or thousands of emailed copies of Bastiat?   At the very least, no one can say we did nothing.

This Isn't Socialism We Are Heading To, But It May Very Well Be the Other 20th Century "ism"

Under socialism the means of production come under control of the state.  De jure ownership resides with the government, de facto ownership resides with the public officials who control access.  The reality of economic life under state socialism is one of attenuated property rights, where control rights are in the hands of state officials, but above ground cash flow rights are cut off.  What we saw in operation under such a system is that those who possessed control rights used that position to their best ability to generate cash flow rights which were hidden from official view.  This is one of the reasons why post-communist privatization was more difficult in practice than on paper --- the existing status quo of "ownership" rights was rarely taken into account in the grand designs.

During our current crisis we are not yet moving in a full blown socialist direction as traditionally understood.  Instead, we are moving toward some sort of mixed ownership form, where resources are retained in some private hands, but also the public hand is deep in control.  Such is the fate of our banking industry.  Washington Post headline today reads: US Clears Path to Bank Takeovers -- Obama's revised plan for industry aid could result in nationalization.  Listening to CNN this morning, I heard how this is really our only way out of the mess we are in.  Supposedly, those watching are told, the Bush team pursued the "let the market correct the problem" approach and that has resulted in our current mess.  Then we tried to recapitalize the banks and that didn't work. So here we are.  BTW, during this same stretch of "logical analysis" we also were told that we are in this problem because of government spent too much and had a debt problem, but that the only way to get out of it is to spend even more and go deeper into debt.  The newwoman turned to the camera and said something along the lines of: I know that sounds strange, but it is the truth.  Followed by two talking heads explaining how our relations with China are critical to the success of Obama's rescue.

We are in trouble but it is a crisis of ideas that is most troubling.  We are marching toward corporatist system as fast as the votes will take us.  Who will say NO to this?

I know this sounds dramatic, and I don't know the full story behind the history, but in watching all of this unfold before my eyes these past several months I was reminded of the White Rose student led resistence movement in Nazi Germany.  A group of students from the University of Munich, inspired by an activist theologian and a philosophy professor, took pen to paper and challenged Hitler's regime, exposed its crimes, and challenged the German people to wake from their fear induced stupor.  Sophie Scholl was one of the leaders of this group and she along with others were executed by beheading in 1943.   But her words are an indictment of complacency in the face of encroachment on human freedom and human decency.  Sophie Scholl wrote the following about teh damage to the German people caused by fascism: “The real damage is done by those millions who want to ’survive.’ The honest men who just want to be left in peace. Those who don’t want their little lives disturbed by anything bigger than themselves. Those with no sides and no causes. Those who won’t take measure of their own strength, for fear of antagonizing their own weakness. Those who don’t like to make waves or enemies. Those for whom freedom, honour, truth, and principles are only literature. Those who live small, mate small, die small. It’s the reductionist approach to life: if you keep it small, you’ll keep it under control. If you don’t make any noise, the bogeyman won’t find you. But it’s all an illusion, because they die too, those people who roll up their spirits into tiny little balls so as to be safe. Safe?! From what? Life is always on the edge of death; narrow streets lead to the same place as wide avenues, and a little candle burns itself out just like a flaming torch does. I choose my own way to burn.”

Let me be straight, I am NOT saying we are not currently lining people up in our own country for extermination and thus threatening any conception of human decency as the fascist regime in Germany did.  The US is a warfare state and a welfare state, and our economic woes are a consequence of this condition. Whatever military adventures we are currently engaged in overseas and the damage they are causing the societies outside our borders, we haven't yet brought back the draft to enslave our young -- though Obama's community service plans is a step in that direction.   The renewed military commitment in Afghanistan was very disturbing to hear from a President that seemingly promised to bring the soliders home.  We have a lot of problems associated with our warfare state that challenge our self-conception as a free and peaceful nation.  Many of these issues are the subject of severe debate.

But there can be little doubt that we are turning over control of our economic life to the state as they did in Nazi Germany in the 1930s, and we must remember that the loss of our economic freedoms does entail an effective loss of political freedoms.  F. A. Hayek 's The Road to Serfdom warned a free people how quickly they can lose their political freedom due to the pursuit even of well intentioned but poorly thought out ideas related to economic policy.  Hayek's warning was directed at the Western allies, namely the UK and US, and he used Germany and Russia as his examples.  At the time he wrote, intellectuals in the UK and US thought they could avoid the political pitfals of Germany and Russia while benefiting from the presumed 'superiority' of the economic model of government planning.  Hayek's classic warning challenged that belief in the workability of democratic socialism.

Perhaps a more timely book to read than even Hayek would be Mises's Omnipotent Government and in particular the sections on the German economic model of national socialist policy.  Our current policy path seems more along those lines, then outright expropriation of private property by the government.  In the German model, Mises argued, private ownership was nominally maintained and the appearance of normal prices, wages and markets was kept.  But in reality entrepeneurs were replaced by government appointed shop managers and the government dictated how the "capitalist" must use his funds and what wages workers must work for.  Government effectively controlled production and distribution. "This is," as Mises put it, "socialism in the outward guise of capitalism. Some labels of capitalistic market economy are retained but they mean something entirely different from what they mean in a genuine market economy." (1944, p. 56)

This may very well be the direction we are heading.  Slippery slopes, unintended consequences, regime uncertainty, etc., these are the concepts you need to understand in order to make sense of our current economic problems.  Bad economic ideas have produced bad economic policies which in turn has resulted in bad economic consequences.  The "solution" is not to be found in more bad ideas and bad public policies even if promoted by an eloquent and charismatic political leader.

On the Keynesianess of Public Works Spending

Our friend Mario Rizzo has been doing absolutely splendid work uncovering the "real" Keynes and his skepticism about the stimulus value of public works programs.  In preparing for this morning's edition of my senior seminar, which covers the Hoover years, I was struck in re-reading Rothbard's chapters on 1929 and 1930 how much support there was among mainstream economists of the era for public works programs as unemployment relievers.  I bring this up because this was all very much before Keynes wrote The General Theory.  We already know, of course, that Hoover enacted a number of such programs during his time as president.

The pre-GT support for public works gives further lie to the various myths of the Great Depression, especially the one that somehow thinks that Keynesian economics was "behind" the New Deal's massive economic interventionism.  In fact, as many have shown, the New Deal was hardly constructed on the basis of a theory of any sort, and even if FDR had turned to Keynes, he would have found a much more ambiguous message (as Mario points out).  And, given my morning's reading, the idea of using public works to create employment didn't need Keynes anyway:  plenty of big name economists believed it long before FDR became president and there was any such thing as Keynesian economics.

For all the good that economists did in opposing Smoot-Hawley, they did much to undermine it by supporting various public works boondoggles.

And You Thought IS-LM Analysis Was Dead

The old Neoclassical Synthesis is resurrected once again, over at Krugman's blog.  (Notice that his discussion of the budget deficit's impact on interest rates assumes the LM curve is nearly horizontal below full employment.) 

What fine work from a recent Nobel Laureate.  Hansen would be thrilled.