Wednesday, November 14, 2012

I just joined Liberty Classroom

I'll be posting on my experiences with this educational resource. Of course, I will not be posting content, since it is a pay site, but take these blog posts as a review of the site.

Liberty Classroom

Monday, October 22, 2012

Obama is getting grey

Has anyone else noticed how much grey hair Obama has gotten over the last four years?

2008:

2012:



The office of President of the United States is such a stressful job that nobody in his right mind should seek to fill it. Which is why, I think we always get such lousy candidates for the job.

Monday, September 24, 2012

Short Sellers: The crony capitalist's enemy

There are a lot of ways that opponents of capitalism don't understand how important financial markets are to the way a healthy economy functions. They see people who sit in an office or work on the floor of an exchange as parasites on the system, instead of productive members of society like construction workers or people working on an assembly line. With a construction worker (at least when he isn't leaning on a shovel), it is easy to see the product of his labor, what he is contributing to society. Its not quite so easy to see with a stock broker or financial consultant.

But financial markets are VERY important to a smooth running modern economy. Many economists have explained how speculation helps to coordinate the use of resources and stabilize prices. During a harvest, speculators buy up grain when supplies are abundant and prices would otherwise be low. This provides the farmers with higher prices. But then the speculators save the grain for later in the season, keeping it off the market so it will be available when grain supplies would otherwise be scarce.

It is hardest too see the benefit to the whole economy of having short sellers. I myself have trouble getting around the fact that short sellers are betting on the destruction of value. Emotionally, this, to me, seems creepy, destructive, sneaky, even dishonest. But the more intellectual parts of me have to acknowledge the great good that has been done by short sellers. What they do is reveal the rot in our economy, and speed the healing process.

Take Enron for example:  regulators should have known that something was wrong, but they turned a blind eye. It was speculators who uncovered the corruption, made a big profit selling the company short, and demonstrating to the world that the company was, in fact, an empty shell. The short sellers did not destroy Enron. It was already hollowed out and destroyed. We didn't know it, yet.

What the short sellers did was speed the process by which people came to realize all this.

Without the profits available to short sellers, there is not as much motivation to do the research, take a really good look at a company's books and see if it is really as profitable as people think it is.

Sunday, September 16, 2012

The elephant and the blind men

Whenever discussion comes up about the 2008 financial crisis, and I end up asking, again "what free market?", I tend to think of the story of the elephant and the blind men. Everyone knows the story. A group of blind men want to know what an elephant looks like, so they find one, and all of them go to touch it, to feel it and find out what everyone is talking about. One touches the elephant's trunk, and says that an elephant is like a snake. Another is at its ear and says an elephant is like a big banana leaf. A third is at one of its legs and says that an elephant is like a tree trunk. The blind man at the elephant's tail says that it is like a rope, and so on.

A large number of free market observers have each pointed out different aspects of government intervention which helped create the housing bubble and the financial collapse of 2008.

Thomas Sowell, in his book The Housing Boom and Bust, describes land use regulations such as "open space" laws and limits to the height of apartment buildings as the cause of localized high housing prices which government officials all the way up to the White House mistook for a national problem, which they tried to solve with such things as Bill Clinton's "National Homeownership Strategy".

Thomas Woods describes the role of the Austrian Theory of the Business Cycle (ABC) and low interest rated from the Federal Reserve in Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.

Daniel Henninger explains the role of things like deposit insurance in affecting banks' behavior in regards to risk in Welcome to 'Moral Hazard'.

Others show how deposit insurance was created to fix problems that were caused by previous regulation:

A Perfect Stormof Ignorance

Other observers have implicated the SEC's role in turning our rating agencies into a virtual monopoly, requiring banks to use Moody's, S&S, and Fitch, the three big ones, in order to invest in securities:

A Government Failure, Not a Market Failure

End the Credit Rating Monopoly

There is probably a whole lot more I can list, if I just keep digging. No economist, conservative or free market politician or commentator, or blogger has named all the regulations which helped to contribute to the housing bubble and financial crisis of 2008. To fully understand it, or at least try to, you need to read many different sources, each of which provide a small piece of the whole picture. 

For those who love free markets, the housing bubble and the collapse of 2008 provide a target rich environment for blaming government for its interference in markets.

Sunday, August 19, 2012

I went to Occupy

Occupy The Truth, that is. The Tea party is sick and tired of the media's lopsided and biased coverage of them and the Occupy movement. Every time there is some violence in our society, the Tea Party is blamed, even if there is no hint of any link between the perpetrators of mass shootings and the Tea Party. They even have to manufacture stories of Tea Party members spitting on senators and using the "N" word. But if Occupy movement members are caught planning terrorist attacks, the media turns a blind eye.

The truth is that the Tea Party has been a model of civility and respect for the rule of law, while the Occupy movement has been barbaric from the very beginning.

I'm so glad I went to this event. I got to meet Michelle Malkin.


Its Bash Ayn Rand Fest at Huffington Post

The story came out in the news that the new VP candidate, Paul Ryan, is an admirer of Ayn Rand, and the attacks are coming out of the woodwork. A lot of the same old strawman attacks, smears, misrepresentations and outright lies are being told about Ayn Rand.

One of the most blatant is that she was an admirer of a child killer, William Edward Hickman. The source material for this comes from The Journals of Ayn Rand. She wrote about this child murderer, making notes for a story she wanted to write, using Hickman as a model for a major character. What the liars are leaving out is that in those journals, Rand calls Hickman "depraved" and a "Purposeless monster".

The other big smear is the very true fact that Ayn Rand accepted Social Security and Medicare payments near the end if her life, supposedly proving that she was a hypocrite, and could not live by her unrealistic moral philosophy. But in no way was accepting SS and Medicare hypocritical. She had payed taxes most of her life in America, and she considered taxation to be theft. As she explained years before she accepted any such payments, in an essay called “The Question of Scholarships,” in The Objectivist, 1966:

Since there is no such thing as the right of some men to vote away the rights of others, and no such thing as the right of the government to seize the property of some men for the unearned benefit of others—the advocates and supporters of the welfare state are morally guilty of robbing their opponents, and the fact that the robbery is legalized makes it morally worse, not better. The victims do not have to add self-inflicted martyrdom to the injury done to them by others; they do not have to let the looters profit doubly, by letting them distribute the money exclusively to the parasites who clamored for it. Whenever the welfare-state laws offer them some small restitution, the victims should take it . . . .

The same moral principles and considerations apply to the issue of accepting social security, unemployment insurance or other payments of that kind. It is obvious, in such cases, that a man receives his own money which was taken from him by force, directly and specifically, without his consent, against his own choice. Those who advocated such laws are morally guilty, since they assumed the “right” to force employers and unwilling co-workers. But the victims, who opposed such laws, have a clear right to any refund of their own money—and they would not advance the cause of freedom if they left their money, unclaimed, for the benefit of the welfare-state administration.
But since there are some people who need an excuse, any excuse at all, to reject Ayn Rand and everything she said, the continue to cling to these smear tactics, and refuse to even apologize when their falseness is pointed out to them.

Saturday, August 4, 2012

They keep lying about Milton Friedman

Why do they have to try to hit a man when he's down? Milton Friedman died almost six years ago, and the liberals have been attacking him ever since, though he can't defend himself.

Its because even though he is dead, he is still one of their strongest enemies. His words live on in his books, articles, and videos available on Youtube. People can read and listen to his powerful defenses of free market capitalism, and his influence lives on.

Which is why Naomi Klein did her best to smear his name by trying to blame him for the worst abuses of the Pinochet regime, though he and his Chicago Boys had no real influence there till three years after the coup, long after most of the abuses actually happened.

Now Krugman and a few other Keynesians are trying to claim he was on their side. Of all the insults, that's hitting below the belt!

From A Lovefest Between Milton Friedman and J.M. Keynes by Nicholas Whapshott:
Yet Friedman’s contemporary supporters no less than his critics will be surprised to learn that he was in fact an enormous admirer of John Maynard Keynes—the patron saint of the New Deal—and not at all the absolute opponent of big government he is usually presumed to be.

 Really?

Yet in his buried essay on Keynes, Friedman expressed a more complicated view. Abruptly dismissing Hayek’s notion that big government tends to curb the rights of individuals, Friedman reports that in Britain, where government was administered with integrity and honesty, governments have grown large without endangering the public good.

Where did he get that impression? Sounds to me like Friedman is saying the exact opposite, though maybe in a nice way so the publishers wouldn't be put off from actually including his essay.

Here is what Friedman actually said:

John Maynard Keynes by Milton Friedman:

The persuasiveness of Keynes’s view was greatly enhanced in Britain by historical experience, as well as by the example Keynes himself set. Britain retains an aristocratic structure—one in which noblesse oblige was more than a meaningless catchword. What has changed are the criteria for admission to the aristocracy—if not to a complete meritocracy, at least some way in that direction. Moreover, Britain’s nineteenth-century laissez-faire policy produced a largely incorruptible civil service, with limited scope for action, but with great powers of decision within those limits. It also produced a law-obedient citizenry that was responsive to the actions of the elected officials operating in turn under the influence of the civil service. The welfare state of the twentiethcentury has almost completely eroded both elements of this heritage. But that was not true when Keynes was forming his views, and during most of his public activity.

Notice that Friedman is saying that government can be good and incorruptible, bot only when it is limited. Clearly not an argument for BIG government, but limited government. It is the laissez-faire of the 19th century which made the SMALL government incorruptible, and the growth of government in the 20'th that corrupted it.

What is more, Friedman is saying that it is the incorruptible government of the 19th century that made Keynes thing that a big government could act responsibly.But small, responsible government doesn't mean big government can be responsible.

Saturday, May 12, 2012

Krugman makes excuses

Krugman answers critics of his who say that Europe has not implemented any austerity programs.

Austerity, Safety Nets, and Spending

Not only does he claim that it matters, in Keynesian theory, contrary to what everyone seems to know about Keynes, that it matters what government spends money on, but that the specific things Ireland spends it on are not stimulating enough, so Ireland has actually implemented austerity.

This is again more of the same argument that Ireland, and other European nations, have instituted austerity because they have not stimulated the economy as much as Krugman would like.

I would say that it is those who actually recommend austerity that should be defining what austerity is, and even with his charts, graphs and data, Ireland has NOT implemented austerity.

Austerity would mean reducing those "social safety nets" so people stop using them as hammocks, get off their butts, and get one of the jobs that are actually available, even if at lower pay or some job they don't like as much as their old one. People have to get working again.

Sunday, May 6, 2012

Free market video

I just found this video by Stefan Molyneux


This is exactly what I have been talking about, what this blog is all about.

Tuesday, May 1, 2012

Second order postmodernism

There is a rhetorical technique used much too often in our society, in which someone claims that there is a consensus, or that "everyone knows" something, as if that is supposed to prove that it is so. More than that, the claim that there is such a consensus is often pretty shaky. I call this second order postmodernism.

The basic idea behind postmodernism is that if enough people agree on a certain belief, that is all that matters.

As Roger Donway explains in The Collapse of a Postmodern Corporation:

The philosophical essence of the postmodern, or anti-Enlightenment, outlook is that there exists no external reality to which our beliefs should conform. On the contrary, say postmodernists, the nature of reality simply is what people believe and say it is. Of course, people cannot believe and say anything they like. Their beliefs and speech must be coherent and consistent. And if they want to work with others, they must ensure that the group is in agreement about what to believe and say. But that is the goal: constructing a shared narrative that supports the group's desires and activities. So long as that is achieved, no "external reality" is going to come along to correct or punish them.

But global warming alarmists and progressives need to get the whole country to come together and work to prevent climate change or make a government run health care system work, or make it true that fiscal stimulus prevented another Great Depression. Since not everyone actually agrees on this, they need to agree at least among themselves that everyone agrees with them. So we have global warming alarmists insisting that there is a consensus, or Krugman followers claiming all sorts of their ideas are "mainstream". They need to come to agreement that there is an agreement that doesn't exist, in order to continue believing things that are not true.

Thursday, April 12, 2012

A letter from Tom Woods.

I just got an e-mail from Tom Woods about a new history education project.

http://www.libertyclassroom.com/

Tuesday, April 10, 2012

Krugman's Hangover

I have had it with some people's worshiping of Paul Krugman and automatic rejection of Austrian theory. Come on, people! His article on the Austrian Theory of the Business Cycle is nonsensical, bordering on gibberish. Hardly a sentence about it is accurate.

Krugman's "The Hangover Theory"

Here' I am going to go through it line by line, explaining what is wrong with his rantings;

He starts out:
A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the "Austrian theory" of the business cycle—a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire.
If he doesn't think it worthy of study, how does he know what enough about it to make such a judgment? Did he not study it?
Oh well. But the incident set me thinking—not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory."

 Austrians don't call it overinvestment. They call it MALinvestment.
It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.
It is important to note that recessions are not the punishment for ALL booms, or all good times. Healthy growth can take place without a subsequent bust. The important question is: "What caused the boom?"
The hangover theory is perversely seductive—not because it offers an easy way out, but because it doesn't.
What do you mean, it doesn't? Austrian economists have their prescriptions for a return to growth and full employment. The problem may be that it gives nothing for government officials to do except get out of the way. But to someone who thinks that government is the solution to every problem, this may be understandable. To such a person, if government isn't doing anything, nobody is.

It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love.
 And if that is true, then so what? Now the problem I see here is that Krugman is ascribing a motive to adherents of an idea as a substitute for arguing about the theory itself.
Powerful as these seductions may be, they must be resisted—for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality—with policies that encourage people to spend more, not less.
OK, sure, Krugman ascribes to a different theory, and so has the right to explain what he thinks the consequences are of not folling HIS theory. I could criticize the idea of spending wealth that has not yet been created, but that's not my purpose here.
Nor is this merely an academic argument: The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression—with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore "sham" prosperity by expanding credit and the money supply. And these same views are doing their bit to inhibit recovery in the world's depressed economies at this very moment.
This is itself a nice thoery, except the fact is, though Hayek did argue against expanding credit and the money supply, THEY HAD NO INFLUENCE on the policy. Hoover and the Fed did the exact opposite of what Hayek would have and did argue for. The Fed tried to re-inflate, to provide a lot of new liquidity to prop up failing banks. Hoover tried to stimulate the economy through stimulus spending, in particular on public works projects. Hayek, von Mises, and other Austrian economists were arguing AGAINST the policies that were actually being implemented. See Murray Rothbard's "America's Great Depression" and Ludwig vomMises' Causes of the Economic Crisis.
The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. 
A very simplistic description of the theory, but not too distorted. He leaves out a lot of things like time preference, malinvestment, and the capital structure of production.

Whatever the reason, all that investment leads to the creation of too much capacity—of factories that cannot find markets, of office buildings that cannot find tenants.
Not really. There is never too much capacity for the production of wealth. There is never any set limit to the amount of wealth that human beings can consume, no shortages of new uses for anything that is produced. The problems arise when there is too much of some things relative to something else. People demand more textile goods, when the economy has been producing too much in the way of housing, or something similar. And since all prices in the economy, including wages, have been inflated, when a monetary shock sets in, there may not be enough money to buy all the goods and pay all the workers at the previous price level. So prices need to fall. More on this later.
Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes—investors go bust and investment spending collapses.
Here, he gets something right. Reality strikes. The previous economic conditions were unsound, a fantasy created by  throwing money at the economy. Money is a measurement of value, not its cause. Trying to make things happen by adding more money is just the equivalent to cracking open the dial on a pressure guage and moving the needle, instead of doing something to change the actual pressure being measured. The result is fantasy. But reality does re-assert itself.
The result is a slump whose depth is in proportion to the previous excesses.
I'm not sure the depth of the slump is in proportion to the excesses. I doubt that an Austrian economist would say there is such a proportionality.
Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover. 
Partly right, but the fall in prices is actually PART of the healing process. In classical and Austrian economics, falling prices are a GOOD thing. Only in mercantilist and Keynesian economics can falling prices be considered bad. See George Selgin's "Less Than Zero".
Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles. Anyone who has watched the ups and downs of, say, Boston's real estate market over the past 20 years can tell you that episodes in which overoptimism and overbuilding are followed by a bleary-eyed morning after are very much a part of real life. But let's ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole?
 Here, again, Krugman oversimplifies. Its not the ups and downs in investment that drive the business cycle. Its malinvestment. The economy has produced things that consumers don't want, so the businesses producing those goods lose business. That's where the slump is.
Don't say that it's obvious—although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them.
 And the Austrian theory DOES explain them, as he would know if he were to actually crack open a book on the subject.  He leaves out the explanation, because he apparently doesn't know the theory. Since consumers aren't buying what producers have to sell, (which is because the low interest rates instead of consumer demand motivated them to produce those goods) they now don't know where to invest. Also, there may have been monetary deflation which has reduced the amount of money available to invest.
And in fact the key to the Keynesian revolution in economic thought—a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles—was John Maynard Keynes' realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.
 He's explaining Keyesian theory here, so I will let this pass, except that he claims it makes Austrian theory obsolete. That assumes that Keynes was right.

Up till now, all my criticisms of Krugman's essay have been pretty minor. Here is his first real big whopper:
Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom?
Again, proof that Krugman doesn't know the theory he is pretending to criticize. The error in his logic and math is that both consumer and investment spending can fall at the same time, if there is monetary deflation. And that is just the simplest explanation. People can reduce their spending overall because consumers can't find the goods they want, they may have chosen to save more, people can't find good investments, and so on. They can simply choose not to spend.

And here is where he really shows his ignorance of Austrian theory:
And if so why should there be a rise in unemployment?
That's an easy one. Austrians have long had an answer to this question. If there is monetary deflation, there is less money to go around. Especially if wages are held artificially high, as as Hoover did (Read Lee Ohanian's "What, or Who, Started the Great Depression?"), there just isn't enough money to pay all these workers. Not only that, some sectors of the economy have overinvested relative to others. They have hired more workers at the expense of other sectors, and letting those workers go so they can be hired elsewhere, where they would be more productive, is part of the healing process.
Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods.
 No, and No. They didn't realize this was a problem for their story, because their story explains it very well, as I already explained. And why does he seem to think Hayek and Schumpeter are the only business cycle theorists? How about Ludwig vonMises and Murray Rothbard?

Here is Ludwig von Mises explaining unemployment in depressions and recessions, especially in ones where wage rates have been propped up by government or powerful labor unions. From The Austrian Theory of the Trade Cycle:

Another factor which is helping to prolong the present period of depression is the rigidity of wages. Wages increase in periods of expansion. In periods of contraction they ought to fall, not only in money terms, but in real terms as well. By successfully preventing the lowering ofwages during a period of depression, the policy of the trade unions makes unemployment a massive and persistent phenomenon. Moreover, this policy postpones the recovery indefinitel~ A normal situation cannot return until prices and wages adapt themselves to the quantity of money in circulation.
And:

The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. 

If previous statements by Krugman were whoppers, the following is off the chart:
(Hence their opposition to any attempt to increase demand: This would leave "part of the work of depression undone," since mass unemployment was part of the process of "adapting the structure of production.")
Now exactly where does any Austrian economist claim that mass unemployment is part of the process of recovery? As a matter of fact, they offer their remedies as a way to PREVENT mass unemployment. See the above quote from Ludwig von Mises.
But in that case, why doesn't the investment boom—which presumably requires a transfer of workers in the opposite direction—also generate mass unemployment?
That's easy. The industries and sectors of the economy which overexpand during the boom period get workers by bidding them away from other sectors, which is a slower and less visible process.

As explained by Roger Garrison:
Actual market processes, however, involve adjustments in both capital and labor markets that translate capital-market misallocations into labor-market fluctuations. During the artificial boom, when workers are bid away from late stages of production into earlier stages, unemployment is low; when the boom ends, workers are simply released from failing businesses, and their absorption into new or surviving firms is time-consuming.

One business hiring workers away from another does not require the worker to be unemployed in the meantime. And the extra money flowing into the economy provides the means to hire new workers as quickly as they join the workforce. The rate of new jobs that need to be created is easy to maintain. But when there is monetary deflation, a lot of workers are suddenly dumped on the economy at once, and it takes time to find work for all of them.

And anyway, this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.
 At least this isn't a misrepresentation of Austrian economics. But the thing is that, even if all businesses, industries and sectors of the economy  contract, they don't all contract to the same degree. The housing sector and the financial sector were both bit harder than most. But the computer industry did fine.

Apple Computers, for instance had very healthy revenue. There are some spikes and dips afterwards, but recovery from the dips was pretty fast.



Pretty much the same thing for Microsoft. A bit of a dip around 2009, but an easy recovery. Nothing compared to the housing collapse or the financial crisis.


As is so often the case in economics (or for that matter in any intellectual endeavor), the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time.Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory.

It may be true that this can happen. The question is, WHY do they decide to increase their cash reserves? Very often, its because they don;t find what they want to buy. Businesses have been busy producing goods they don't want. Or they have lost trust in banks and investments, often for good reason.  Nothing here is incompatible with the Austrian theory.

For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money?
Because that was the cause of the original problem in the first place. 

You may tell me that it's not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?
 But that IS the Austrian economists' prescription. Liquidate the bad investments, and take all that productive capacity and put it to better use. The problem is that increasing the money supply makes those bad investments look like they can be saved, and they don't get liquidated, they continue to be used unproductively, and end up idle again since there is not enough consumer demand for them. And by consumer demand, I don't just mean money, but also the actual desire to consume them, relative to other things they want.

The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. 
 There is no need for such an explanation, because unemployment is not needed. What is needed is for the workers formerly employed by the bad investments to be sent to work for better, more productive and profitable investments. As i said, the mass unemployment is the result of trying to stop this process of recovery.

Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea.
 Very mature. Imagine a motive for people's belief, so you can attack that  instead of making a sound argument against the belief, which so far Krugman has failed to do.
Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism.
Another imagined motive.
 And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors.
 Not the intellectual pretensions of ALL economics professors. Just yours.  Remember, people who believe the Austrian theory hold Austrian economics professors in high regard.

But moderates and liberals are not immune to the theory's seductive charms—especially when it gives them a chance to lecture others on their failings.
 And Krugman doesn't like to lecture people on their failings? Almost every article of his I have ever read is a lecture demeaning people who disagree with him, accusing them of all sorts of moral and intellectual failings.

Few Western commentators have resisted the temptation to turn Asia's economic woes into an occasion for moralizing on the region's past sins. How many articles have you read blaming Japan's current malaise on the excesses of the "bubble economy" of the 1980s—even though that bubble burst almost a decade ago?
 Japan's current malaise is not blamed on the bubble. It is being blamed on the Keynesian stimulus that is being used to try to lift it out of the malaise. As per the Austrian theory, stimulus is actually keeping Japan's economy down. They keep stimulating, yet the economy doesn't seem to recover.
How many editorials have you seen warning that credit expansion in Korea or Malaysia is a terrible idea, because after all it was excessive credit expansion that created the problem in the first place?
Yup. And do you have any reason to believe that isn't true?
And the Asians—the Japanese in particular—take such strictures seriously. One often hears that Japan is adrift because its politicians refuse to make hard choices, to take on vested interests. The truth is that the Japanese have been remarkably willing to make hard choices, such as raising taxes sharply in 1997. Indeed, they are in trouble partly because they insist on making hard choices, when what the economy really needs is to take the easy way out.
And don't Austrians say you should cut taxes? That's not one of the hard choices Austrians recommend. Did they cut spending? Abolish their central bank? Eliminate monetary inflation? Stop printing money? Go back to a gold standard? Allow workers' wages to fall?

The Great Depression happened largely because policy-makers imagined that austerity was the way to fight a recession;
 I quote Herbert hoover, the guy Krugman seems to think imagined that Austerity was the solution, from his 1932 nomination acceptance speech:

Two courses were open to us. We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put that program in action.

And

Our measures have repelled these attacks of fear and panic. We have maintained the financial integrity of the Government. We have cooperated to restore and stabilize the situation abroad. As a nation we have paid every dollar demanded of us. We have used the credit of the Government to aid and protect our institutions, both public and private. We have provided methods and assurances that none suffer from hunger or cold amongst our people. We have instituted measures to assist our farmers and our homeowners. We have created vast agencies for employment. Above all, we have maintained the sanctity of the principles upon which this Republic has grown great.
 And

It is in accord with these principles and these purposes that we have made provision for $1,500 millions of loans to self-supporting works so that we may increase employment in productive labor.

And

It was in accordance with these principles that we have strengthened the capital of the Federal land banks--that, on the one hand, confidence in their securities should not be impaired, and that on the other, the farmers indebted to them should not be unduly deprived of their homes. It was in accordance with these purposes that the Farm Board by emergency loan to farmers' cooperatives served to stem panics in agricultural prices and saved hundreds of thousands of farmers and their creditors from bankruptcy. It was in accord with these ideas that we have created agencies to prevent bankruptcy and failure in their cooperative organizations; that we are erecting new instrumentalities to give credit facilities for their livestock growers and their orderly marketing of their farm products.

Notice how that last one especially violates the Austrian recommendations for overcoming a recession? As Ludwig von Mises said, in "The Austrian Theory of the Trade Cycle" (link above):

The sooner the depression-readjustment is gotten over with, the better. This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease.

Hoover increased government spending and deficits:


Hoover created the Reconstruction Finance Corporation, instituted public works projects, and pressured businesses to keep workers'wages high. From Lee Ohanian's What - or Who - Started the Great Depression?

The theory is based on President Hoover's industrial labor program, in conjunction with the growing power of unions. In November 1929, Hoover met with the leaders of the major  industrial rms and presented his plan to deal with a possible recession. He told them that at a minimum, they should not cut wages, and preferably would raise wages.

Remember Ludwig von Mises saying "The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries."? Hoover did exactly what the Austrians and their "Hangover Theory" say he shouldn't have.
 the not-so-great depression that has enveloped much of Asia has been worsened by the same instinct. Keynes had it right: Often, if not always, "it is ideas, not vested interests, that are dangerous for good or evil."
  Interesting that Krugman doesn't consider his own ideas, or those of Keynes himself, to be very dangerous, since the ones being implemented right now are closer to his own than to any "hangover theorist's".

Monday, April 9, 2012

The Real Causes of the Financial Crisis

Here is an excellent article for those who think that the 2008 financial crisis was caused by deregulation and free market capitalism:

The Real Causes of the Financial Crisis by John Allison.

Basically, he is blaming FDIC insurance and super low interest rates from the Fed.

Though that is not the entire story. For those who want to blame government meddling for the crisis, we have a target rich environment.

CRA, Fannie Mae and Freddie Mac, SEC creating ratings agency monopolies, HUD, local land use restrictions, a vast array of regulations on real estate, banking, and the rest of the economy.

There is a wealth of other links out there for more information on the subject:

Welcome to Moral Hazard by Daniel Henninger


The Housing Boom and Bust by Thomas Sowell

The Myth that Laissez Faire is Responsible for our Financial Crisis by George Reisman

The way I look at it, the government interventions that contributed to the crisis are so massive, they are the elephant in the room. They are obvious, on public record, undeniable, and clearly violate free markets, yet those who want to blame capitalism have no choice but pretend they don't exist.

And it is an elephant in another way. Like in the story of the elephant and the blind men, it is so massive that not everyone who defends free market ideas and blames government interference can see it all. Understanding the whole thing requires reading a vast number of different economists and economic journalists. Thomas Sowell lets us know about how land use restrictions drove up housing prices in a few locations like California, causing a problem that people like Bill Clinton saw as national, requiring government assistance so people can buy homes in a high priced market. Austrian economists like George Reisman inform us of the fed's role in lowering interest rates and supplying the liquidity to inflate the bubble. Others point to the SEC requiring investment banks to use ratings agencies to buy derivatives, but only certifying three, creating a monopoly.

Government intervention into the housing and finance industries was so pervasive, massive, multifaceted, and influential that there is plenty of room for debate about what were the most important causes of the crisis, how much each of these interventions contributed. But there is no rational way to blame the free market.

The free market, as usual, has an alibi. It wasn't there!

Sunday, April 8, 2012

A choice of two Mao's

China is said to be at a crossroads. If it is to continue to grow as a society, it needs to embrace freedom, and Mao can show them the way. Not Chairman Mao. Mao Yushi of the Unirule Institute of Economics in Beijing, a free market think tank in China!

Mao Yushi Wins the Cato Institute's 2012 Milton Friedman Prize for Advancing Liberty

Thursday, April 5, 2012

When Bush deregulated

A lot of the blame for the 2008 financial crisis is given to Bush, because he supposedly deregulated our economy. Very interesting theory, which would make sense if Bush actually did deregulate.

Bush's Regulatory Kiss-Off

Interesting factual tidbits in this article:

Overall, the final outcome of this Republican regulation has been a significant increase in regulatory activity and cost since 2001. The number of pages added to the Federal Register, which lists all new regulations, reached an all-time high of 78,090 in 2007, up from 64,438 in 2001.

The Bush team has spent more taxpayer money on issuing and enforcing regulations than any previous administration in U.S. history. Between fiscal year 2001 and fiscal year 2009, outlays on regulatory activities, adjusted for inflation, increased from $26.4 billion to an estimated $42.7 billion, or 62 percent. By contrast, President Clinton increased real spending on regulatory activities by 31 percent, from $20.1 billion in 1993 to $26.4 billion in 2001.

It takes a lot of bureaucrats to create and enforce all those regulations. In eight years, Bush increased the federal government's regulatory staff by 91,196 employees. Clinton cut it by 969. This is why Business Week recently designated Washington as one of the top places to ride out the recession: The government is hiring.



So of course, deregulation MUST be to blame. RIIIIIGHT!

Thursday, March 29, 2012

The Free Market's Alibi

There are a vast number of misconceptions and myths about capitalism and free markets. The most prevalent source of these myths is accusations by capitalism's enemies that the free market was the cause of some crisis, collapse, abuse, or corruption. A lot of, if not all, of their evidence is true. The problem is that they leave out some important facts. Businessmen, investors, speculators, bankers and consumers did behave the way capitalism's critics say they did. ENRON did generate and perpetrate a number of Star Wars named schemes to bilk consumers and the state of California of a lot of money. House flippers did buy homes, wait just a few months for the price to appreciate, and sold them at big profits. Bankers did lend money to people who could not pay it back. California did experience rolling blackouts. The great Depression did happen.

The problem is, the free market isn't guilty. It has an alibi. It was not there when the problems happened.

In every case, the government was doing exactly what basic economics would tell you will cause exactly such a problem. There were price controls on electricity in California. The state of California created an artificial market called the California Power Exchange with a complex set of rules which ENRON was able to use to game the system to its advantage. The Federal Reserve lowered interest rates in order to try to inflate the economy out of the Tech Bubble recession, and inflating a housing bubble instead. Hoover is accused of being a laissez-faire president, and that was supposed to have caused the Great Depression, but it turns out that he was the most interventionist President America had yet elected. He increased government spending, ran deficits, instituted public works projects, signed Smoot Hawley, increased taxes, created the Reconstruction Finance Corporation, and instituted so many new government interventions that taken together, some historians call it "Hoover's New Deal".

In every one of these cases, the free market gets the blame, but the purpose of this blog is to show that the free market has an alibi. It wasn't there. Like a murder suspect who was across town at a public event in front of dozens of TV cameras at the time of the victim's death, the free market is proven innocent, because it could not have committed the crime.