Hell in a Hand Basket?

My friend Ivan Pongracic chides me in the comments of my most recent post about the (lack of) economic crisis. According to Ivan, the crisis is severe indeed. People’s ability to retire, perhaps “ever,” is now ruined; unemployment is about to skyrocket; and the US government is poised to default on its debt. In short, America is going to hell in a hand basket.

 

As my previous post suggested, Ivan's perspective is shared by many. But do the doomsayers really believe their own rhetoric? I'll pick on Ivan since his comments inspired this post. A few questions:

 

 

1. Have you divested yourself of your 401(k)?

2. Have you exchanged all your dollars for gold in preparation for the impending devaluation?

3. Are you shorting US treasuries?

4. Have you pulled your money out of your bank and either made the flight into real values (see #2) or stashed your cash in a shoebox under your bed?

5. Have you stockpiled cigarettes, canned goods, alcohol, and bottled water in preparation for the impending economic calamity?

6. Finally, when you go home after work in the evening do you:

(a) turn on the TV, watch the talking heads or perhaps a sitcom and spend time surfing the Internet; or

(b) work hard at honing your butter-churning skills in preparation for the imminent return to self-sufficient production.

 

 

I don’t know Ivan’s recent decisions, and I'm happy to be corrected if I'm mistaken, but I’d bet he hasn’t done a single item of 1-5 and on 6 his answer is closer to (a) than it is to (b). This is problematic since, if Ivan believes his own dire predictions about the US economy, we would expect him to be doing items 1-5 and something closer to (b) than to (a) on 6.

 

If I'm right, this tells us that, cheap talk aside, the doomsayers really believe the same thing about America's economic propspects as I do: the near future looks pretty much like the near past.

Comments

[Charles N. Steele]

Let me get this straight: Ivan Pongracic uses economics to argue that Peter Leeson is mistaken about the crisis. Leeson decides that Pongracic's economic theories imply a particular investment strategy. Since Pongracic doesn't follow Leeson's strategy, Leeson concludes Pongracic must be, umm, "less than forthcoming?" when he makes his arguments.

This is a strange argument from Leeson; but I suupose we can try again: American recessions of late have been ended by consumer spending. But American consumers are now particularly heavily indebted, w/o savings, and finding their asset values are falling. Federal deficits are projected to grow indefinitely at an increasing rate, assuming no increases in spending and no recession. Perhaps China will continue to finance us at low rates forever, but one would suppose this can't go on forever. So isn't this likely to have serious effects in the real economy?

Perhaps Leeson should actually explain what things make him so bullish about all this, other than the Pongracic Investment Indicator.

[Ivan Pongracic Jr.]

Thanks to Charles and Fred for having my back. :)

Pete, here's a recent piece by a guy that probably taught you a thing or two, Richard Ebeling: http://www.aier.org/research/commentaries/636-a-shotgun-wedding-big-government-in-the-banking-business
Are you telling me this alone doesn't give you any doubts about the future direction of the economy? That it's going to be the same as it ever was?

Regarding my saving decisions: given the current situation, I honestly have no idea what is the best place to put my money. I really don't. If I did, I would have definitely changed my portfolio. I think I suffer from radical uncertainty. But then, I think that everyone does, and you're kidding yourself if you don't think you do. In addition, there's a high penalty for pulling out of a 401k; and staying within a 401k greatly reduces which options you have (the main reason why I have my money in a 401k is due to my college's 'doubling' program). For example, even if I thought it was a good idea, I don't think I could have all my 401k in gold. I certainly have no superior local knowledge in any particular market. This is why people like us buy and hold - transaction costs are too high to play the market. Or maybe it's just my laziness.... One way or another, none of this has any bearing on my arguments. Please tackle those. I'm looking forward to your substantive response.

[liberty]

That is the best I've read on the bailouts and the financial system so far. Nice.

[liberty]

by which I meant the article by Ebeling, not the post by Leeson.

[Vedran]

Pete,

My question is "If this isn't a big enough intervention to be worried about, then what is?"
I mean this seriously. What level of nationalization and regulation of the banking system would in your mind be worrisome?

[Pete]

Ivan and Charles,

I'm sorry if the point of my post wasn't clear. It has nothing to do with 'investment strategies.' The economic argument I'm invoking is an old and simple one: if you're unwilling to put your money where your mouth is--especially when your money is literally what's at stake--our confidence in your rhetoric is greatly diminished.

Ivan, you've acknowledged you haven't done any of the items I listed and pointed to 'transactions costs' or 'laziness' as reasons why.

Here's the problem: if the crisis is as severe as you say it is, then the losses from *not* divesting your 401(k), moving to gold, etc. are vastly greater than the transactions costs you stand to incur from making these changes. If not, the crisis can't be that severe after all--apparently not even severe enough to impose costs greater than those of overcoming laziness!

My post was designed to ask: have you put your money where your mouth is? And the answer I got back was no, which is what I expected and why I say you don't really believe the world is exploding after all.

[Pete]

Well Pete,

Using your same argument, are you buying up chunks of GoldmanSachs? Because if everything is just fine it seems like you could get great deals on all these banks which are foolishly devalued. So are you bullish in the market with your own money?

[Vedran]

Sorry that was me directly above

[Less Antman]

Sure, Pete, that's easy for you to say: you're all ready for Armageddon after years of study on how to steal people's goods effectively on the high seas.

Personally, I'm 100% invested in global equities. It's NOT because I'm certain we'll muddle through, but because there is no safe haven should we not. If the world is impoverished and I'm rich, I'll be the first to be strung up by the mob (or robbed by Pete's crew).

[Pete]

Vedran, as I've repeatedly said, I'm no more or less bullish/bearish about the long-run prospects for the economy than I was a year ago. Accordingly, I've left my investments unchanged. Buying GoldmanSachs isn't the behavior that would match my claims (the claim to go with this would be me being particularly bullish about GoldmanSachs). Keeping my portfolio unadjusted is, which is just what I've done.

To reiterate my contention regarding Ivan's claims: there are two possibilities. Either (a) the crisis isn't the cataclysm he suggested it is, or, (b) he's indifferent to taking massive losses. Not sure what's controversial about this.

[Vedran]

Why should you leave you position unchanged? Before everyone thought the market was going fine. Now pessimism has driven stock prices down. Considering you have the same conjectures as before shouldn't lower prices rationally lead you to buy more. That is unless your own perceptions have changed. If your perceptions are truly the same, you should buy as you get a lower price for the same expectations.

and agreed Goldman was a bad example.

[Pete]

And I have. Perhaps my language was unclear. To clarify: before I put $x/month in an index fund. Today I do as well. Before, $x bought y shares. Today, at lower prices, $x buys y + z shares.

Still not sure what's controversial.

[Dave Prychitko]

Putting one's money where his mouth is?

Why take it out of your 401k? Most of us are dollar cost averaging. (In the interest of full disclosure, I should mention that at NMU I don't put a cent into my TIAA-CREF account, but my employer contributes 15.5% on every dollar I earn.) The recent drops, even if they persist and level off much lower over the next several years, shouldn't worry someone who's dollar cost averaging with a 20 to 25 year retirement horizon.

And about the dollar: The dollar has really increased against other currencies as people are rushing toward cash holdings. Why throw out the dollar so soon?

Also, it might make sense to short wheat, bean, and corn futures. They've begun to get killed recently as the dollar has increased in value. A potentially large corn harvest combined with lower export opportunities caused by the dollar's increase might very well drive prices down further. (Side point: See, we complain when the dollar weakens, and we complain when it grows stronger.)

I think things look pretty bad for a few years out. But why -- right now -- would I draw from my retirement account and invest my dollars elsewhere like they were hot potatoes?

I don't know how to churn butter. But I know how to use a chainsaw and splitting maul (despite criticisms raised many months ago on this blog!). I can run a trot line and skin rabbits.

As Hank Jr. says, a country boy can survive.

[Vedran]

I thought you meant that you left your total portfolio the same not your total monthly spending on the portfolio the same. Well that makes sense then. Thanks for clarifying. That seems legit to me.

[Vedran]

"As Hank Jr. says, a country boy can survive."

.....awesome

[Vedran]

wait actually....why not put more in? If it's cheaper and the return is the same according to your predictions, then you should want to buy more than you otherwise would.

Let's say that I expect a $10 return on a $100 investment. Hence I invest $100. But now with the recession. I get to buy the same investment for $90 with a $20 return why the hell would I still only spend $100??????

[Ivan Pongracic, Jr.]

Pete, I must say that I'm really put off by your 'analysis' - which is completely absent of any analysis. I personally don't give a flying fig what you think of my investment strategy - or absence thereof. I tried to explain to you that I have no idea what the proper ways to invest are right now. I'm by no means convinced that gold is the right thing to put my money in right now. And the amount of money I have in my 401k is not that large, and I'm not retiring for many, many years. What I do care about is that you please reply and analyze the claims I made in my original challenge to you, which you still haven't done - here they are again:

Disappearance of multiple trillions of dollars from the financial markets (and we're not done yet - take a look at CNN right now), devastating many people's retirement savings and making it impossible for them to retire until much later than they planned, if ever; a large run-up in unemployment (and we haven't seen anything yet - unemployment numbers will definitely go up much higher than they are now); federal government becoming a part-owner in many American banks, leading to God-knows-what down the road; and probably the most problematic long-term development, a huge increase in the federal debt, leading to questions about the government's ability to repay it in the long-run and leading to the Chinese and Japanese slowing down in buying of the US treasuries (I believe that the federal govt will be facing a very real possibility of defaulting on debt within the next several years).

Are you saying that none of these things will happen? Even if only one of them happens, then things will have certainly changed for most Americans. Please also recognize that I was not predicting economic armaggedon or the end of civilization, and I must say that I don't appreciate you portraying my argument in such a way in order to subtly ridicule it. I was saying that there are things going on now which could in fact lead to a noticable DROP in our standard of living, and maybe for a significant time to come - maybe even a decade. Who the hell knows beyond that.

The fact is that the interventions instituted during the Great Depression most certainly DID decrease the standard of living for most Americans for over a decade. The standard of living started improving only once the interventions were eliminated with the end of World War II. Are you telling me that you think that things in the US would have gotten better as they did if Truman kept the exact same '33-'41 policies when the war ended in '45? And if not, then why is this different? Isn't it possible, if not even likely, that partial nationalization of banks will lead to the politicization of investment decisions which could lead to massive misallocations of capital - and therefore considerably stunted economic growth? Do you mean to say that government can accumulate debt without limit and there will be no real economic repercussions?

I wait with baited breath for you to let go of your rhetorical 'ace' of my investment strategy and provide a substantive analytical answer - and also to Ebeling's article.

[Ivan Pongracic, Jr.]

And I forgot - also a substantive analytical answer to Steele's point at the top would be nice, too.

[Ivan Pongracic, Jr.]

Ah, damn, and FRED'S POINTS, too!! (It's too late to be doing this....)

[Bob Murphy]

Pete,

I just want to say that I am very concerned about things--and again, not because of the "credit crunch" which I think was mostly bogus, but because of the government reactions to it. And because of my beliefs, I have done some of the things on your list, but not all since a few of your suggestions are inapplicable and/or dumb.

1. Have you divested yourself of your 401(k)?

I barely have anything in it so it's not worth moving. (Ivan knows that my three years at Hillsdale as a visiting prof did not add up to much in the market.)

2. Have you exchanged all your dollars for gold in preparation for the impending devaluation?

The day when gold had its highest jump, I went to a coin shop and bought $750 worth of (pre-1965) US coins. (I wanted $1000 but I cleaned them out.) I figured that if the dollar collapsed it would be easy to get Americans to google "silver content US coins" to understand what I was holding.

3. Are you shorting US treasuries?

No, but mostly because I am still indebted from grad school. I am in fact rolling over credit card balances on low-APR offers rather than paying them down, so in a sense I am shorting the dollar that way.

4. Have you pulled your money out of your bank and either made the flight into real values (see #2) or stashed your cash in a shoebox under your bed?

I pulled out a grand in cash and hid it in my house.

5. Have you stockpiled cigarettes, canned goods, alcohol, and bottled water in preparation for the impending economic calamity?

No, because that would be premature. If President Obama starts talking about price controls to ensure Americans can still get bread and milk once inflation hits 10%, then I might.

6. Finally, when you go home after work in the evening do you:

(a) turn on the TV, watch the talking heads or perhaps a sitcom and spend time surfing the Internet; or

(b) work hard at honing your butter-churning skills in preparation for the imminent return to self-sufficient production.

Now you're just being goofy. If we had 40% inflation it would still make sense for people to specialize and trade.

Look, if you had just said, "I think the crisis is overblown and we will look foolish if we cry wolf on this," fair enough. But I can't believe you really meant it when you said that your views today are no different from what they were a year ago. Really, you can't possibly mean that. If you do, then I don't understand why you care about economic liberty, since it obviously has little effect in your mind.

[Bob Murphy]

Note: I tried to italicize the numbered items above, because I was quoting Pete. But it obviously didn't work...

[Dave Prychitko]

Vedran: I also have a Roth IRA where I buy additional stocks with an eye, of course, on the same 20 year horizon.

Pete: Why short Treasury's when the interest rate is currently falling? Lower rates should drive up bond values and, if so, there's a chance for capital gains.

(All of this, of course, is based on my expections that the Fed will continue to lower interest rates, and I know that the capital gains, and the short contracts on agricultural goods, are already built into the market. I haven't, by the way, entered into any commodities contracts. Those make me nervous.)

[Peter Boettke]

Ivan and Charles,

Why are you having such a problem with a basic point that economists have used for years --- "If you so smart how come you aren't rich". In this instance, Pete is just saying that before listening to anyone talk about the future of the economy, it would be useful to know what their own portfolio looks like because that reflects their "true" beliefs.

There are real problems with our current situation, and we need to address those problems. But arguing that we are headed into the stone age is an empirical claim that should be "tested" --- it is not a apriori law. This is a question of magnitude and as such is empirical and must cope with the "other things constant" question.

Putting our heads in the sand is not appropriate, but neither is joining the frenzy of doom and gloom. Use all that economics has taught you, not just one part. I think that is all that Pete is saying.

[Ivan Pongracic, Jr.]

Pete B.: "But arguing that we are headed into the stone age is an empirical claim that should be "tested"."

Am I in some kind of an alternate "bizarro" world?? Fred wrote in his post that this is NOT what I'm saying. *I* wrote two ro three times that this is NOT what I'm saying. I listed the problems facing us that I believe will bring about a lower standard of living, and that I want Pete L. to address, THREE times, yet he is not. And now *I'm* being accused of 'putting my head in the sand.' Wow...

[Ivan Pongracic, Jr.]

Sorry, I misread: I see I was not accused of putting my head in the sand, just 'joining in the gloom and doom.' Apparently for applying a Misesian analysis to the current situation, i.e., his business cycle theory which says that monetary effects WILL have an impact on the raal economy, espeically if the bust is not allowed to clear out the malinvestmnets; his understanding of government ownership of a significant industry - banking - leading to significant misallocations of capital; and his dynamics of interventionism explaining that the current round of much more significant interventions is a direct result of the unintended consequences of previous interventions, and will likely lead to even more extreme interventions down the road. Whereas Pete L. is making a completely non-theoretical point based on our experience of the last fifty years that 'things just work out'... Still wow....

[Steve Horwitz]

I do think folks are being a bit unfair to Ivan by strawmanning his argument. That said, I'm much closer to the Leeson and DRS view: the next few years might involve lower/flat/much slower growth, but not a cataclysm.

Yes, Ivan, I care about economic liberty, but I also understand that markets are very resilient and that people find ways to work around many forms of state intervention. Losses of economic liberty are bad and make us *worse off than we would be otherwise* but they don't necessarily mean another Great Depression or anything like it. Especially not in the world we currently inhabit, compared to that of the 30s.

[Pete]

Ivan,

I've tried several times now to clarify why I'm offering an economic argument about whether or not your rhetoric about the economy is cheap talk or reflects what you actually think is going to happen, and to clarify why I'm not offering investment advice as you and Charles (strangely) characterize it. I'll try once more, this time using an example we're all familiar with, along with a few other approaches, to hopefully make my argument clear.

In the 1980s Julian Simon challenged Paul Ehrlich to a bet. Ehrlich was declaring resource gloom and doom. Simon's point was simple: if you believe this, put your money where your mouth is. Ehrlich took Simon's bet (and lost). Why did he take the bet? Because if he hadn't it would've have been clear to everyone watching that he didn't really believe his own doomsayer rhetoric.

You have proffered doomsayer rhetoric about the economy. The natural question, then, is: Have you 'taken the bet' implied by your own rhetoric? This is what my post asked. According to you, you haven't. Just as we would've (rightfully) dismissed Ehrlich's rhetoric as cheap talk if had refused Simon's bet, so too should we dismiss your rhetoric as cheap talk since you refuse to 'take the bet' implied by your rhetoric.

To summarize: I asked if you had put your money where your mouth is? You said no, to which I replied: Why not? You said 'transactions costs,' to which I replied: If the losses of not altering your investments along lines consistent with your prediction of doom and gloom aren't large enough to overcome the 401(k) withdrawl penalty or 'laziness,' then the crisis can't be very big. You didn't reply to this.

To put it another way: I'm not giving investment advice. I'm asking, why, if you believe catastrophe is around the corner, isn't your behavior consistent with that we would expect from someone who thinks catastrophe is immiment?

Or, to put it yet another way: What should we conclude about the validity one assigns to their own predictions about the US economy who simultaneously (a) states, as you did, that the economy will come to such great ruin that Americans may *never* be able to retire and (b) states, as you also did, that 'laziness'/transactions costs are the reason they haven't made any financial moves to stave off this imminent collapse? Economics tells us what we should conclude: this person doesn't take their own prophesies of gloom and doom very seriously.

If none of the foregoing has clarified why my post is an economic argument that should matter for evaluating the validity of your rhetoric, let me try one last approach. I'm sure you and Charles are aware of economists' emphasis on the information-revealing properties of prediction markets and the associated literature that discusses these markets and their information-revealing properties. The basic intuition behind why we say prediction markets work well in this regard is the same one behind why we should discount rhetoric about the economy that someone is unwilling to back up with an actual 'bet' about the economy.

I hope that helps clarify things. Though, unlike when it comes to the economy, I'm not optimistic.

[Ivan Pongracic, Jr.]

Steve wrote: "I do think folks are being a bit unfair to Ivan by strawmanning his argument. That said, I'm much closer to the Leeson and DRS view: the next few years might involve lower/flat/much slower growth, but not a cataclysm."

Still in the bizarro world I see... First Steve admits that my argument has been distorted - and then he does the same thing by implying that I was predicting a "cataclysm". And distorts it further by allowing that Leeson's argument includes the option of 'much slower growth', which according to my reading of what he wrote it does not.

Steve wrote: "Yes, Ivan, I care about economic liberty," That was Bob's question, not mine. And it was a good one. The Great Depression DID happen. Policy makers could bring about another one - it IS possible. LET'S BE CLEAR: This is not what I was or am predicting! But I do believe that policies currently being adopted are significant enough to force us to consider this possibility.

[Pete]

Bob, we have more intervention this year than last year. Last year we had more intervention than the year before that. Two years ago we had more intervention than we did three years ago, and so on. The pattern is the same as it's been for a very long time.

But there's another pattern that's prevailed for a very long time: markets have proven resilient enough to, on the whole, 'outpace' the increases in intervention.

Since both patterns have held for some time and I don't see us entering a new 'New Deal' or markets becoming less resilient, as some have suggested, why should I be more pessimistic about capitalism's ability to outstrip bungling bureaucrats than I was last year?

I, of course, agree that if the US became the USSR that there would be much reason for concern. But I don't see that happening. As I mention above, I don't even see a new New Deal. We're not cartelizing production and labor here. We're doing some very stupid things with bailouts, which is hardly new even if the magnitude is. It's possible that this round of increased regulation is larger than previous rounds. OK, but is it orders of magnitude larger? Large enough to plunge us into a second GD? I think these kinds of predictions and associated claims that Americans may now never be able to retire are, as Pete put it, needlessly 'losing one's head.'

[Steve Horwitz]

Yes, Ivan is *is* possible. But to play Tyler for a second, what's the "p" we attach to it? For me, it's well under .25.

And I didn't mean to say you were predicting a "cataclysm" but others have. I've been in a debate in another online community with just such a person and probably let that conversation affect my word choice here.

You're also being a bit unfair to me. I wrote: "I'm much closer to the Leeson and DRS view: the next few years might involve lower/flat/much slower growth, but not a cataclysm."

I think it's pretty clear from that sentence that the view after the colon was my own, which is "much closer" to Pete's, rather than my attempt to articulate Pete's view.

Probably best to invoke Lachmann's Principle of Charitable Interpretation all around here.

[Vedran]

Ok...Pete so what if Ivan says I did everything you suggested. What happens to your argument then? Ultimately, you're attacking Pongracic's investment portfolio and not his idea.

Further, one does not have to be completely 100% certain of an idea for it to be a decent thought. The whole point of debating something is to get closer to certainty, not to immediately dismiss it because the individual didn't divest their whole portfolio immediately.

I don't see how your argument is different from if I came to you as a student and asked, "What do you think about paper topic ABC should I write?" and the response being "well if you're not already writing it already. The idea must be bad"

Also, I don't think you adequately ever explained the issue regarding your own stock purchases. You make the exact same purchases with the exact same expectations although stocks are priced much lower now. Your demand for investment must be really inelastic or you FAIL YOUR OWN TEST. It's one of those two.

Lastly, right from the beginning you overblew Pongracic's argument. Please copy and paste where Pongracic said the dollar will absolutely collapse and that this disaster is the equivalent of the stoneage leading to the buying up of cigarettes and toilet paper. I don't see it. It's a straw man.

[Ivan Pongracic, Jr.]

Pete L. wrote: "You have proffered doomsayer rhetoric about the economy."
My reply: sigh....

Pete L. wrote: "I asked if you had put your money where your mouth is? You said no, to which I replied: Why not?"
My reply: I answered once - I don't know what is a safe bet. So, I have a diversified portfolio, with lots of different parts in it, and I'm hoping for the best, at least in the long-term (30-35 years). My challenge to you was to explain WHY things should get better in the near terms, over the next few years, maybe up to ten, given the depth of current interventions.

Pete L. wrote: "who simultaneously (a) states, as you did, that the economy will come to such great ruin that Americans may *never* be able to retire"
My reply: Please allow me to clarify this, cause now I see that it wasn't clear in my first post. I didn't mean that ALL Americans wouldn't be able to retire. I meant that there are Americans that planned on retiring in the next few years who are now unable due to the financial crisis. There are people in their sixties whose portfolio losses are large enough that it calls into question their ability to ever retire. That's all I meant, and it was a response to your first post that 'nothing will change.' Well, certainly for the people in those situations, something pretty fundamental has changed.

Pete L., I already understood where you were coming from before, the above post was unnecessary. I have tried to answer you. I have tried to get a theoretical analysis from you that is not about 'shooting the messanger' but rather taking seriously the message. I can't seem to, so I should just give up and go think really hard about where my savings would be safe...

[Ivan Pongracic, Jr.]

Thank you VERY MUCH, Vedran!

[Bob Murphy]

OK let me make an attempt at neutrality by criticizing Ivan before diving in against Panglossian Pete... :)

Ivan, it sounds like you and I have similar misgivings, so I really would encourage you to think about acquiring some physical gold and silver. Obviously there's no "right" answer; part of this whole crisis proved that the mathematical finance models leave much to be desired. So rather than getting paralyzed by asking, "What percentage of my wealth should be in silver?" I think you can at least agree that it's higher now than it was last year, and so you can buy some and be quite comfortable with your purchase. (Plus you can play with the coins and feel like Scrooge McDuck. They're cooler than Vegas chips.)

OK Pete L., you said this which made me almost choke:

"Since both patterns have held for some time and I don't see us entering a new 'New Deal'..."

What would it take for you to "see" that? The government has *literally* been doing things the last year that it has not done since the New Deal. Bush and other world leaders are in consultations on coming up with a globally regulated "new form of capitalism." (Their words, not mine.) The U.S. government just called in the heads of the 9 biggest banks and made them an offer they couldn't refuse.

I submit that all of this would have been INCONCEIVABLE a year ago. A year ago, some analysts were worried that the Fed was cutting rates, despite rising inflation. Remember? Some people were worried that cutting the fed funds rate was too interventionist, a year ago. And now the government partially nationalized the banking industry.

Again, if you want to say the most vocal doomsayers are giving Austrian economics a bad name, fair enough, maybe they (we?) are. But if the $2 trillion (I think that's right) committed to the markets by the government in the last 6 months isn't "orders of magnitude" above other interventions in the last few years, what is your magic number?

[liberty]

Pete: "I, of course, agree that if the US became the USSR that there would be much reason for concern. But I don't see that happening. "

OK, at least my arguments are getting a side reference. My point is that there may be tipping point. Yes, intervention each year (for most years) is worse than the last and we've muddled through, because of the exponential growth of technology and exchange that the remaining market is able to continue to build on. However, at some tipping point, we lose this ability and hit a point where this no longer holds.

The USSR is the extreme example - the 100% tax rate to prove the incentives problem with higher taxes, kind of thing. Of course people still work, invest and open firms at 50% rates, but not as much as at 5%.

So, where is the tipping point? I would argue that many countries have already found it in different ways, and climbed back out (some of them) but not without a great cataclysm first, something which is fundamentally different from "the near past". Something more like a Great Depression than a mild recession. Japan and Sweden come to mind... And I am not sure its all that far from where we are now.

Pete: "As I mention above, I don't even see a new New Deal. We're not cartelizing production and labor here. We're doing some very stupid things with bailouts, which is hardly new even if the magnitude is."

Actually we are. If Obama gets in and pushes through the policies I mentioned, in particular the EFCA with a new stronger National Labor Relations Board, we would have essentially cartelized labor. If we nationalize half our banking industry, and allow a nationalized Fannie and Freddie to continue to dominate and expand in the mortgage markets, we will have moved sharply toward commanding heights socialism. And those are only the very beginnings of Obama's plans.

Granted, even with a Democratic majority in both houses, he MIGHT get through very little of his proposed policies. But that is not at all certain. If he does get it all through, we'll look back at FDR as a moderate.

This bailout is not just more of the same - it represents a fairly sharp turning point. Its like Kelo -- legalistically, it was a small step, but in reality it was a major turning point. Once a line is crossed it becomes a lot harder to turn back or even stopper the flow. Toothpaste out of the tube and all that.

[Vedran]

To add some criticism on the same quote

"Since both patterns have held for some time and I don't see us entering a new 'New Deal'..."

You know that would have been the exact same argument circa 1929. Hey, they've never done anything too crazy and you know this pattern has been going on for some time. I don't think this Roosevelt fellow will be any different.

[liberty]

Thank you Bob Murphy!

[Roger Koppl]

First they came for the hedge funds, but I didn't own a hedge fund . . .

(I'm not entering the fray, here, just making a joke!)

[Vedran]

Roger,

lol

[Bob Murphy]

Pete,

Let me say one last thing (unless you motivate me to post again...). I think part of what is getting some people so riled up, is that you are so casually dismissing things when you are in a much stronger position than they are. I.e. you're young and you're really smart, and it's not like graduate schools might go out of business next year. So even if the S&P loses 95% next week, you're going to be fine.

In contrast, my parents just bought a retirement home in Florida. I was joking to my dad that he should start smoking again to reduce his life expectancy. Or, my buddy who works at a hedge fund in NYC and recently bought a house. It's not just that he might lose his particular job, but that his entire industry might collapse.

So your statement that, "Contrary to the impression one gets from the vastly over-discussed economy in the media, there isn't much interesting to talk about" was rather provocative, in case you are trying to understand why so many people flipped out over your initial post. The S&P is down more than 40% year-to-date. That's not "interesting"???

[Vedran]

Good thoughts Dr. Murphy.

I've been criticizing Pete but let me lay down my position. I don't think we're going to have a New Deal. This time around compared to the Great Depression the forces of the free market politically are far more organized and are ready to fight tooth and nail against the worst possible scenario. It's going to be a tough fight but I think we can win. The first rejection of the bailout gave me a lot of hope as well as a lesser known 50 billion dollar public works project which was rejected in the Senate a week beforehand.

However, we will only see victory by acknowledging the problem and taking great steps to combat the issue. All the free marketers need to get busy and get on the front lines instead of crossing our fingers pretending nothing is going on waiting for things to blow over.

The "don't vote, don't get involved, don't care" attitude is more dangerous than our enemies on Capital Hill. The outcome will not decide itself. The outcome will arrive endogenously from an equation where free market economists and their actions are important variables.

[Steve Horwitz]

I think Vedran makes an important point here: one of the reasons I don't think we'll have the GD again is because free market ideas are more widely spread and there are more institutions to promote those ideas. This is why, even if we think the long-run does not involve having to ask Dave P to teach me how to skin rabbits, we still have to "control the narrative" to make sure we minimize the damage that does occur.

[liberty]

Yeah, its kind of the revolution will come about as a result of the internal contradictions of the system, but it still needs a vanguard.

[lwaaks]

Bob Murphy raises a point I made in an earlier post. The long-term view is no consolation to someone whose retirement is delayed or whose standard of living is diminished in his final 10-15 years. But I am optimistic about my daughter's future based on my belief (unfounded?) that policy makers have more respect for free-market ideas than ever before. And now I see that S. Horwitz and Vedran read my mind and posted before I finished. Eerie! :-)

[la liberté]

I've been lurking and enjoying all of the posts, so far. I must agree, however, with Ivan. His answers are much more lucid, and he backs them up with proof and appropriate challenges.

Kudos!

[Ivan Pongracic, Jr.]

Thank you Bob, Vedran and liberty for further explaining my position (and doing a damn good job of it!!) and adding many great points to the discussion. And thanks to la liberté for your support. :)

[Ivan Pongracic, Jr.]

Oops, and thanks to twaaks! (I do wish people would show their real identities, though...)

[Bob Murphy]

Steve H. wrote:

"[O]ne of the reasons I don't think we'll have the GD again is because free market ideas are more widely spread and there are more institutions to promote those ideas."

Well, to be honest this area is why I am so pessimistic right now. Larry "I love the free market" Kudlow was saying what a great deal the Paulson Plan was going to be for taxpayers, Alan Greenspan just admitted that free markets caused the current crisis (and Tyler Cowen agrees with him: http://www.marginalrevolution.com/marginalrevolution/2008/10/what-did-alan-g.html), and I think the Heritage Foundation (I might be wrong) said the bailout was necessary.

We've done an awful job controlling the narrative; we lost. It's already over. Greenspan's "admission" was fatal to our position.

It doesn't mean we give up, of course, but I'm just saying we lost that one, just like people in the 1930s thought overleveraged speculators caused the Depression.

One last thing: I think some of you are still in a "it can't happen to us" denial mode. Half the gas stations were closed in Nashville a couple of weeks ago, because of dumb "anti-gouging" laws coupled with high wholesale prices from the hurricane. I couldn't believe my eyes; I actually saw gas lines.

And when people were complaining about it, they certainly weren't drawing supply and demand curves. It was the fault of greedy oil companies taking advantage of the hurricane. (Like that even makes sense: "Let's shut down our shop to make money!")

Barring something crazy (and we really *can't* bar "something crazy" anymore), Obama will win, and he is unbelievably ignorant of economic theory. I'm not saying he's a bad guy; maybe he is, maybe he isn't. But e.g. when someone asked him if he knew that raising capital gains taxes would bring in less revenue, and he said "well it's still a matter of basic fairness," or how he wants to raise taxes on oil companies to bring down gas prices... If things get bad while he's running the show, I shudder to think of the horrible policies he will put in place, not even realizing what he is doing.

[liberty]

To the point about showing real identities, I am using my middle name, because I prefer it, and am linked to my web site where you can access my resume and anything else you may want :)

I happen to work at Heritage Foundation, also. As to the point about Heritage's position, I was initially very unhappy with the position taken, which was to essentially support the bailout, but with a top 10 points of what not to do, including not to give Paulson unlimited power. It was an emergency pragmatic approach, basically, because the thinking was that we would only be heard if we went along with the plan but with limitations, and would be ignored if we said it wasn't necessary at all- plus there was some initial disagreement about whether it was in fact necessary.

After the initial week, there have been several papers and posts from Heritage about the causes (Freddie/Fannie, the Fed etc) and the policies (don't bail out, nationalize, expand power). So, the official position isn't all that terrible. The unofficial position (I don't think I will get fired for leaking this) is sometimes even more to my liking. Someone - not me - posted Reason's "What Would Mises Do?" article on the bailout on our little bulletin board in the CDA.

But, the larger point - Greenspan, many economists including Tyler Cowen - still stands. However, its a mixed bag. There have been a lot of good articles in the Wall Street Journal and other media that have touched on important points. The public seems to get it - at least partly.

[Charles N. Steele]

Good grief. Economic theory does not imply an investment strategy. Successful investment further requires specific knowledge of time and place, and entrepreneurial insight. One can be spot on with economic theory and still not know how to invest.

I am astounded and apalled that both Peter Leeson and Peter Boettke are making such a ridiculous argument. What next? Perhaps knowledge of economics means one can centrally plan? Why not? Oskar Lange figured that was all it took; Leeson and Boettke seem to think this is all it takes to be an investment tycoon. Lange, Leeson, and Boettke are wrong.