Two Means to the Same Ends

The editorial board of The Kansas City Star published a piece today condemning recent moves in the house and senate to increase corporate welfare in farm bills. Overall, the editorial isn’t half bad. It makes good points about the moral hazard and distortion in the agricultural and insurance industries as a result from such intervention.

There is one misconception, however, regarding the relationship of food stamps and farm bailouts. The board writes: “The crazy-glue bill has for decades bonded farm aid and food stamps. Other than they both involve food, the two have little to do with each other.”

They do concede the obvious: that urban representatives and rural congressmen each benefit from the farm bills, which transfer other people’s money to their constituents. There is however another, less obvious connection; in reality the programs are intimately linked.

Food stamps buy products that come mostly from industrial farms. Every swipe of an EBT card is an indirect transfer from taxpayers to big ag; welfare recipients are merely one of the intermediaries between the two. Arguing against farm aid while promoting increases in food stamps is like decrying bank bailouts while giving billions of dollars to depositors at the country’s largest banks. One is more roundabout than the other, but the money makes its way to the same place in the end.

An Elephant of a Different Color

The announcement of Paul Ryan as Mitt Romney’s choice for Vice President seems to have given at least a temporary boost in enthusiasm for the GOP ticket. Given that Romney has been running for president since 2007 and struggled to get more than a third of the vote for much of the last primary, this is sort of a big deal. That conservatives haven’t been really excited about Mitt Romney’s campaign until someone else was added is telling.

Robert Wenzel has published a nice collection of posts critical of Paul Ryan on his EconomicPolicyJournal, which I recommend perusing; here I wanted to present my own take on the pageant.

As if on cue, conservatives jumped on board immediately with Ryan. They praise him on talk radio, the Internet is abuzz with what a great conservative he is, editorials from various news agencies are singing his praises, and Cato has come out in favor of Ryan. Finally, they thought, someone who can speak the conservative language, someone who can articulate the values of free enterprise and limited government, and oh they can’t wait to see Ryan mop the floor with Joe Biden in the VP debates.

Apparently all of these folks forgot, never knew, or just don’t care about Ryan’s actual record as a congressman. Speaking the language, articulating values, regurgitating platitudes in a debate, those mean nothing when one takes a second look and considers that a vote for TARP used to be a litmus test fail for conservatives. Apparently not anymore; here’s the neo-Reagan pleading with congress to pass the Great Bank Bailout of 2008.

The thing about his argument that is perhaps most telling is that he was “offended” by Henry Paulson’s simple three page request for cash. But after it had made the rounds and been tweaked here, fiddled with there, and grown to 110 pages, well then it was suddenly acceptable.

He also voted for and supported the Great Auto Bailouts of 2009, raising the debt ceiling, a huge expansion of Medicare, No Child Left Behind, the Patriot Act, the NDAA (with the government kidnapping sections) and a host of other fiscally irresponsible and draconian government programs. And this is conservative; this is the guy they expect to wipe the floor with Biden in a debate?

If the No Child Left Behind Act or Medicare Part D had been passed under Democratic presidents would anyone be surprised? We’re talking about a massive expansion of the Department of Education, itself a creature of the Democrats, but also one of their pet institutions because of its close ties with teachers unions and leftist academia in general. And Medicare? It’s part of the welfare legacy of progressive-Democrat Lyndon Johnson, not some conservative program. The bailouts, the debt, the executive power, while these increased dramatically under George W. Bush, they’ve continued to unprecedented levels under Obama.

So what exactly are Biden and Ryan going to debate about, that is of any substance? I suppose they could quibble over how many foreigners the Feds should allow in the country each year or how much wealth the Feds should confiscate in the present via taxation versus how much they should consume in the future via borrowing, but all if this arbitrary and no substantive difference remains. In the other areas of token marginal disagreement we have abortion and gay marriage, but neither Romney nor Obama is likely to affect any major changes in those areas.

So what we have in Paul Ryan is the same as with other supposed limited government Republicans – all talk and no action, or rather action, but in the opposite direction of their rhetoric. With Democrats, generally what you see is what you get. They don’t hide the fact that they’re in favor of a powerful central government. They proudly and unashamedly support government intervention and an overall policy of tax and spend.

With Republicans it’s different. They wax on about the virtues of free enterprise, of a limited government, of low taxes, fiscal responsibility, adherence to the rule of law and the sanctity of human life. But seemingly at every turn their actions are more in-line with Democrats than anything representing what their rhetoric calls for.

During the Bush years Republicans controlled the House, Senate, and White House, and we got tax breaks, sure, but they weren’t offset with equal cuts in spending, they were financed with borrowed money. There was the aforementioned No Child Left Behind and gross expansion of Medicare, the first Trillion dollar deficit, a doubling of the national debt, the Patriot Act, the build-up of the National Security bureaucracy with the DHS (where Aunt Janet now rules), and of course the TSA. And all of those pro-life Republicans did nothing to overturn Roe v. Wade.

So in short, they’re both evil, there is no “lesser” of these two parties or their candidates. Replacing Obama with someone who agrees with Obama on virtually every issue is no change, and it’s long past time for people to realize this.

Inequality: Or What Makes The Division of Labor Possible

Individuals are not equal, at least not in their abilities, interests, gifts, wants, and goals. The implications of this, and how a socialist attempts to suppress this reality, are what Ludwig von Mises deals with in ”On Equality and Inequality,” on the 12th day of the 30 Day Reading List. It is true that individuals are equal in the sense that each is endowed with the same rights and liberties, but this only provides a framework from which to argue morals, it doesn’t mean that individuals will or should be equal in terms of intelligence, wealth, or social status.

The fact that we aren’t all equal is not a disadvantage or something to be corrected. It’s very healthy and allows a division of labor that would be nonexistent if we were all homogenous units.

Mises explains how life in pre-capitalism ages meant that the wealthy and powerful, “the ruling minority,” gained their status by force, but “the market economy – capitalism – radically transformed the economic and political organization of mankind.” This, he notes, is because “under capitalism the more gifted and more able have no means to profit from their superiority other than to serve … the wishes of the majority of the less gifted.” We know this to be true because in a market economy, as opposed to a planned economy, the consumers are the ones who ultimately decide what is produced, what quality, quantity, etc., by their choices.

At this point Mises draws a corollary between the market economy and representative government. He likens voters to consumers who make their selections from the existing politicians and their brands of governance in similar fashion to entrepreneurs and the firms. But this can only be true if an individual is free to opt out and entrepreneurs are not prohibited from freely competing with the state, otherwise the analogy is lost entirely. And since the freedom to decline the State’s services, and more importantly to refuse payment for those services does not exist, this is not a sound comparison.

An important point Mises raises regarding inequality is that people (mainly leftists, in this case) will admit their inferiority to athletes and artists, but assume that those better off financially must have done something wrong to achieve this. The idea that some are blessed with an entrepreneurial spirit or some other talent conducive to wealth creation is ignored or never considered. (It is important to note that in the current organization of state capitalism or corporatism, many who do amass wealth are aided by the State, but such arrangements are not what Mises is referring to).

In describing the behavior of consumers, which is often maligned by socialists who simply disagree on taste, Mises points out that many of the authors of his day implied that the masses were stupid rubes. This, he points out, is a sharp contrast from the older socialist authors who wrote as if the proletariat were “the originators of what is great and good in the world, and the builders of a better future for mankind.” Either way, the desires of consumers are their own business, and they, by virtue of holding currency, may do with it whatever they want in regards to buying (or abstaining from buying).

And to this point he notes that one factor in a market economy is that high quality arts and entertainment are sometimes hard to come by when so many of the consumers have poor taste in such things. The result of such a situation is that by and large, producers will “give the people what they want.” Again though, these are by nature subjective preferences, and one man’s rubbish is another man’s masterpiece.

It’s also important to note that when people complain about the poor quality of music, or movies or other art, that it isn’t necessarily the fault of the producers of these things, who are merely trying to satisfy the tastes of their patrons, the public at large. Vices too fall into this same category. It’s not because cigarette producers market their product that people smoke; it’s because people smoke that cigarette companies market their products.

The socialist argues that all of these supposed ills are due to the trickery of businessmen. Advertising is forever the scapegoat and it’s always the marketing that is to blame for people’s poor choices; again, according to someone else’s preferences. What they fail to recognize is that such schemes to dupe consumers could just as easily be applied to necessities or higher quality items. As Mises notes, “only the better [product] enjoys the advantage of being better.”

 

On the topic of education Mises describes how mandatory schooling degraded the quality of an education. In order to give very child access to an education, government schools must lower standards and reduce the curriculum to the lowest common denominator. As a result, he explains that colleges had to begin offering remedial classes in reading for the students who’d been rushed through high school and passed, yet could not read. Unfortunately, such conditions have only worsened, and virtually every primary subject has a special program to bring college freshmen up to a point where they can participate at a college level. It’s also important to note that remedial classes notwithstanding, the first year of college (at least the math and English portions) is basically a high school refresher anyway.

 

What Mises points out, and what few are willing to acknowledge, is that “a limited number of teenagers are intellectually and morally fit to profit from school attendance.” The majority of teens would profit far more from vocational training, apprenticeships, or simply starting their own businesses. When everyone is forced to undergo the same watered-down class work time is wasted for those who would be better served learning a jobs kill, and those would stand to benefit from an education are held back by the lower standards necessary to accommodate those forced to attend.

 

On the socialist New Deal policies of the 1930s and 1940s (and which persist today), Mises writes that for all the celebration of the “common man” coming from the Left, it was the

 

Millionaires, not ‘proletarians,’ [who] were the most efficient instigators of the New Deal and the ‘progressive’ policies it engendered. It is well known that the Russian dictator was welcomed on his first visit to the United States with more cordiality by bankers and presidents of big corporations than by other Americans.

In the same way it is not the common man who argues for the bailouts of large corportations, it is the large banks and insurance firms who promote these. As for other corporate boondoggles, such as the Stimulus, Dodd-Frank financial bills, Affordable Care Act, and others, the common man promotes these because shills in the corportate media tell them they’re good for the common man. What these poor, naive individuals fail to recognize is that the same big businesses they aim to control or regulate are also promoting these same programs. As for the rise of socialism

It is not the progress of socialism among the backward nations, those that never surpassed the stage of primitive barbarism and those whose civilizations were arrested many centuries ago, that shows the triumphant advance of the totalitarian creed. It is in our Western circuit that socialism makes the greatest strides. Every project to narrow down what is called the ‘private sector’ of the economic organization is considered as highly beneficial, as progress, and is, if at all, only timidly and bashfully opposed for a short time. We are marching ‘forward’ to the realization of socialism.

At which point

The common man will be freed from the tedious job of directing the course of his own life. He will be told by the authorities what to do and what not to do, he will be fed, housed, clothed, educated, and entertained by them. But, first of all, they will release him from the necessity of using his own brains. Everybody will receive ‘according to his needs.’ But what the needs of an individual are, will be determined by the authority. As was the case in earlier periods, the superior men will no longer serve the masses, but dominate and rule them.

 

But this need not be our fate, it is not written anywhere that this must happen, and Mises charges “the rising generation” with reversing the trend towards totalitarianism.

Rothbard Teaches Austrian Business Cycle Theory

In today’s work from Robert Wenzel’s 30 day reading list, “Economic Depressions: Their Cause and Cure,” Murray Rothbard explains the business cycle. He first provides a critique of the “New Economics,” or Keynesian understanding of the boom-and-bust cycle, and then presents the Austrian Business Cycle Theory (ABCT).

Rothbard presents three fundamental flaws in the Keynesian viewpoint, which fails to accurately pinpoint the real cause of economic depressions. They are as follows:

1. “[T]here is nothing in the general theory of the market system that would account for regular and recurring boom-and-bust phases of the business cycle.”

He explains that most Keynesian economists separate their theories for how prices form and how the market functions into one theory and in a separate theory explain business cycles. This allows them to hold contradictory views regarding how the economy functions and what should be done to relieve depressions, recessions, and downturns. The Austrian however understands that “knowledge of the economy is either one integrated whole or it is nothing.”

2. “The market economy […] contains a built-in mechanism, a kind of natural selection, that ensures the survival and the flourishing of the superior forecaster and the weeding-out of the inferior ones.”

In other words, the market economy relies on the profit and loss test and in order to survive, firms must endure this constantly to remain in business. What allows them to survive is successfully forecasting the needs and wants of consumers and being able to provide the goods and services that are in demand at the appropriate time. Since many firms do manage to accomplish this, it seems odd that from time to time all or most of these profitable firms find themselves on the verge of bankruptcy at roughly the same time.

Keynesians don’t have a sufficient answer for this, since their typical explanation is a lack of aggregate demand, or under consumption. But a lack of aggregate demand shouldn’t lead to such devastating losses in a group of the best entrepreneurs, and especially not in such a systematic fashion. Something else must account for this phenomenon.

3. “Invariably, the booms and busts are much more intense and severe in the ‘capital goods industries…’”

If under consumption were to blame for the depressions, it follows that the producers of consumers’ goods would be the first and hardest hit, rather than those making higher order goods, which are the ones used to produce final goods. But, just the opposite happens. Rothbard asks if “insufficient spending is the culprit, then how is it that retail sales are the last and the least to fall in any depression, and that depression really hits such industries as machine tools, capital equipment, construction, and raw materials?”

He also notes that it is these industries which see the highest growth in investment during the boom phase of the cycle. Consider the last two major credit bubbles: the bubble in tech stocks a decade ago and the one in housing shortly after. Both bubbles were in industries that supplied capital goods – web space (capital equipment) in the former, and construction in the latter.

Before moving into the ABCT, Rothbard briefly explains fractional reserve banking, and how together with a central bank, the two set the stage for boom-and-bust cycles. He provides an example using a hypothetical credit bubble induced by inflation of the money supply, followed by a contraction and ultimately a bank run.

In essence, banks hold currency (generally gold and silver) and issue paper notes as claims on that currency. The notes can then be used to redeem the specie on demand, but often are used as money in everyday transactions. Banks then issue loans with the deposited funds to investors or consumers, such that more claims to gold or silver are in circulation than actually exist in the bank.

This all works so long as depositors trust that their money is secure in the bank and can still be redeemed. Meanwhile, the increase in available credit and demand deposits (which is inflation) bids up prices and leads to bubbles. Eventually the banks must contract the amount of money in circulation or risk a run; either case amounts to a deflating of the bubble and the bust phase of the cycle begins. Once the bust levels out and banks are comfortable again, the process resumes.

Rothbard is careful to note that such an arrangement as above is not the product of a free market. For all of the banks to inflate as they do in unison, there must be a central bank and government regulations that permit it. He also notes that it was “only when central banking got established that the banks were able to expand for any length of time and the familiar business cycle got underway in the modern world.” So rather than a structural failure in the market economy being the cause, it is the “systematic intervention by government in the market process” that leads to the boom and bust.

And here is where Rothbard introduces and details Ludwig von Mises’ Austrian Business Cycle Theory. Its foundations are in David Ricardo’s observation of the increase in money supply and credit leading to an inflationary boom. But Mises expanded on that analysis and noted that another effect was the lowering of interest rates below their “free market level.” This lowering of rates induces investment in capital goods in anticipation of a higher future demand that is, in reality, nonexistent.

This entire process can take years to manifest itself, all the while the boom persists for years, building slowly into a massive bubble. As long as the banks continue to inflate and the credit keeps coming the bubble will continue and prices will continue to rise as a result of the inflation. But once the inflation slows it all comes crashing down. The classic analogy is of a man who drank too much the night before and has the choice between a hangover and continued drinking. One is immediately painful but short-lived, while the other merely prolongs the ultimate consequence, and only makes things worse in the end.

So we see that Mises’ theory addresses each of the above problems that Keynesian economists fail to answer. The business cycle occurs regularly due to fractional reserve banking enabled by central banks; the natural selection of the market is interrupted and distorted by the manipulation of credit, and entrepreneurs are deceived as to the realities of consumer demand; and the capital goods industries take the brunt of the depressions because lower interest rates induce those firms to invest in new capital more so than in other sectors of the economy.

Lastly, Rothbard gives advice on what should be done to relieve current booms and prevent future busts. His recommendations are: immediately stop inflating, for this is what brings on the cycle and allows bubbles to expand; do not bailout faltering businesses because it prolongs and worsens the depression by propping up failed ventures; do not prop up wages or prices, don’t spur consumer spending and reduce government expenditures. In short, do nothing but allow the market to re-equilibrate.

Basically governments should do exactly the opposite of what has been done for the past four years. Interest rates have been lowered to practically zero through inflation; consumers have been incentivized to buy cars, houses, refrigerators, replacement windows and a whole host of other products; banks, insurers, car manufacturers, energy companies, and entire countries have been bailed out; minimum wage laws have increased, new insurance mandates have been implemented, and government spending has never been higher. And yet, little has really improved.

Mises predicted the crash of 1929 years before it happened, as did a number of Austrians in the years preceding the housing crash, notably congressman Ron Paul. In fact, Austrian economists have a pretty good track record in warning about problems in the economy. It’s high time more people started listening to their warnings and quit paying any attention to the Keynesians who’ve not only been clueless as to the cause of all this malaise, but are promoting the very policies which lead to and prolong depressions.