The Media Is Lying To You About Inflation

The Media Is Lying To You About Inflation

With the recent rise in inflation—with subsequent increases in both consumer and producer price levels—one suspects that sooner or later people on the left either would downplay it or find a way to spin the bad news into something positive like an alchemist would want to spin straw into gold. Both accounts have arrived, thanks to the New York Times and the hard-left publication, The Intercept.

The various accounts in the Times hardly are surprising, given the link the paper has to the nation’s political, economic, and academic elites, and given that these are the people that have created the inflation problem in the first place. Not surprisingly, the NYT “experts” (because progressives believe that the “experts” always have the right answers) are playing down the latest spikes as temporary and related to current issues of supply and demand, not any unprecedented increases in the nation’s money supply.

We should not be surprised that the NYT’s resident economic “expert,” Paul Krugman, has debunked any worries of inflation and especially inflation over the long term, instead likening the current price spikes to what happened after World War II ended and the economy moved from one dedicated to total war to one producing capital and consumption goods. Likewise, President Joe Biden is touting an endorsement of his “Build Back Better” initiatives by a number of Nobel economics winners who have claimed the proposed programs included in the legislation would reduce inflation. (One should not forget that while Krugman is a Nobel recipient, his NYT columns go well beyond any economic analysis, establishing him as little more than a partisan political shill.)

There is an important point to be made here: all of these “experts” are willing to say they believe inflation is a problem for most people and the disagreement isn’t so much about the real and potential harm inflation brings, but rather the duration of the current spikes. However, there also exists among radical progressives a belief that inflation actually is a good thing because, in their minds, it transfers wealth from the rich to the poor.

The first time I saw this theme was in an article by the Marxist journalist Alexander Cockburn, who at one time had a regular column in the Wall Street Journal. Writing about the alleged “Hitler Diaries” supposedly unearthed in the early 1980s (and later exposed as forgeries), Cockburn said if one actually could mine Hitler’s thoughts, they would find that he didn’t see the hyperinflation that ravaged Germany in the 1920s as any kind of a threat, and that it actually was good for the economy. (I’m writing from memories, as I have not been able find this column in the WSJ archives.)

Cockburn has been dead for nearly a decade, but the radical publication The Intercept is taking his place when it comes to inflation. In the article “Inflation is Good for You,” we find that inflation is not a nuisance, nor does it do real economic harm. Instead, according to the author, Jon Schwarz, inflation is a good thing because it transfers wealth from creditors to debtors, and debtors fall into the so-called 99 percent. He writes:

And what’s happening is this: The inflation freakout is all about class conflict. In fact, it may be the fundamental class conflict: that between creditors and debtors, a fight that’s been going on since the foundation of the United States.

That’s because inflation is often good for most of us, but it’s terrible for the kinds of people who own corporate news outlets—or, say, founded coal firms.

Schwarz continues:

First, inflation lessens the real value of debt. In 2020, American households had around $14.5 trillion in debt from their mortgages, credit cards, student loans, and other sources. Inflation of 6.2 percent means that the real value of that $14.5 trillion is now just $13.65 trillion in last year’s dollars.

In other words, the inflation over the past year has effectively transferred $850 billion in wealth from creditors to debtors. That’s a lot of money.

Most people are a mixture of creditors (e.g., you have a bank account) and debtors (you have a mortgage and student loans). But overall, this $850 billion has generated a big check written by the tippy-top of the income scale to everyone else. And as you’d expect, the people at the tippy-top don’t like this.

Second, inflation generally accompanies economic booms, when the unemployment rate is low and workers have the market power to demand higher pay. That’s what’s happening now: As prices increased 6.2 percent over the past year, wages for regular people went up 5.8 percent. In other words, inflation barely touched their purchasing power. And with almost 300 labor strikes in the U.S. so far this year, workers are leveraging their power to demand better compensation at historic rates. So while inflation can be a significant problem for workers if they don’t get it back in higher paychecks, that seems unlikely today.

Moreover, the median American recently had about $65,000 in debt. And while inflation has reduced the real value of each dollar of wages—in other words, its worth relative to tangible things—it’s done the same to the real value of each dollar of debt. Workers who get raises will have more dollars to pay off the same dollar amount of debt.

Put these two things together—lowered values for their assets and higher wages for workers—and you can understand why the rich people who run the U.S. absolutely detest inflation.

This is what one might call a “Yes, you really did mean that” moment much like readers experienced nearly forty years ago when Cockburn praised Germany’s hyperinflation. For that matter, we can point to the recent examples of hyperinflation in Venezuela and Zimbabwe, neither of which can be reinterpreted as having provided the lower-income masses with anything but lower real incomes. (Surprisingly—or perhaps not surprisingly—Schwarz does not mention either country.)

On the surface, one might think The Intercept has a valid point. After all, inflation really does deleverage debt that is based upon fixed interest rates, and during the Germany hyperinflation, many debtors were able to dump piles of worthless money upon creditors’ desks, paying off their loans. Furthermore, if the legitimate explanation for what happens with inflation were limited to the quantity theory of money, then inflation would be a good thing for anyone owing money, since under this theory, incomes rise immediately with prices, so at worst, most people are temporarily inconvenienced by rising prices.

Picture this theory as being based upon the imaginary event of someone throwing new money from a helicopter, with each person grabbing an amount of money that increases all incomes simultaneously by the same percent. Someone who earns $20,000 a year grabs $2,000 while someone earning $200,000 grabs $20,000. Such a scenario would result in growing absolute income inequality with each new round of inflation and immediately undermines the leftist claims that inflation “helps” lower-income people, not that leftists ever would admit it. The only other scenario is that everyone catches the same amount of money, so that while everyone sees an increase in their money income, low-income people see their incomes go up by a greater percentage—if that is how inflation really works.

But it is clear inflation does not work like that, but only the Austrians have presented an accurate picture of how incomes rise during bouts of inflation, and there is no helicopter in sight. In Man, Economy, and State Murray N. Rothbard points out that inflation begins with expansion of bank credit through the fractional reserve system and the transmission mechanism determines how incomes will be gained from there. He writes:

Credit expansion has, of course, the same effect as any sort of inflation: prices tend to rise as the money supply increases. Like any inflation, it is a process of redistribution, whereby the inflators, and the part of the economy selling to them, gain at the expense of those who come last in line in the spending process. This is the charm of inflation—for the beneficiaries—and the reason why it has been so popular, particularly since modern banking processes have camouflaged its significance for those losers who are far removed from banking operations. The gains to the inflators are visible and dramatic; the losses to others hidden and unseen, but just as effective for all that. Just as half the economy are taxpayers and half tax-consumers, so half the economy are inflation-payers and the rest inflation-consumers.

He continues:

For the new monetary equilibrium will not simply be the old one multiplied in all relations and quantities by the addition to the money supply. This was an assumption that the old “quantity theory” economists made. The valuations of the individuals making temporary gains and losses will differ. Therefore, each individual will react differently to his gains and losses and alter his relative spending patterns accordingly. Moreover, the new money will form a high ratio to the existing cash balance of some and a low ratio to that of others, and the result will be a variety of changes in spending patterns. Therefore, all prices will not have increased uniformly in the new equilibrium; the purchasing power of the monetary unit has fallen, but not equi-proportionally over the entire array of exchange-values. Since some prices have risen more than others, therefore, some people will be permanent gainers, and some permanent losers, from the inflation.

Particularly hard hit by an inflation, of course, are the relatively “fixed” income groups, who end their losses only after a long period or not at all. Pensioners and annuitants who have contracted for a fixed money income are examples of permanent as well as short-run losers. Life insurance benefits are permanently slashed. Conservative anti-inflationists’ complaints about “the widows and orphans” have often been ridiculed, but they are no laughing matter nevertheless. For it is precisely the widows and orphans who bear a main part of the brunt of inflation. Also suffering losses are creditors who have already extended their loans and find it too late to charge a purchasing-power premium on their interest rates.

As Rothbard notes, the wealth transfers occur when people first in line to receive the new injections of money are able to spend at the old prices, while those who are further back on the receiving chain will be the ones continually falling behind, as they purchase goods at their new prices. Contra Schwarz, one can be assured that lower-income people will be at the bottom of the inflation food chain.

Furthermore, as Henry Hazlitt writes in Economics in One Lesson, the wealthy-as-the-creditors-and-everyone-else-as-debtors story does not stand up to scrutiny. First, and most important, the incessant money pumping from the Federal Reserve System coupled with its suppression of interest rates has benefitted the wealthiest Americans at the expense of everyone else. Take billionaires like Jeff Bezos and Bill Gates, for example. The vast amount of the official wealth owned by these men is in Amazon and Microsoft stock, respectively, and we have seen a large increase in stock prices due to Fed policies.

Middle-class people, on the other hand, historically have increased their wealth through saving, whether it be done through bank time deposits, money market certificates, or corporate and municipal bonds, making them creditors. Fed policies have severely limited these options, driving investments into equities, and many middle-class people who are not sophisticated investors find it difficult to navigate the wild swings in stock prices that have come with inflation-driven asset bubbles. These bubbles have wildly inflated stock prices, enriching those whose income is driven by stock price increases and widening the wealth gaps in the economy.

Whatever temporary gains many workers are experiencing with higher wages, the euphoria is not likely to last long. Furthermore, one doubts that this current bout of inflation is as temporary as Paul Krugman recently claimed. The U.S. economy more and more seems to be running on empty and this means that monetary authorities are going to pump even more new money into the system. Don’t count on this being a windfall for anyone but the wealthiest among us.

This article was originally featured at the Ludwig von Mises Institute and is republished with permission.

Calling Out Paul Krugman’s Booms & Busts

Calling Out Paul Krugman’s Booms & Busts

That Austrians and Keynesians do not share many views on economics (or probably anything else) is obvious, so a difference of opinion between the two hardly should surprise anyone. However, it still is important to point out the differences between the two camps, especially at the current time when Keynesians are all the rage in Washington (When did they ever leave?) and especially in the Joe Biden administration and, of course, the editorial pages of the New York Times.

Perhaps there is no greater difference between Keynesians and Austrians than their beliefs on economic booms. In short, Keynesians believe that all policies should promote the booms and even when they crash, that government should employ all means to continue the boom. Austrians, on the other hand, see booms as times when massive malinvestments pile up until the whole unwieldy system no longer can stand, leading to the inevitable crashes. In short, Keynesians claim that booms should be the goal of economic policymakers while Austrians see them as wasteful, dangerous, and ultimately destructive.

As noted before, Keynesians definitely hold the official reins of governmental power and also are the darlings of the mainstream media. Janet Yellen, US secretary of the Treasury, is a Keynesian. Chairman of the Federal Reserve System, Jerome Powell, is not a Keynesian by formal academic training but certainly has operated his office in the spirit of Keynes. And the loudest Keynesian shill, Paul Krugman, wields much influence from his perch at the NYT. Austrians, on the other hand, are nowhere to be found in the reaches of government nor in the influential corporate office and certainly not on Wall Street.

If political and academic dominance were the arbiter of truth, then Keynesians are right, and Austrians are dangerously deluded. Keynesians have the raw numbers and the loudest and most powerful institutional voices. Austrians enjoy none of those perks.

A thousand Keynesians speaking with one voice, however, still are wrong about economic booms, and none is more mistaken than Krugman. In a recent column, “Who’s afraid of the big, bad boom,” Krugman presents the Keynesian view of economic booms and concludes that the end of all economic policies should be the initiation and sustaining of the boom. He writes:

There definitely is a boom underway, even if a vast majority of Republicans claim to believe that the economy is getting worse. All indications are that we’re headed for the fastest year of growth since the “Morning in America” boom of 1983–84. What’s not to like?

Krugman goes on to write that booms are not perfect and sometimes can lead to economic “bottlenecks” (such as the current spike in lumber prices), but such things are little more than temporary glitches to the happy world of prosperity for all, made possible by permanent spending sprees:

But do such bottlenecks pose a risk to overall recovery? Do they mean that policymakers need to pull back? No. The overwhelming lesson of the past 15 years or so is that short-term fluctuations in raw material prices tell you nothing about future inflation, and that policymakers that overreact to these fluctuations—like the European Central Bank, which raised interest rates in the midst of a debt crisis because it was spooked by commodity prices—are always sorry in retrospect.

So, pay no attention to the man behind the curtain. Commodity prices always fluctuate, boom or no boom, so if lumber prices go up and housing markets start to resemble to real estate bubble of the mid-2000s, that is the natural consequences of prosperity brought to you by loose monetary policies and increased government spending.

But what happens if the housing markets—and the stock markets—crash as they did in 2007 and 2008? In 2008, Krugman squarely laid the problem upon inadequate financial and economic regulation and claimed Ronald Reagan was responsible for the deregulation that created the mess. (Not surprisingly, Krugman also got it wrong on the history of deregulation, but like Bluto Blutarsky, who wrongly claimed that “the Germans bombed Pearl Harbor,” we can’t interrupt someone when he is on a roll.)

Since 2008 and the presidency of Barack Obama, things have changed drastically. This time there are no subprime mortgage securities cooked up by Wall Street geniuses and the federal government essentially nationalized the mortgage industry as a response to the meltdown, something that met Krugman’s approval. Furthermore, the government’s monetary policies of suppressing interest rates (ostensibly to fuel that Keynesian polestar, aggregate demand) have created the stock market bubble—that is the only thing we can call it—which has accelerated that “wealth gap” that Krugman claims is perhaps THE major economic problem this country faces.

(Krugman believes that we can both create stock bubbles and then alleviate the results through massive wealth and progressive income taxes, as both are forms of economic stimulation that encourage spending and discourage alleged “hoarding” by the rich. That is something for a future commentary.)

When this current boom crashes (as inevitably it will), one suspects that Krugman first will blame free market capitalism and claim that part of the problem is a lack of regulation, since everyone knows that since the advent of the Ronald Reagan presidency, there has been no government regulation of any markets. To Krugman and the Keynesians, it will be proof that markets cannot be trusted and further proof that market prices are little more than a right-wing plot by the intellectual descendants of Milton Friedman.

Once the blame game starts, then Krugman and other Keynesians will demand that government engage in various policies—and especially borrowing and spending—to bring back those lofty levels of so-called aggregate demand and the high prices that accompany such demand. This hardly is a new strategy. The original New Deal policies from Franklin D. Roosevelt (as opposed to the nearly identical New Deal policies from Herbert Hoover) were based upon the belief that falling prices were the main cause of the depression and that government needed to force up agricultural, commodity, and labor prices in order to right the economic ship. Thus, the government tried to cartelize the entire nonfarm economy through the National Industrial Recovery Act and prop up farm prices through the Agricultural Adjustment Act, both of 1933. In 2008, Martin Feldstein, President Reagan’s chief economic adviser, sounded the same horn on housing, declaring in The Wall Street Journal that the chief culprit of the 2008 meltdown was falling prices in housing:

A successful plan to stabilize the U.S. economy and prevent a deep global recession must do more than buy back impaired debt from financial institutions. It must address the fundamental cause of the crisis: the downward spiral of house prices that devastates household wealth and destroys the capital of financial institutions that hold mortgages and mortgage-backed securities.

One could write volumes about the economic fallacies contained in that paragraph, but readers get the point. In Keynesian land, there are no economic fundamentals, no relationships between factors of production, just spending. Spend enough money and policymakers can keep factors of production employed indefinitely; when the inevitable dislocations appear, paper them over with even more spending and let the good times roll and roll and roll.

Austrians, according to Krugman, are the authors of a very bad morality play when it comes to diagnosing and analyzing booms and busts:

The hangover theory (what Krugman calls the Austrian Business Cycle Theory) is perversely seductive—not because it offers an easy way out, but because it doesn’t. 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. 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.

Krugman wrote this more than twenty years ago but has not changed his views since then. Not surprisingly, he reduces accounts of malinvestment—in fact, he doesn’t even use that term, wrongly calling it “overinvestment” instead—to mere moral tut-tuts which actually are dangerous because Austrians, in Krugman’s view, malevolently urge people to stop spending at a time when increased spending is needed most. In short, booms are good, always good. Booms bring prosperity, and anything that discourages prosperity is bad, end of argument.

This analysis misjudges both booms and busts, which the current political and academic climate tends to reward rather than punish. (Robert Murphy goes into detail about Krugman’s errors in this article, one well worth reading.) If Krugman believes booms are good and should be maintained perpetually, then it is reasonable to believe that anything less that outright condemnation of a bust borders on being immoral. When that viewpoint is combined with Krugman’s increasing left-wing radicalism, it is not hard to understand his unrelenting hostility to Austrians and their viewpoints. When he first criticized the Austrian business cycle theory in 1998, his take was that Austrians were wrong, dismissively so, but he stopped there. Today, he wants readers to believe that Austrians are Evil People who want others to live in poverty and starve to death. We no longer are dealing with intellectual disagreements but rather a titanic battle between the Forces of Good and Evil and Krugman is on the side of Good. One cannot argue with anyone defending free markets and market prices because, in his words, “the mendacity is the message.”

Krugman’s radicalism notwithstanding, we still must deal with his argument that economic booms not only are desirable but that they can be sustained indefinitely with no resulting damage to the economy. This is not to say that a sustained boom contains no fluctuations; even Krugman admits that, but he also believes that government simply can make adjustments on the fly to even the rough places, something that requires the election of like-minded progressives that believe government can work near economic miracles.

Why, then, do Austrians hold that booms cannot be sustained? First, and most important, Austrians point out that the conditions that create the boom are not benign. Booms occur when monetary authorities (i.e., Federal Reserve System or some other national central bank) hold interest rates below market levels by expanding the supply of money for the purpose of expanding borrowing for business expansion. This increases the demand for capital goods (and factors of production associated with their creation) and puts new money into the hands of employees in those associated industries. The employees spend the money on consumer goods, creating new demand for those products.

(The best account of the Austrian theory is found in Murray N. Rothbard’s America’s Great Depression, whose first half Rothbard dedicates both to explaining the business cycle theory and also answering the Keynesian critics of the theory. One only wishes that Rothbard had lived long enough to respond to Krugman’s missives.)

With Keynesians such as Krugman, this process can go on indefinitely. True, some of the capital investments might not be sustainable, but that can be explained by the fact that there always are business fluctuations in the course of the economy. He writes:

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? 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 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.

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? And if so why should there be a rise in unemployment?

In other words, even if some capital investments go south, there is no reason for the economy to decline. After all, money has not disappeared, so if spending is halted on some unsuccessful capital investments, then consumers can just spend more money elsewhere. The Keynesian Cross “proves” that aggregate expenditures and GDP are identities, so it really doesn’t matter if money is spent on capital goods or consumer goods since the results are the same.

Then what causes the economic downturn? Krugman has an easy answer:

A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time.

In other words, large-scale malinvestments really don’t matter; instead, it is the panicked consumer that decides in the face of economic uncertainty that saving money might be a good thing. Indeed, as Robert Murphy notes, US savings rates quadrupled from late 2007 to mid-2009 (from about 2 percent to 8 percent) so that would seem to verify Krugman’s causality. But it doesn’t.

To counter Krugman’s thesis, I go back to the Austrians but not Rothbard. Instead, I turn to Carl Menger, the “founder” of the Austrian school who begins the opening chapter in his groundbreaking Principles of Economics with:

All things are subject to the law of cause and effect. This great principle knows no exception, and we would search in vain in the realm of experience for an example to the contrary.

While these words hardly seem to refute anything, let alone Krugman’s stated cause of economic downturns, look again. Austrian analysis is monocausal, that is, there is a cause and an effect. Krugman’s theory (I assume he believes his theory is “settled science”) brings up an interesting question: Why do consumers suddenly cut back on their spending begin saving? Krugman never says.

It seems that one obvious reason is that consumers are unnerved about the economic downturn, but if Krugman’s statements about the breakdown of the boom are correct, then consumers would have no logical reason to be nervous. Perhaps Krugman might claim that those dastardly Austrians have fooled everyone into thinking that credit-fueled booms are unsustainable, so when someone goes out of business or some other economic indicator points downward, people panic and the Austrians then goad them into saving more money.

But why don’t consumers start spending again as soon as someone in Washington gives the equivalent of the “all clear” signal? After all, the Keynesian paradigm dominates in politics, the media, and in higher education. The notion of Austrians playing the role of Emmanuel Goldstein is a bit far-fetched, given the Austrians don’t have much of a media or political platform. How Austrians can scare an entire population into sabotaging the economy by increasing their savings lacks the authenticity of Mengerian causality.

When they look at the increase in savings, Austrians ask the following: Why the sudden increase in savings? In fact, if we look at US personal savings rates for the past sixty years, we see that savings rates do increase at some point in most recessions, but they increase during the recoveries, too, so there is no way one can draw a clear causal inference that moves from the growth in personal savings to a recession.

savings

The monocausal view would lead us elsewhere. In Krugman’s world, people irrationally start saving, send the economy spiraling downward, and then it takes government—led by brilliant technocrats like Krugman—to spend and inflate the economy back into prosperity. To the Austrians, the notion of people suddenly stampeding to save their money for no visible reason in nonsensical. Furthermore, contra Krugman, saving money is not an irrational response to a perceived change in the economy. People don’t save in a vacuum; they save in order to be able to spend in the future, either for a major purchase or for times when their incomes are less than they are at present. In short, the evidence shows that people quickly change their saving habits in response to a crisis, as opposed to an increase in savings creating the crisis.

Krugman claims that even large-scale malinvestments really should have no overall effect, writing:

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? 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?

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. 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.

Elsewhere, he states of the Austrian theory:

[T]his story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts.

His statements show ignorance in two areas: capital theory and the actual events of the business cycle. Rothbard corrects Krugman’s errors, first by pointing out that the crisis is characterized by what Rothbard calls a “cluster of (entrepreneurial) errors,” and then by noting that the downturns do not hit all sectors equally:

It is the well-known fact that capital-goods industries fluctuate more widely than do the consumer-goods industries. The capital-goods industries—especially the industries supplying raw materials, construction, and equipment to other industries—expand much further in the boom, and are hit far more severely in the depression.

This is important, as the crisis does not occur because people stop spending and then all business sectors shrink accordingly. The capital goods and related industries are likely to have the greatest number of malinvestments, so it stands to reason that they would be hit hardest in the crisis.

Krugman does make an interesting point: If the problem is just malinvested capital, why can’t workers make the quick transition back to employment in sectors not hit as hard? In fact, that often was what happened in previous business cycles. Thomas Woods writes of the 1920–21 recession that it was severe—and short. Writes Woods:

The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover—falsely characterized as a supporter of laissez-faire economics—urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.

The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.”2 By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.

In other words—contra Krugman—there was no intervention, no money printing, no jobs programs, nothing that Krugman claims are vital to bring economic recovery. If one realizes that this downturn came in the aftermath of World War I when the war-spending boom quickly contracted and accompanying the return of millions of soldiers was the Spanish Flu pandemic which killed 500,000 Americans (when the US population was 104 million, less than a third of the population today). Yet, the economy quickly recovered when the economy moved out of inflation-driven war goods production back into production commensurate with postwar needs.

Austrians do not question booms because they don’t like prosperity or because they have character defects. Rather, Austrians understand that booms involve lines of investment into areas of production that cannot be sustained, even when government throws even more money at them. What Krugman calls “perfectly good productive capacity” actually is malinvested capital that is idle for a reason.

This article was originally featured at the Ludwig von Mises Institute and is republished with permission.

Our Tower of Economic Lies

Our Tower of Economic Lies

In a recent issue, Time Magazine boldly declared, “The Free Market Is Dead,” and then added: “What Will Replace It?” Of course, one always can expect Time to be disingenuous at best and dishonest at worst, and as an academic economist, I have come to realize that after reading Time off and on for more than five decades, this is a publication that rarely gets it right when it comes to economic analysis.

Yet, we also are dealing with a publication that effectively reflects whatever the current spirit might be. In the mid-1980s, Time gave its readers the infamous cover condemning the bacon-and-eggs breakfast and gave massive publicity to the eat-more-carbs “experts.” America’s climb into obesity followed shortly afterward, and even Time had to backtrack on its original claims in 2014, admitting that the so-called food science truths it promoted turned out to be falsehoods.

One doubts, however, that Time ever will admit in any future edition that it has promoted outright economic lies while it promotes the policies of the Joe Biden administration. Instead, one figures that the publication will do what it always does when the government interventions it champions blow up: blame free market capitalism. For example, even more than a decade after the 2008 meltdown occurred, Time still claims that the free market did it:

We are witnessing the most profound realignment in American political economy in nearly forty years. President Ronald Reagan summed up the conventional wisdom that reigned from the mid-1970s onward in the United States: “Government is not the solution to our problem, government is the problem.” Economists, policymakers, and everyday Americans alike generally accepted that markets, unfettered and free, are the best way to create economic growth. (Emphasis mine)

That ideology began to crack after the Great Recession, and in the wake of the coronavirus pandemic, it has collapsed. The rise of ethno-nationalism on the right and democratic socialism on the left testify to the growing disillusionment with the conventional wisdom of how government and economics are supposed to work.

There is plenty of evidence to demonstrate that government housing policies, combined with the policies of the Federal Reserve System, helped drive the infamous housing and stock booms even if the editors of Time refuse to acknowledge its existence. No free market in real estate and banking would have created the utter recklessness that characterized the booms of the early 2000s, even as we see a current repeat of the housing and stock bubbles, houses of cards that have arisen in the aftermath of government’s near nationalization of the mortgage industry. The reckless behavior we observed happened because the Federal Reserve under Alan Greenspan and Ben Bernanke made public their infamous “put,” a promise to “provide liquidity” to the markets in case of losses.  With the Fed providing the financial backstop, investors were greatly incentivized (to put it mildly) to pyramid questionable securities atop each other until the whole unstable mass collapsed. Not surprisingly, the Krugmans of the economic and political world claimed the entire matter was due to rampant free enterprise.

Progressives, including journalists, politicians, academics, and corporate interests, for the past four decades have claimed that markets have caused a particular problem—a problem that usually is related to a past government market intervention—and demand governmental action to fix that same problem. The proposed intervention, after being implemented, then causes another set of issues (and it also fails to “fix” the original difficulty) that now requires even more governmental action. All the time, the media assures us, the economy has operated under total laissez-faire.

One is hard-pressed to understand how the onset of COVID-19 discredited free markets, given that private enterprise was the entity that kept necessities delivered to American homes even while governments at all levels did everything they could to shut down the economy. It wasn’t the government that made massive adjustments on the fly to keep Americans fed, clothed, and relatively healthy. Instead, governments engineered the mass deaths in nursing homes (by ordering patients infected with covid to be put into the nursing home populations) and thoroughly botched the distribution of vaccines. But Time has spoken; the free market caused covid.

The magazine is not satisfied with false claims about what happens with free markets, electing to shill for the economic plans of the Biden administration, which make the irresponsible economic policies of Donald Trump look almost Misesian in comparison. Not surprisingly, Time gives its readers a rather crabbed (and false) history of what has happened in the last forty years regarding government and the economy. While I cannot repeat everything Chris Hughes has written on the recent history of “free market” economics, what I can say is that his account makes even Paul Krugman look honest. Here are a few vignettes:

A crisis in confidence in government triggered the last paradigm shift, making way for the rise of free market thinking. In the 1970s, the Vietnam War and Watergate challenged America’s faith in their leaders at the start of the decade. Meanwhile, the gains of the Civil Rights Movement and the introduction of affirmative action profoundly threatened the American racial order of the time, facilitating a narrative that government was putting its thumb on the scale for “undeserving” Black and poor folks.

Geopolitical tensions in the Middle East flared, causing oil prices to spike and creating long gas lines. Inflation was out of control, reaching as high as 20% on an annualized basis in 1978. Americans stopped spending, and inflation and unemployment kept rising. Presidents Gerald Ford and Jimmy Carter, Congress, the Federal Reserve all failed to develop any coherent program to help.

Far-right economists and policymakers were waiting in the wings with an explanation for the social and economic instability and a way out: government created our problems, and markets will solve them.

It gets even better:

Inside the academy, they aimed to demolish the intellectual paradigm that predated free market orthodoxy, the Keynesian consensus. Before the 1970s, most economists and lawyers believed that we needed robust government action—countercyclical fiscal spending, management of the currency, tactical protectionism—to create long-term prosperity. The free market apostles wanted to erase the role of the state.

Their ideas rapidly caught on more broadly, in large part because of a shift in the country’s racial politics. Their supposedly “values neutral” economic framework justified an end to race conscious policymaking.

Until the 1960s, numerous government policies were explicitly racist. Black Americans were unable to take advantage of the Homestead Act or the GI Bill, and they were effectively barred from purchasing homes, limiting their ability to build household wealth. But the 1960s saw a historic shift with government moving to support racial equality, through the Civil Rights Acts, Voting Rights Act, and integrated schools.

Free market orthodoxy made an intellectual case that government should stop pursuing policies that might disproportionately help Black Americans, like investments in public housing or affordable health care. Any state program—even those focused on reducing poverty, providing healthcare access, or banning discrimination in the workplace—was an “intervention” in the natural economy, no matter how virtuous the intent. Political leaders cast the logic in unthreatening language, arguing that hard working Americans, whatever their race, should simply work their way to the top. But limiting government’s role in public investment and regulation only entrenched and deepened the racial inequities in the American economy.

Reagan and George H.W. Bush used the same rhetoric of the free market to demolish programs that reined in private corporations and supported the middle class and poor. Their successors, Democrats and Republicans alike, continued to cut spending, pursue deregulation, and privatize swaths of the government.

The scenario Hughes has presented does not exactly square with what happened since the 1970s. First, and perhaps most important, the first meaningful steps toward reversing the inflation and economic instability of that time did not come from Milton Friedman, James Buchanan, or others who might fall into the “free market” category. Instead, they came from President Jimmy Carter, Cornell University economist Alfred Kahn, and Senator Edward Kennedy, names that are not exactly synonymous with free market economics. These men were the architects of massive deregulation that effectively repealed many New Deal–era regulatory measures of railroads, trucking, passenger airlines, and finance, and they also began steps to undo the regulatory measures shackling telecommunications. Furthermore, it was Jimmy Carter who appointed Paul Volcker, who at least brought some discipline to the Federal Reserve, certainly more discipline than what we saw from Republican appointments. (Yes, these facts do disturb the modern progressive narratives that Hughes presents, which is why they didn’t make it into the Time article.)

Second, the notion that governments cut spending is simply a progressive fantasy. The graph below shows that contrary to what Hughes claims, federal spending per capita has risen sharply, especially with Republican presidents.

spend

However, in 2008 all those so-called free market reforms fell apart and it was Government to the Rescue. That the current real estate and stock market bubbles are the direct creation of a nationalized mortgage system and aggressive Federal Reserve System efforts to suppress interest rates does not even begin to resonate with people like Hughes. They simply stick to the narratives spelled out twice weekly by Paul Krugman—government spending is good, private saving and investment are bad—and repeat them enough that they supposedly become established facts.

So, what kind of economic future do Hughes and Time envision for the rest of us? Hughes presents a scenario:

[A] managed economy on a national scale needs public investment to flourish. When government invests in public goods like roads, airports, public transit, schools, solar panels, economic growth soars—just like when you put a roof over a farmer’s market. President Biden has begun his term as President by proposing a $2 trillion infrastructure investment and calling it a prerequisite for creating growth in the future. Finally, the new managed market recognizes the need for the state to buffer shocks and surprises.

The fantasy continues:

At a national level, monetary and fiscal authorities employ macroeconomic policy to mitigate the blows of unexpected crises. Just last year in response to the pandemic, the Federal Reserve took rates to zero, restarted its bond buying program, and broke new ground by moving into corporate and municipal debt markets. Meanwhile, political leaders of both parties passed three emergency aid bills to keep tens of millions of Americans out of poverty and thousands of businesses above water.

Without this support, economists believe we would be living through the darkest time in modern economics. “Without them, without those fiscal and monetary measures, the global contraction last year would have been three times worse,” said the managing director of the IMF. “This could have been another Great Depression.”

We have always used regulation, public investment, and macroeconomic management to make our economy work, but we’ve done so sporadically and often weakly because we’ve told ourselves a different story about how the economy works. It’s time for the story we tell to match the reality of economic growth—and to fully embrace the opportunity that creates.

As I read this sort of economic revisionism, I am reminded of Rod Dreher’s book, Live Not by Lies, which is based on a text written by Aleksandr Solzhenitsyn. Dreher is writing specifically to American Christians who are facing increasing hostility from progressives and the institutions that they control. His point is that much of what our political, economic, media, and educational elites are telling us are outright lies and that elites are demanding that everyone conform to them. Those that don’t are mobbed, fired from their jobs, and publicly humiliated.

Likewise, we see elite academic economists and elite journalists telling outright falsehoods about our own economic history, making false claims and even trying to portray the Great Depression itself as something that was caused by failing markets and was mitigated and ultimately ended by FDR’s New Deal policies. (Krugman and other economists make the false claim that the New Deal actually created the American middle class.)

The current set of lies tell us that the way to “grow” the economy over the long term is for government to borrow trillions of dollars, spend it on programs (such as paying people not to work at a time when jobs are begging) while simultaneously blocking capital development in areas that are profitable, especially in the energy industries in which the Biden administration plans to seek capital “divestment” from profitable oil and gas ventures and divert capital into the inefficient and costly “alternative energy” sectors.

The Biden administration justifies such plans by claiming that “thousands of new jobs” will be created in the solar and windmill industries to replace those lost elsewhere, something that is economically impossible if the “new” technologies are more costly and less productive than what currently exists. (The bigger lie is that such destruction of the economy will reverse the dreaded “climate change,” making everything worth it.)

So, the lies continue to pile up. Massive borrowing and spending by the federal government will create all sorts of economic miracles such as ending poverty, pumping vast amounts of new money will neither increase inflation nor force up interest rates (from Janet Yellen), and the government can administratively replace prices and profits when it comes to capital development and there be no negative consequences or even the dreaded opportunity cost. All it takes is vision and political will, both of which Biden and his government own in spades.

We don’t need for the “build back better” economy to play out in order to know how this latest iteration of democratic socialism (or whatever one calls it) will end. Inflation already is here, even in the early stages of the so-called Biden boom. While Yellen, Biden, Krugman, and media acolytes such as Hughes are claiming that all that is needed to bring back prosperity is for government to borrow and print money, which will pay for all of the new “investments” to save us from climate change and in the process give everyone high-paying jobs, the economic adults in the room know better.

Economists Ludwig von Mises and Murray Rothbard didn’t live by lies, nor did they advocate replacing the truth with lies when presenting economic analysis. Mises a century ago proved that one cannot build an economy on socialist lies, and nothing since has proved him wrong.

This article was originally featured at the Ludwig von Mises Institute and is republished with permission.

The Prosecutors Are Coming

The Prosecutors Are Coming

The violent protest at the U.S. Capitol on January 6 has long been over, but the upcoming Biden administration’s response to it is likely to do greater violence to the U.S. Constitution and the rule of law than anything the worst of the protesters could have accomplished. Thanks to the response of the George W. Bush administration and Congress to the 9/11 attacks almost two decades ago, Joe Biden’s prosecutors will have plenty of legal ammunition to go after their political enemies. It won’t stop with prosecuting people who broke into the Capitol.

J.D. Tuccille writes:

After the 9/11 terrorist attacks, horrified Americans were ready to embrace virtually any proposal that promised to keep them safe. Government officials, for their part, were eager to curry favor with the fearful public and saw an opportunity to promote legislation and policies that had failed to win support in the past. The result was a surge of authoritarianism from which the U.S. has yet to recover. Now—with the public understandably concerned after the January 6 storming of the Capitol—we should brace ourselves for another wave of political responses that would, again, erode our liberty.

We are in very uncertain and certainly perilous waters. In the post-Trump era, Democrats want revenge and they want it now. I fear for my friends that worked in the Trump government, with Democrats calling for them to be blacklisted, harassed, and ultimately “canceled.” Representative Alexandria Ocasio-Cortez, who continues to shed any perception that she wants anything less than a soft totalitarian country, has publicly called for a “media literacy” initiative that reminds one of Orwell’s Ministry of Truth.

In an interview with MSNBC (surprised?), former CIA head John Brennan declared that the Biden administration agencies

“are moving in laser-like fashion to try to uncover as much as they can about” the pro-Trump “insurgency” that harbors “religious extremists, authoritarians, fascists, bigots, racists, nativists, even libertarians.”

Not surprisingly, there was zero pushback on his statement from the mainstream media, and one suspects that probably most mainstream journalists today would not mind seeing large numbers of people they dislike being hauled off to prison or just plain disappearing at the hands of the authorities.

For that matter, the Trump presidency was hardly the Libertarian Moment, and Trump gave one the sense that if he could control the flow of news, he would gladly do so. Whether or not one believes he was cheated out of office in the last election, for him to claim he “won in a landslide” and to call for official election results to be overturned can hardly leave one surprised that the DC “rally” turned into an out-and-out donnybrook.

Unfortunately, the violence that followed has given the Biden people the fig leaf they need to move against the Constitution and rule of law on many fronts—all the while claiming they are “restoring democracy.” The United States could well be at a tipping point at which whatever pretenses we had toward constitutional government are cast aside for a “pragmatic” state that addresses the so-called needs at hand and is not bound by legal niceties. For now, my guess is that Biden will unleash federal prosecutors who will face no constraints whatsoever, and that means a lot of innocent people are going to have their lives ruined.

Before going into more detail, I explain why the Bush administration nearly twenty years ago made Biden’s job much easier for him than it ever should be under the rule of law. In the early 2000s, I began to write about the abuses that accompanied the expansion of federal criminal law and published (often with Candice E. Jackson) in a number of outlets including Regulation, Reason, the Independent Review, and the Mises page. Because of what Jackson and I called the “highly derivative” nature of federal criminal law (the actual charges are compiled from actions that usually are only prosecuted under state law), it is easy for federal prosecutors to draw up a list of charges that are hard to fight, have draconian penalties, but often involve criminalizing actions that harmed no one, and certainly did not do harm that is up to standards of criminal conduct.

In the hysterical aftermath of the 9/11 attacks, Congress rushed through the PATRIOT Act (which Joe Biden claimed to have written almost single-handedly—probably an exaggeration), a law that even at the time legal experts doubted would be effective in preventing acts of political terrorism but that allowed federal prosecutors to throw other “crimes” under the umbrella of “terrorism,” thus permitting them to box in defendants and force them to plead out to lesser charges and receive substantial prison time.

At the time, civil liberties groups like the American Civil Liberties Union along with media entities such as the New York Times served at least a semieffective role in blunting the more outrageous attempts by prosecutors to expand their powers. (The NYT had not shown the same restraint during the 1980s when Rudy Giuliani abused his powers in the infamous Wall Street prosecutions, instead allowing Giuliani to break numerous federal statutes in the paper’s crusade to “fight capitalism.”)

This time, however, it is highly doubtful that either the ACLU or the media will do anything but be cheerleaders for the Biden DOJ, given that the government says it will specifically target what it sees as threats from the right, something the NYT recently praised. A couple of recent incidents regarding the media and the so-called conservative threat are instructive.

Shortly after the January 6 Capitol riots, a number of mainstream news outlets breathlessly reported that the leaders of the protests actually were planning on kidnapping and assassinating a number of political figures. Not one mainstream news outlet questioned the feds’ claims. Shortly thereafter, however, CNN (which gave the original charges massive coverage) reported that the Department of Justice was walking back its original statements.

Not to be outdone, the Associated Press on January 11 presented the specter of armed uprisings all over the country:

The FBI is warning of plans for armed protests at all 50 state capitals and in Washington, D.C., in the days leading up to President-elect Joe Biden’s inauguration, stoking fears of more bloodshed after last week’s deadly siege at the U.S. Capitol.

The dispatch continues:

An internal FBI bulletin warned, as of Sunday, that the nationwide protests may start later this week and extend through Biden’s Jan. 20 inauguration, according to two law enforcement officials who read details of the memo to The Associated Press. Investigators believe some of the people are members of extremist groups, the officials said.

As we know, there were no armed uprisings, no right-wing armed mobs storming capitols and no massive protests. Now, on Inauguration Day, there was mob political violence and lots of it, but the mobs were leftist and the cities were Portland and Seattle and the national media saw little reason to publicize the protests, as they did not fit The Narrative.

Even the January 6 riots, as bad as they were, did not fall into the category of a coup, no matter what journalists and other political pundits were claiming. David French went even so far as to claim it was a “Christian insurrection” because some of the protesters said they were Christians and someone played Christian music on a loudspeaker. While it was an ugly scene nonetheless, does anyone (at least besides David French) really believe that the vast government regime known as The United States of America was in danger of being overthrown by a mob led by someone in a buffalo costume?

Yet, the same journalistic and political elites who excoriated Donald Trump for sending some agents to protect the federal courthouses in Seattle and Portland from Antifa mobs apparently had no problem with Biden dispatching thousands of federal troops to turn Washington, DC, into an armed camp. It is the same kind of overreaction that leads the media and political elites to demand that the government engage in massive surveillance of half the country.

Not all who are considered to be on the left are good with Biden’s internal spying plan, including Tulsi Gabbard, the former member of Congress who angered fellow Democrats with her appeals to civil liberties during her appearance in the presidential primary last year. National Review reports:

“What characteristics are we looking for as we are building this profile of a potential extremist, what are we talking about? Religious extremists, are we talking about Christians, evangelical Christians, what is a religious extremist? Is it somebody who is pro-life? Where do you take this?” Gabbard said.

She said the proposed legislation could create “a very dangerous undermining of our civil liberties, our freedoms in our Constitution, and a targeting of almost half of the country.”

“You start looking at obviously, have to be a white person, obviously likely male, libertarians, anyone who loves freedom, liberty, maybe has an American flag outside their house, or people who, you know, attended a Trump rally,” Gabbard said.

Even more eye-opening is the missive that the hard-left publication Jacobin has launched against this round of surveillance. Now, the publication that is openly nostalgic about the former East Germany hardly is going to champion civil liberties or even basic freedoms, but the people there are politically astute enough to know that a government with vast surveillance powers isn’t going to stop at going after political conservatives:

However such legislation may be justified with liberal-sounding language, there’s absolutely no reason to believe authorities wouldn’t use new powers to target groups that have nothing to do with Donald Trump or Trumpism. Police almost certainly infiltrated Black Lives Matter protests last summer, and American law enforcement has a long and ignominious history of targeting progressive groups—not to mention socialists, trade unions, and civil rights activists. As this history suggests, the premise behind any new anti-terrorism law will also be wrong on its face: the American state hardly faces excessive restrictions on its capacity to surveil, discipline, and punish. (The FBI, to take an obvious example, already possesses considerable power to investigate groups suspected of extremist activity.)

The problem is that the traditional gatekeepers of civil liberties that we once had in the media and in political and academic circles has disappeared into the maw of political tribalism. Matt Taibbi, a former writer for Rolling Stone and now an independent journalist, sees mainstream journalism as little more than an echo chamber for progressive politicians in which journalists seem to pretend they are players in a version of The West Wing:

West Wing was General Hospital for rich white liberals, a seven-season love letter to the enlightened attitudes of the Bobo-in-Paradise demographic. If that’s the self-image of the national press, it’s no wonder they make people want to vomit. The coverage of Biden’s inauguration, another celebration of those attitudes, was an almost perfect mathematical inverse of late-stage Trump reporting, a monument to groveling sycophancy.

John Heileman at MSNBC compared Biden’s speech to Abe Lincoln’s second inaugural, and suggested that the sight of “the Clintons, the Bushes, and the Obamas” gathered for the event was like “the Marvel superheroes all back in one place” (this was not the first post-election Avengers comparison to be heard on cable). Rachel Maddow talked about going through “half a box of Kleenex” as she watched the proceedings. Chris Wallace on Fox said Biden’s lumbering speech was “the best inaugural address I ever heard,” John Kennedy’s “Ask Not” speech included. The joyful tone was set the night before by CNN’s David Challen, who said lights along the Washington Mall were like “extensions of Joe Biden’s arms embracing America.”

Journalists who are going to claim that a bunch of lights in paper bags symbolize a Joe Biden group hug are not going to be intellectually or professionally capable of taking a hard look at the government’s attempt to arrest and imprison political and religious conservatives and libertarians, since they already have convinced themselves that these people constitute a dire threat to what is left of the republic. They more likely will serve as the publicity arm for the DOJ—as long as prosecutors stick to going after men in buffalo suits waving Trump flags.

To be depressingly honest, the only barrier to the Biden administration’s launching of an American version of the Stasi against dissenters on the right would be the individual consciences of those in charge of the spying and making arrests. Much of the Democratic Party and most of mainstream journalists seem to have no problem with criminalizing speech and launching a regime of mass arrest and imprisonment.

As I see it, we no longer are looking at threats to our liberty in the abstract. For years, I have launched missive after missive at federal (and sometimes state) prosecutors and not feared for my own safety and liberty, save a few death threats I received when I aggressively wrote against Michael Nifong, the dishonest prosecutor in the infamous Duke Lacrosse Case, and I didn’t take those seriously.

This situation is different because those who were the gatekeepers of liberty now have decided that liberty itself is a threat to our well-being. When the New York Times comes out against free speech and when journalists call for the power of the state to be used against other journalists they don’t like, we have turned the corner and are headed for the abyss.

No, I don’t expect to be hauled off to a concentration camp because I have written articles critical of federal prosecutors, but this country now is building a critical mass of journalists, college professors and administrators, and political figures that well might see concentration camps and other “reeducation” devices as being legitimate political tools. We are not as far away from such a dystopian future as one might think.

Federal criminal law provides these antiliberty groups the kinds of devices that can be used to criminalize speech and turn garden-variety dissenters into criminals. We should not be surprised if ambitious US attorneys in the Biden administration, cheered on by the likes of the New York Times and MSNBC, decide it is time to do just that.

This article was originally featured at the Ludwig von Mises Institute and is republished with permission.

Woodrow Wilson: A President Worth ‘Canceling’

Woodrow Wilson: A President Worth ‘Canceling’

Princeton University has made it official: Woodrow Wilson’s name no longer will have any place on campus. The former president, or at least his memory, now is part of cancel culture, which is sweeping the nation. The Woodrow Wilson School of Public and International Affairs will replace the former president’s name with “Princeton,” and Wilson College now will be called First College.

This hardly is surprising but in many ways discouraging, but not for reasons that many people might assume. Wilson did, after all, leave a sorry legacy of Jim Crow racial segregation and actively sought to damage if not destroy race relations in the United States, so the drive to remove his name is not a surprise given the wave of renaming and destruction of statues and monuments that has dominated the headlines ever since Minneapolis police killed George Floyd.

The reason for discouragement is not that the university where Wilson served as president before becoming president of the United States has “canceled” him for his racism—something that no one ever sought to hide when discussing Wilson’s legacy—but rather the stubborn insistence that despite his racial policies Wilson’s record of pushing progressive legislation as well as his role in bringing the United States into World War I should be considered as pluses for his presidency. Declares Princeton president Christopher L. Eisgruber:

Wilson remade Princeton, converting it from a sleepy college into a great research university. Many of the virtues that distinguish Princeton today—including its research excellence and its preceptorial system—were in significant part the result of Wilson’s leadership. He went on to the American presidency and received a Nobel Prize. People will differ about how to weigh Wilson’s achievements and failures. Part of our responsibility as a University is to preserve Wilson’s record in all of its considerable complexity.

Translation: Wilson’s record is complex, as he did many positive things both for Princeton and for the USA when he was in the White House. In fact, the “complex” review of Wilson is quite common with historians and journalists, many of whom seem to believe that if it were not for his fealty to Jim Crow and institutionalized racism Woodrow Wilson would have been a great president. That is the legacy that we need to reexamine, and as we do, we find that Wilson’s presidency was a complete disaster, one that reverberates to the present time and still inflicts great harm to our body politic. There is nothing complex at all when examining the cataclysmic aftermath of those eight years Wilson spent in office.

Dick Lehr of The Atlantic seems to be typical of journalists, as he condemns Wilson’s racism but portrays him positively when it comes to his imposition of a progressive legislative and social agenda:

Wilson might have bumbled, and worse, on civil rights, but he was overseeing implementation of a “New Freedom” in the nation’s economy—his campaign promise to restore competition and fair labor practices, and to enable small businesses crushed by industrial titans to thrive once again. In September 1914, for example, he had created the Federal Trade Commission to protect consumers against price-fixing and other anticompetitive business practices, and shortly after signed into law the Clayton Antitrust Act. He continued monitoring the so-called European War, resisting pressure to enter but moving to strengthen the nation’s armed forces.

It is hard to know where to begin here. First, and most important, “industrial titans” were not “crushing” small businesses. They made their fortunes through mass production of iron, steel, petroleum, railroad locomotives, and farm implements, along with making automobiles affordable for those people they allegedly were “crushing.” These industries required large-scale capital, not backyard furnaces, and this was a time when the American standard of living was rising rapidly. It is one thing to write about how “price fixing” allegedly was cheating American consumers but quite another to provide credible examples.

Most historians and journalists writing about this period take it on faith that antitrust laws and other so-called reforms brought on by progressives actually improved the lot of most people in this country. Finding proof that these “reforms” did what supporters claim can be a bit more quixotic.

Let us look at some of the actions that Wilson and his progressive Democratic Congress accomplished during his presidency. For example, most historians and journalists see the Sixteenth Amendment, which provided the legal base for a national income tax, as a “reform” that made the lives of most Americans better. How a tax that takes a significant share of individuals’ earnings has been spent such that those paying are better off having the government spend those monies than they would be by directing their own resources requires creative thinking. Given that most federal employees receive better pay and benefits than the people who work to create the wealth those federal workers consume, one is hard-pressed to explain why the taxpayers are getting a better deal than if they hadn’t paid those taxes at all.

Then there was the creation of the Federal Reserve System in 1914. It is the rare journalist, historian, and even economist who does not lavish praise upon the Fed even though one can effectively argue that it is often responsible for the very conditions that breed financial crises in the first place. Most people would not praise an arsonist who throws fuel on a fire he started, but somehow Federal Reserve governors who provide “liquidity” for financial institutions that acted irresponsibly—often with government and Fed encouragement—are seen as economic saviors.

There is much more. During Wilson’s first term, Democrats pushed through law after law that bolstered the Jim Crow system of racial segregation in the federal government system, which up until then had not followed the lead of many states that were instituting an apartheid system for whites and African Americans. While the federal government was not directly involved in medical care, nonetheless progressives such as Wilson were also firmly behind the guiding principles of the Flexner Report of 1910, which according to Murray N. Rothbard created and maintained the medical cartel that even now deprives Americans of many healthcare options. (Note that very few, if any, journalists and historians have any problem with the cartelization of medical care despite their supposed love affair with competition and their uncritical endorsement of antitrust laws.) Furthermore, the Flexner Report and its aftermath doomed medical education for black Americans and women and left the country woefully short of physicians.

Yet the “crowning achievement” of Wilson’s presidency is American involvement in World War I and its role in the disastrous “peace process” that followed Germany’s surrender. Not surprisingly, journalists and historians see Wilson’s manipulation of this country into the war as being something both inevitable and necessary, a move that launched the USA as a “great power” in world affairs.

Germany posed no danger to the United States, the infamous Zimmerman Telegram notwithstanding. Its armies could not have invaded our shores, and had the Americans not turned the tide in favor of Great Britain and France, almost certainly the belligerents would have entered into a negotiated settlement that would not have laid the conditions for the rise of Adolph Hitler and what turned out to be an even more cataclysmic World War II and its warring aftermath.

Wilson’s contempt for black Americans extended into military service. Like other Americans, they were conscripted into the armed forces and forced into subservient roles, as the prejudices of the day held that blacks were cowards in battle despite their fighting records in previous American wars. Those who did carry a rifle mostly did so under French leadership, where they excelled on the battlefield but also were slaughtered like so many others in the hellish trenches that came to define that war.

On the home front, Wilson’s Congress pushed through laws that turned the USA into a virtual police state, such as the Espionage Act of 1917 (used to prosecute people who dissented against US involvement in the war) and the Trading with the Enemy Act of 1917 (which Franklin Roosevelt used as the “basis of authority” for his executive order to seize gold from Americans). The legacy of both laws continues to this day, as the Obama administration used the Espionage Act to prosecute Julian Assange and Edward Snowden.

If one defines “greatness” as dragging a country into a disastrous war, promoting legislation that hamstrung the economy, vastly increasing taxation, and leaving a racial legacy that wreaks havoc to this very day, then Woodrow Wilson was a “great president.” However, if one sees “greatness” in the Oval Office as someone, according to Robert Higgs, “who acts in accordance with his oath of office to ‘preserve, protect, and defend the Constitution of the United States,’” then Wilson is neither great nor “near great” (the ranking bestowed on him by progressive historians).

Woodrow Wilson does not have a “mixed” legacy. The America that existed before Wilson took office was a very different and less free country after his second term ended in 1921. The dictator-like military organization of the economy that was used to direct war production would form part of the basis for FDR’s attempts to further cartelize the US economy during the New Deal. Wilson pushed through laws to eviscerate the First Amendment and to imprison dissenters, and his racial policies speak for themselves. He did not “lead” the nation during crises; he drove the country into crisis, and this nation never has recovered.

William L. Anderson is a professor of economics at Frostburg State University in Frostburg, Maryland. This article was originally featured at the Ludwig von Mises Institute and is republished with permission. 

Airline Bailouts Destabilize the Economy and Inflate Asset Prices

Airline Bailouts Destabilize the Economy and Inflate Asset Prices

In the end, after all of the political posturing and all of the speeches and exhortations for Congress to “do something,” a $2 trillion “coronavirus stimulus” bill landed on the president’s desk for The Donald to sign. And sign he did, uttering all of the platitudes and everything else that comes with “historic” spending legislation that never should have seen the light of day. Although COVID-19 has helped expose vast weaknesses in public health systems in the USA, it also has shown that with much of corporate America, the emperor has no clothes.

Although tracking where the money goes is not an easy thing, we do know that the airlines will receive about $50 billion in cash and loans, while Boeing will receive a share of $17 billion earmarked for industries favored by Congress. Another $500 billion will go to cruise lines, hotels, and other firms that have lost business because of travel restrictions and the economic shutdowns.

Politicians of both parties heaped praise upon themselves for their “bipartisan” efforts, which in real life only can mean that Congress cleaned out what was left of the IOUs in the till. Rep. Thomas Massie, a Republican from Kentucky, drew attacks from all sides as he tried to force a roll call vote (as opposed to the voice vote that the members wanted) and announced his opposition to the bailout. President Trump called for his expulsion from the Republican Party while Democrats declared him to be an unsavory ideologue.

There is not much to do but to wait for the results, and they will unfold over time. However, much of this bill’s harm is invisible, the way that termites quietly but surely destroy a house when homeowners fail to detect them. The politicians and the pundits, along with corporate executives, are hailing this infusion of public funds to business as a lifeline to the economic system itself, when, in reality, it will weaken these firms in the long run.

This commentary deals mostly with the airlines, but what we say here applies to any firm receiving rescue funds and loan guarantees. While some of these essentially bankrupt firms gain some relief as taxpayers and consumers pony up to pay the companies’ bills, the temporary cash infusion allows them to kick the financial can down the road and not deal with the underlying problems that they are facing, at least for now.

In a recent New York Times op-ed piece, Tim Wu of Columbia University asks the following: “Are taxpayers rewarding a decade of bad behavior?” If he is asking specifically about US airline firms, the answer is a resounding yes. Wu notes that in recent years the airlines have been very profitable but that instead of building defenses against possible downturns that are not easily predicted (such as the coronavirus crisis), they have used much of their profitability to buy back their own stock.

Obviously, stock buybacks are controversial, and as long as stock prices rise, company officials look like financial geniuses. However, if the markets crash or if bears loom on the horizon, all of that value vanishes very quickly and the companies are left in worse shape than when they began. As a financial strategy, stock buybacks are inherently risky and tie up cash that could go toward capital development or even the “rainy day” fund for the inevitable market downturn. Writes Wu:

During the past decade, flush with cash, most of the companies in line to get taxpayer money did not prepare for a downturn. Instead, they spent enormous sums on stock buybacks, which reward shareholders and increase executive pay. For example, the airline industry, which is prone to booms and busts, collectively spent more than $45 billion on stock buybacks over the past eight years. As recently as March 3 of this year, with the crisis already beginning, the Hilton hotel chain put $2 billion into a stock buyback.

Such behavior is especially galling given that the airlines received a major bailout in the immediate wake of the 2001 September 11 attacks that severely damaged that industry. Likewise, Congress spread out the rescue money in 2008 and 2009 to deal with the infamous housing bubble that the government and the Federal Reserve System created. Yet here are the Usual Suspects once again gathering around Washington, collective hats in hand.

Airlines this time are promising (or at least say they are promising) not to use the newest amount of rescue money to engage in stock buybacks, but that hardly is reassuring. There is a larger problem, and it is not limited just to overvaluing their stock or their inability to learn any lessons from past disasters.

The greater problem of which we speak the Federal Reserve’s ongoing policy of pumping up the system the way that nineteenth-century cattle ranchers would “water” their herds shortly before sales by feeding them salt. The overly thirsty cattle would drink more water than usual, and when they would be weighed during a sale, would seem heavier—and fatter—than they really were.

While Fed pumping (and simultaneous suppression of interest rates) inflates the value of stock—providing a façade of an economy performing better than it really is—it also inflates the capital assets of companies, and airlines are no exception. Because of past bailouts, glorified money printing by the Fed, and corporate practices such as stock buybacks, the nominal values of these firms are substantially higher than they would be in a more free market.

It is not difficult to see the vast network of market misrepresentations that has come with these policies. Wu notes:

The past decade was also an “easy money” decade, thanks to federal monetary policy that favored liquidity and low interest rates. Many of the firms now asking for bailouts took advantage of low interest rates to borrow heavily. For their part, many creditors lent money at rates that did not fully reflect the risks to these industries. The debt loads have created their own fragilities during the economic downturn.

In other words, one set of policies to get around natural market constraints has led to one distortion after another. We now are at the point where airlines—and the banks that have been underwriting them—are hooked on cheap money, inflated stock prices, and overvalued capital assets. If Congress, Trump, and the Fed actually were to step back and let market forces work, the short-term results would be devastating—to current airline management. Yes, the airlines would be bankrupt, but in real terms, they have been bankrupt for a long time and the COVID-19 crisis now has exposed this industry for the financial fraud that it has been.

Given that the various players previously mentioned have decided to keep the fraudulence afloat, what does that mean for the future of the airline industry? One cannot necessarily predict future events and when they will happen, but one can say with utmost certainty that the airlines soon enough will bring a new generation of management to Washington bearing the same tin cups that their forebears carried.

There is no doubt that airlines, along with Boeing and almost certainly Airbus, will find themselves in a future crisis that keeps them at least partially grounded. It could be another pandemic, a terrorist attack, or just awful political leadership, but one can be sure that something will occur to significantly reduce airline ridership. Reduced ridership means reduced funds, and a similar scenario to what we see currently playing out is sure to follow. At some point, however, the financial damage will be so great that not even the Fed will be able to “water” airline stock anymore and the cold water of massive bankruptcies will follow, imperiling the entire financial system.

These bailouts don’t just reward irresponsible business behavior, but they also impose restrictions that will create future problems. Airline firms receiving federal funding are not permitted to cut worker pay or lay off workers until at least September 30, which means that the aid is a glorified welfare check to labor unions representing airline workers. (The bailout rules also forbid stock buybacks and freeze executive pay at 2019 levels.) Bloated union contracts also are part of the problem with airline financial policies, so, in the end, Congress and Trump have managed to reward most, if not all, of the bad actors in this sorry saga.

What is done is done, but at least we can take a look at what would have happened had Congress just said no to the airlines this time. Unlike the current situation, in which we will see the “good” effects first and the “bad” effects down the road, a “solve your own problems” approach to the airlines would result in immediate layoffs, bankruptcies, and at least some airlines would completely go out of business.

Although most politicians and airline executives want us to believe that airlines are an “essential” industry that is the equivalent of the “thin blue line” between prosperity and a depressed economy, the markets see things differently. First, and most important, with the current situation there is no way that airlines can meet their loan payments, issue stock dividends, or even pay all of their employees at current rates (including their executives). Faced with that situation, the healthier companies would most likely come to terms with their creditors and restructure their finances.

The unlucky firms, however, would go into Chapter 7 bankruptcy, with all assets sold to pay off their creditors. That means massive layoffs, fewer flights—and realistic valuation of their assets. If the economic need for airlines really were as great as airline executives and political pundits claim, then whoever has purchased those assets at bargain prices would be able to put them to use in no time. The industry will have had its necessary cold-water bath, and asset values, along with prices of airline tickets, would settle at true market values, not the bloated numbers that pollute current airline balance sheets.

Because the “bad effects” of allowing airlines to go under would result at first in massive layoffs, bankruptcies, and fewer passengers in the air, the media and political classes would be condemning those who voted down the federal largess. “Bad effects,” not surprisingly, are quite visible and the plight of the newly unemployed and of stranded travelers plays well on the news.

The “good effects,” however, are less visible. By the time airline assets were sold at bankruptcy auctions and new companies hit the airport runways with market-priced capital and market-paid employees, the media would be on another crusade and the resurrection of airlines would not receive the coverage it deserved.

By shoveling out cash to the airlines and more promises to the banks whose unsteady solvency always lurks in the background, Congress and Trump have perpetrated a financial fraud greater than much of the mess we saw on Wall Street more than a decade ago. Yes, they will receive praise in the media and votes from those grateful to have taxpayers pay their wages and salaries, but they have solved no problems and have created a generation of new ones. Almost surely we will be covering the next crisis on these pages.

Reprinted from The Mises Institute.

Socialism Always Fails

Socialism Always Fails

The Nation, which enthusiastically has supported every totalitarian communist regime that has existed in the past century (and that includes Pol Pot’s Cambodia and North Korea) is now firmly riding the Bernie Sanders bandwagon. This article, entitled “Why American Socialism Failed—and How It Could Prevail Today,” unwittingly gives away the mentality of American socialists which claims all economic issues as being “solved” by the implantation of socialism—regardless of the actual economic outcomes.

Three years ago, I wrote “The End of Socialists is Socialism, Not Prosperity,” and this article follows some of the same themes…

Read the full article at the Independent Institute.

Conservatives Are Increasingly Wrong about Free Markets

Conservatives Are Increasingly Wrong about Free Markets

Capitalism creates poverty. Capitalism has stolen our future. Capitalism ravages the planet. Capitalism oppresses us. Capitalism needs to be controlled by government or it will throw most of us into poverty and misery and enrich only the well-placed few.

These are not missives from The Nation or the Daily Worker, although no doubt the writers from those publications would share the sentiments. No, these diatribes against the market economy come from the American Conservative. Of course, it is hardly the only conservative publication that rails against the market system, as First Things can also be counted on to speak out against the evils of an economy based on private property, a price system, and profit and loss. For that matter, before it fell to the grim reaper, the Weekly Standard also raised its voice against markets. Pat Buchanan has been railing against free trade and free markets for years.

So, what is the case that conservatives make against a market system, and how do they justify the kind of government intervention that perhaps in a sober moment they might realize will have the opposite effects of what is allegedly intended? What is the so-called case against the market, and why do some conservatives believe that coercion can create a better economy and better society?

There are numerous issues that we must examine to answer these questions, and the first is this: what exactly is the conservative case against the market? Why are prominent conservatives attacking capitalism?

In a word, change. Capitalism brings change, and bedrock conservatism is anti-change at its core. To better understand that point, we need to go back nearly seventy years to the 1950s, a time that apparently both conservatives and progressives wish to freeze in time. Whether one reads Pat Buchanan or Paul Krugman, the message seems to be similar: this was a golden era for American workers and businesses, a time when the government tightly managed the financial system and key industries were heavily regulated, from transportation to telecommunications.

In a recent article, the American Conservative declared that during the 1950s organized labor “gave capitalism its ballast.” Writes James Pinkerton:

In fact, for a time after World War II, America’s national political leadership was mostly reconciled to strong unions, abuses and all — because the alternative was deemed vastly worse.

In those mid-century years, people remembered what it was like when unions were weak or nonexistent, when unfettered capital was free to grind the face of labor. Such immiseration was seen as a leading cause of the Bolshevik Revolution in Russia — and nobody wanted that to happen here.

Moreover, the Great Depression was an even more recent memory. Thus the Keynesian wisdom held that it was vital to boost workers’ pay so as to keep purchasing power in their hands; they could, after all, be counted on to spend their money and thereby keeping the economy going. In those years, fear of a Depression-ish capital strike was far stronger than fear of a labor strike.

Ballast balances ships to keep them from capsizing at sea. In Pinkerton’s view, organized labor kept the economy “balanced” by keeping “unfettered capital” at bay and preventing it from oppressing labor.

Economically speaking, such a statement only can be called nonsense. As Carl Menger so aptly put it in his 1871 Principles, it was the development of capital goods that raised living standards and provided labor with real wealth increases. Far from grinding the face of labor, it was private capital — and capitalism — that gave them the benefits that people like Pinker attribute to the violence of organized labor.

Writing about labor and the 1950s, Pinkerton declares,

strong unions shaped society. Picket lines were not to be crossed, and work rules — detailing which worker could do which job — were strictly enforced (unless there was a payoff).

To anyone much younger than a Baby Boomer, the impact of unionization is hard to comprehend, because over the last four or so decades, we simply haven’t seen incidents such as the one in 1956, when the Teamsters blocked all deliveries to the Waldorf Astoria in Manhattan because of a jurisdictional dispute over the hotel’s barbers.

Still, this Baby Boomer, who grew up near Chicago, well remembers what it was like to live in a strong union town. For instance, meat wasn’t for sale on Sundays. Why not? Because the butchers had work rules to prevent such selling — and that was that. Then there was McCormick Place, the big convention center that was a steady source of scandal-mongering newspaper stories: about union featherbedding, prohibitive labor costs, and the occasional disappeared load of cargo.

Of course, sometimes, union matters got worse than that: incidents of union-related strong-arming, leg breaking—even the occasional murder—were in the news.

Nothing Pinkston has described can build an economy, and it certainly cannot build wealth. Instead, he has described classic plunder, in which people seeking the opportunity to make a living were beaten, threatened, and even murdered for the “crime” of wanting to do something without the permission of organized labor. And according to the American Conservative, we should want to return to such a regime, which supposedly dominated the 1950s.

Perhaps we should be wary of labeling the 1950s a golden era, even though the theme of the 1950s as Oz reverberates from Paul Krugman to Pat Buchanan to Tucker Carlson. To Krugman, marginal tax rates were 90 percent and organized labor ruled the workplace, which, in his view, preserved a balance in US society that no longer exists. Conservatives like Buchanan see American industry from steel to automobiles to textiles as having been seemingly unchallenged in the world, protected by tariffs double the rates we see today.

That idyllic economic landscape, in Buchanan’s view, disappeared in the 1980s, when Americans began to buy goods, from automobiles to clothing, that were imported. Workers in Third World lands that once sold Americans nothing at all began to undercut the high American wages that both Krugman and Buchanan believe were central to US prosperity. As Buchanan and other conservative critics of the market economy put it, less protectionism and the lure of “slave wages” overseas enabled capitalists to gear their investments “in a race to the bottom.” Such a scenario did not exist in the 1950s. Make cars in Mexico and in South Korea? Not a chance.

Before we call for the return of tax, labor, and trade policies in the decade of poodle skirts, sock hops, and ubiquitous picket lines, however, we should remember that a third of Americans then lived in poverty, much of it abject. Jim Crow laws were on the books, and racial discrimination was embedded in American life in a way that most people today would not be able to comprehend. The government organized key industries, from banking and finance to all forms of transportation and telecommunications, into regulated cartels that forced Americans to pay higher prices for just about everything. If you wanted economic opportunity, you usually needed a union card or a connection to government regulators and politicians.

Yet, there is an appeal to the nostalgia of the company towns and the seeming stability of the working-class towns. I lived in such a place in southeast Pennsylvania from the mid-1950s to mid-1960s, until I was almost eleven years old, and I remember knowing people who worked at places like US Steel, the Sun Oil refinery, Ford Motor Company, Baldwin Locomotive Works, and Sun Shipbuilding. Ours was a middle-class town, and it was the rare worker that was not a member of a labor union.

The industries that once buttressed my former hometown no longer exist, from the oil refinery two miles from my house to the other manufacturing facilities that employed my neighbors. They are shuttered, many of the buildings and fixtures sold for scrap or having been transformed into large, empty lots. This is Rust Belt scenery and the ruin porn is repeated on the Eastern Seaboard and in towns in Ohio, Pennsylvania, Michigan, and elsewhere. Many old working-class towns once held together by a single manufacturing plant that has closed are left to struggle, and some places are transformed into what some have called the “Heroin Belt.”

Conservative critics tend to agree with politicians like Bernie Sanders and Elizabeth Warren about the cause of this economic and social decline, and they increasingly are willing to accept the “solutions” these politicians are demanding, from high tax rates on businesses and individuals to both internal and external protection. And like Sanders and Warren, these conservative market critics blame “corporate greed” for the changes that new investment patterns bring to once prosperous manufacturing communities.

Like those on the Left, the anticapitalist conservatives want to preserve those places that we remember from years ago. What they fail to comprehend is that demanding that government hold back changes in capitalization along and in the methods by which firms make things, they also are demanding that government restrict changes in everything else. To put it another way, we cannot preserve the 1950s manufacturing economy and the mill village without restricting changes in the quality of medical care we receive, in telecommunications, and in transportation.

The old socialist countries provide an insightful lesson regarding the “freezing in time” syndrome. People who have visited places like present-day Cuba or spent time behind the Iron Curtain when the USSR and the eastern European satellites were in existence note that in many ways going there was like entering a time warp. However, this was not the experience one has when visiting an “old town” section of a modern city to see examples of lovely architecture from the past.

Instead, although the old architecture might have dominated in, say, Havana or Prague before the 1990s, everything looked old and run down. Yes, there was evidence of some of the glory of the old days, but for the most part, these places would evince grime, disrepair, and the lack of hope. If one does not want change, then one should go to Havana, where even the 1956 Chevys still are on the road.

For that matter, one does not need to bring back memories of communism to find examples of how the lack of change and development because of government restrictions can have negative effects. Look at American railroads before and after deregulation. As Milton Friedman pointed out in Free to Choose, the US rail system pre-1980 looked like something from the 1950s, and he contrasted the railroads with the US automobile industry, which was already coming out with new models every year.

Since the Jimmy Carter administration ended nearly a century of federal regulation of the railroad industry in 1980, American railroads have become a major factor in a stronger US economy. Michael Grunwald wrote in Time Magazine in 2012:

It’s not just that they are self-sufficient and fuel-efficient, employ 175,000 workers and have poured $500 billion into their trains, tracks and terminals since 1980. They are also quite literally the engines of our economy. America’s passenger rail is a global joke, but our freight rail is the envy of the world, carrying over 40% of our intercity cargo. Trains carry much less of Europe’s freight, which is why trucks clog Europe’s highways. And America’s rail-shipping rates are the world’s lowest, reducing the cost of doing business in the U.S.; they’ve fallen 45% in real dollars since the industry was deregulated three decades ago.

One only can imagine the objections we would hear today from TAC and conservative journalists such as Tucker Carlson if such a deregulatory proposal was to be presented today. “What about economic concentration?” “The railroads will jack up prices!” “Good service will disappear!” “What about safety?” “Won’t there be more derailments and rail accidents?” And so on.

The conservative case against free markets is based on the belief that if change disrupts the status quo in any way, or if companies impose cost reductions that result in a shifting of employment — or even some layoffs — then government should step in and take control. Now, I should add that the conservatives are not advocating outright state ownership or control — or at least that is what they are saying.

Of course, the notion that government will just regulate a little bit and only restrict a few things is fantasy. Likewise, anyone who believes that government regulation will reduce alleged economic concentration does not know the history of regulation. Before the late 1970s and early 1980s, the government essentially organized several industries into regulatory cartels, including passenger airlines, trucking, railroads, banking, and telecommunications. One might recall the numerous railroad bankruptcies that resulted in the formation of Conrail, which was nothing more than a government rail firm that covered the East Coast.

Telecommunications? The only game in town was AT&T and phone service was primitive compared to what it would become only a decade after the end the old regulatory regime. A relative free market transformed the rail industry, and trucking also has vastly increased its hauls. These industries are much more competitive now that government does not control rates and routes.

Since 1980, American living standards have increased in ways that no one then could have predicted. Free markets have played a major role, and one would think that conservatives would appreciate that fact. Instead, they present a picture of wise and paternalistic government that somehow can provide prosperity but still preserve our imaginary Norman Rockwell world.

Reprinted from the Mises Institute.

AOC and the Green Great Leap Forward

AOC and the Green Great Leap Forward

In what its supporters have claimed is “visionary,” the congressional media darling, Alexandria Occasio-Cortez (AOC) has released her short-awaited Green New Deal , and she has called for nothing short of destruction of life as we have known it:

Rep. Alexandria Ocasio-Cortez said she has no qualms about acknowledging a so-called “Green New Deal” will mean unprecedented governmental intrusion into the private sector. Appearing on NPR, she was asked if she’s prepared to tell Americans outright that her plans involve “massive government intervention.”

On one level, AOC is being honest; such a plan would be unprecedented, at least in the United States, but it hardly would be the first government-led massive intrusion into a nation’s economy. The 20 th Century was full of such intervention, beginning with World War I, and continuing through the years of communist governments. The century was full of intervention, and the earth was full of the dead bodies to prove it. What AOC and her political allies, including most Democrats that have declared they will run for the U.S. Presidency, are demanding is the U.S. version of Mao’s utterly-disastrous Great Leap Forward.

For all of the so-called specifics, the Green New Deal (GND) reads like a socialist website which is full of rhetoric, promises, and statements that assume a bunch of planners sitting around tables can replicate a complex economy that feeds, transports, and houses hundreds of millions of people. The New York Times declares the plan to give “ substance to an idea that had been a mostly vague rallying cry for a stimulus package around climate change, but its prospects are uncertain.”

Actually, there is nothing we can call “substance” in this proposal if we mean “substance” to be a realistic understanding that it would be impossible to re-direct via central planning nearly every factor of production in the U.S. economy from one set of uses to another, since that is what the proposed legislation actually requires. For example, the following is what AOC and others call the “scope” of the proposed law:

(A) The Plan for a Green New Deal (and the draft legislation) shall be developed with the objective of reaching the following outcomes within the target window of 10 years from the start of execution of the Plan:

  1.  Dramatically expand existing renewable power sources and deploy new production capacity with the goal of meeting 100% of national power demand through renewable sources;
  2.  Building a national, energy-efficient, “smart” grid;
  3. Upgrading every residential and industrial building for state-of-the-art energy efficiency, comfort and safety;
  4. Eliminating greenhouse gas emissions from the manufacturing, agricultural and other industries, including by investing in local-scale agriculture in communities across the country;
  5. Eliminating greenhouse gas emissions from, repairing and improving transportation and other infrastructure, and upgrading water infrastructure to ensure universal access to clean water;
  6. Funding massive investment in the drawdown of greenhouse gases;
  7. Making “green” technology, industry, expertise, products and services a major export of the United States, with the aim of becoming the undisputed international leader in helping other countries transition to completely greenhouse gas neutral economies and bringing about a global Green New Deal.

It is hard to know where to begin in analyzing such an ambitious plan, especially when one understands the ramifications of what is in this bill. No doubt, many will believe it to be bold and long overdue. The CNN website breathlessly declares :

Public investments should prioritize what the resolution calls “frontline and vulnerable communities,” which include people in rural and de-industrialized areas as well as those that depend on carbon-intensive industries like oil and gas extraction.

And in a move that may draw support from a broad range of advocacy groups, the resolution sweeps in the full range of progressive policy priorities: Providing universal healthcare and affordable housing, ensuring that all jobs have union protections and family-sustaining wages, and keeping the business environment free of monopolistic competition.

However, CNN adds that the specifics – paying for the whole thing – are not included, at least not yet. In addition, the news organization adds the following for those worried that the entire operation might prove to be prohibitively costly:

… the New Dealers argue that a federally funded energy transition would stimulate growth by providing jobs, improving public health, and reducing waste. In addition, they argue that the government could capture more return on investment by retaining equity stakes in the projects they build.

In other words, this whole operation allegedly will generate so much new wealth that it will pay for itself, lift millions from poverty, and transform the entire U.S. economy. The plan is so generous that it promises an income even to people, according to the Democrat’s press release, who refuse to work still will be provided a “living wage” income.

The plan also is famous not only for what it purports to create (out right utopia) but what it also calls to be banned: cows and airlines. The plan calls for phasing out air travel within a decade to be replaced by a network of high-speed rail, as though this were even feasible. Cows, as the released document acknowledges, have flatulence, so they must be totally eliminated from the earth and meat from the U.S. diet, but there is nothing to address the massive disruption to life as we know it in order to implement such a plan.

Not surprisingly, The Atlantic is nearly breathless with praise for this monstrosity, but even that publication admits that the scale of AOC’s “vision” is beyond anything we ever have seen before:

Yet even in broad language, the resolution clearly describes a transformation that would leave virtually no sector of the economy untouched. A Green New Deal would direct new solar farms to bloom in the desert, new high-speed rail lines to crisscross the Plains, and squadrons of construction workers to insulate and weatherize buildings from Florida to Alaska. It would guarantee every American a job that pays a “family-sustaining wage,” codify paid family leave, and strengthen union law nationwide.

To be honest, “untouched” is not the appropriate term here, as “smashed” or “destroyed” is much more accurate and descriptive. We are not speaking of ordinary government intervention that marks most of the U.S. economy, but does allow for something of a price system to continue to exist. Instead, something of this magnitude would require a complete government takeover with central planning on a scale so huge that it would have to surpass the grandest dreams of the old Soviet Gosplan.

One of the most-asked questions, of course, is: “How do we pay for this?” Perhaps it is natural to ask such things, but we are not speaking of a particular project for which we have to purchase materials and pay those who create it. Instead, this plan would simply redirect nearly every resource, almost all labor, and every other factor of production away from current uses to something as determined by government planners and overlords. There is no other accurate way to describe what we are seeing.

The resolution naively assumes that all that needs to be done is for government to “finance” these projects through huge increases in taxes, borrowing, and (of course) printing money, and that such infusions of money will enable the government to “pay” for all of these new projects as though one were building a new skyscraper in Manhattan:

  • Many will say, “Massive government investment! How in the world can we pay for this?” The answer is: in the same ways that we paid for the 2008 bank bailout and extended quantitative easing programs, the same ways we paid for World War II and many other wars. The Federal Reserve can extend credit to power these projects and investments, new public banks can be created (as in WWII) to extend credit and a combination of various taxation tools (including taxes on carbon and other emissions and progressive wealth taxes) can be employed.
  • In addition to traditional debt tools, there is also a space for the government to take an equity role in projects, as several government and government-affiliated institutions already do.

Such statements demonstrate a profound ignorance of even basic economic concepts. The authors and supporters of this document believe that all it will take is for the government to direct massive amounts of money toward these new projects, and everything else will fall into line. But that is not even close to reality, as the only way to redirect such massive amounts of money would be to use force, and deadly force at that.

First, and most important, much of the present capital in the USA is geared toward the kind of economy that AOC and the Democrats demand be made illegal, so huge swaths of the capital stock would have to be abandoned, as little of it could be redirected elsewhere. One cannot overestimate the kind of financial damage that would cause, and it would impoverish much of the country almost overnight.

Second, the entire economy would be required to pivot toward capital development that would not be possible, given current technologies and opportunity costs, to create, especially in the 10-year time frame that the Democrats are demanding. Diverting new streams of finance toward such projects would be useless and even counterproductive, as the system simply would be overwhelmed. It would not be long before scarcity itself would mean that entire projects either would be stalled (like what we see with the infamous “Bullet Train” in California) or even abandoned. The human cost alone would be staggering.

As pointed out at the beginning of this article, for all of the “grand vision” rhetoric that accompanies the rollout of the AOC plan, this is nothing less than an attempt to re-implement Mao’s Great Leap Forward, albeit with high-speed rail instead of backyard steel mills. One cannot overestimate the disaster that would follow if this were forced upon the American economy.

So-called political visionaries rarely are willing to be truthful about the destruction that follows their schemes. When Baby Boomers were in college a half-century ago, many saw Mao as their political hero, a man with great vision who had the political will to do what was necessary to advance the fortunes of his own people. That he was a murderous tyrant who presided over mass death that exceeded even the killings of World War II was irrelevant or even ignored.

Today, we are told by her adoring press that Alexandria Occasio-Cortez is the New Visionary, a person who is far-seeing and knows what we have to do in order to survive the coming consequences of climate change. That her grand vision is little more than a mass-depopulation scheme is ignored, and we ignore it at our peril.


William L. Anderson is a professor of economics at Frostburg State University in Frostburg, Maryland. Contact William L. Anderson

Republished from mises.org.

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