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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