In his usual straight-to-the-point way, Peter Schiff of Euro Pacific Capital has summarised the recent financial split at the G20 meeting, in the style of the great Jonathan Swift describing the divide between the Lilliputians and the Blefuscudians:
The New Ideological Divide
By Peter SchiffDespite the apparent deficit-cutting solidarity that emerged from this weekend’s G-20 meeting in Toronto, it is clear that the great powers of the industrialized world have not been this philosophically estranged since the end of the Cold War. Ironically, in this new contest, the former belligerents have switched sides – the capitalists are now the socialists, and vice versa.
We now are witnessing a struggle between two camps that I playfully call the “Stimulators” and the “Austereians.” Both warn that a worldwide depression will ensue if governments now make the wrong choices: the Stimulators say the danger lies in spending too little and the Austereians from spending too much. Each side also has their own economic champion: the Stimulators follow the banner of Nobel Prize-winning economist Paul Krugman, while the Austereians are forming up behind the recently reformed former Fed Chairman Alan Greenspan. (It is cold comfort to witness “The Maestro” belatedly returning to the hard-money positions that characterized his earlier years.)
In a recent Wall Street Journal editorial, Greenspan argued that the best economic stimulus would be for the world’s leading debtors (the United States, UK, Japan, Italy, et al) to rein in their budget deficits, a strategy dubbed “austerity” by the press. Greenspan explains that because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid- and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. Greenspan’s Austereian view has been echoed loudly in the highest policy circles of Berlin, Ottawa, Moscow, Beijing, and Canberra.
Meanwhile, in several articles for his New York Times column, including one today, Krugman has argued that those who push for austerity in the face of recession are either doing so for political expediency or out of a “crazy” fealty to archaic economic views. Krugman has apparently judged inadequate the trillions of dollars worth of deficit spending unleashed by the United States and European governments in the last 24 months. He believes our only remedy is to spend more – no matter how much debt results. Absent this, he claims, millions of workers “will never work again.” Unfortunately, Washington has clearly aligned itself with Krugman and the Stimulators.
Reading straight from the Keynesian playbook, Krugman argues that cutting government spending now will simply send the economy back into recession. He asserts that by flooding the economy with money, i.e. “stimulus,” governments can encourage consumers to spend. Once the spending creates better conditions, so the argument goes, the economy will be better positioned to withstand the spending cuts, tax hikes, and higher interest rates necessary to address the staggering deficits left behind.
Krugman proposes an enticing argument that is nevertheless built on rubbish. Economies do not grow because consumers spend; consumers spend because economies grow [for a detailed explanation of how this works, read my latest book: How an Economy Grows]. Investment capital comes from savings, and when governments borrow, savings are diverted from private investment. While it is possible for governments to invest as well, it is much more likely that the money will be spent on entitlements or “invested” in projects that may be politically advantageous but economically useless.
Any money spent by governments is not available to the private sector to invest. The Stimulators don’t make this connection because they believe money grows on trees and that a printing press is a legitimate creator of wealth. However, printing money merely encourages people to spend their savings now rather than wait for it to lose value through inflation. This is okay to Stimulators, because stimulating “demand” by any means necessary is the only goal they can see.
What really grows an economy is not more demand, but more supply [also explained in my book]. The Austereian argument is that reductions in government spending will allow the private sector to generate the additional supply of goods and services. Europe seems to understand this; unfortunately, the US does not. Judging by the recent weakness of the dollar – not only against gold, but other fiat currencies, including the pound and the euro – the markets are coming to the same conclusion.
As sovereign-debt worries initially spread throughout Europe, the dollar benefitted. However, now that Europe has demonstrated a willingness to reduce its debts, while we have committed to make ours even larger, the sovereign-debt worries are moving west.
If Greenspan and the Austereians are correct, the stimulus will fail and leave us in a much deeper hole. As long as governments create bigger deficits, we will never have a sustainable recovery. Instead, we will be chasing our tail, and wearing ourselves out in the process. When we finally realize the folly of this approach, the austerity measures that we will then be forced to adopt will make those currently proposed by the Europeans seem relatively painless.
My guess is that before year-end, our stimulus-induced recovery will falter, prompting Obama and Congress to administer even more stimulus. After all, the Stimulators have no other answer. However, given the adverse reaction this will produce in the currency and debt markets, this next jolt will likely vindicate the Austereians, as the world witnesses its greatest power careen into inflationary depression.
Are Krugman and his mates (Stiglitz for example) stupid? I rather think not. So… are they mistaken… is it some kind of genuine error – they perhaps are unaware of all of the evidence and alternative perspective? No. So are they mad? All of them? Seems implausible to me.
I’m driven then to the idea that they are bad. They are aiming to produce the outcome we fear.
I don’t think they’re stupid, David. If we strip out their comfortable livings within the cosy intellectual ivory towers provided by the state, to gain the support of the intellectuals, and strip out their handsome earnings from government and government-licensed agencies, and avoid the dangers of being accused on conspiracy nuts, I think we come down to a more basic emotional and mental driver and that is the power of utopianism, which lies at the root of all of the world’s most powerful religions. Keynesianism is a powerful religion, with Keynes as its God and Krugman as his prophet, because it promises utopia. Manna from heaven, bread from stones, and wealth from paper, are only some of the things it promises (and fails to deliver).
Continual failure of a religion rarely hurts a religion. Just think of all those people who go up a hill on a certain date with jumpers over their heads proclaiming the end of the Earth, and when the final cataclysm fails to materialise at midnight, who come back down again in the morning even more strongly adherent towards their religion. ‘We read the scriptures wrong,’ they say. ‘We got the wrong date. It’s going to happen in XXX number of years.’ This new date is usually chosen to be conveniently beyond the ends of their expected lifetimes, but they still remain convinced about it.
When the stimulus fails, which isn’t going to be long now, it won’t be because Keynesianism is bunk but because the stimulus wasn’t big enough. The stimulus can never be big enough, and it may get to a point, with Krugman, where even all-out nuclear war with Iran and Pakistan will not be a big enough stimulus. He truly is a dangerous and frightening man. We truly may all one day be dead due to the Keynesian long run, in the worst possible sense, because Keynesianism is a millennialist religion and its millennium will be the day that we are all drowning in money, starving, and incapable of procreating due to a nuclear winter.
It won’t get that far (I hope) because common sense will prevail in the end, but the Krugman’s of this world will keep pushing for war and money printing, because it is better to face Armageddon and drag everyone else into it, for an intellectual, than admitting that you were wrong.
Even Christianity itself is a Millennialist religion, and the world was supposed to end at 100 days after the death of Christ, a hundred years, a thousand years, two thousand years, take your pick, with Christ returning in Armageddon to save the believers, like Tony Blair.
Indeed Millennialism lies at the heart of communism, with God removed, but the hand of history moving ever onwards to humanity coalescing into a single disembodied unity of loving overflowing spirit. Communism, socialism, and Keynesianism are all part of the same utopian dream of soft-headed men and women who may understand what makes people tick but who are incapable of understanding how the physical world works.
You cannot make bread out of stones, but only out of wheat, and wheat must be grown by an entrepreneur coordinating the acquired resources of seeds, soil, water, land, energy, and time, in the risky hope that someone will want to take the finished wheat product off his hands, in exchange for something else he wants more.
Keynesianism misses most of that out, especially time, entrepreneurialism, and risk, but instead can make it all happen by shifting electronic numbers between registers in a central bank’s mainframe computer or by printing inky zeroes on bits of fancy paper.
Austrianism, on the other hand, is almost disutopian in its promises. ‘There must be a hard recession and economic pain to clear out the malinvestments’, ‘People must pay their own way in the world, with hard money and hard work, off their own bat, to get whatever they desire’, and ‘You are on your own and no-one else is obliged to help you’, are unattractive Austrian-like ideas in a world in which politicians regularly promise heaven on Earth (paid for by someone else or paid for from a printing press).
Lord Chancellor Sir Thomas More was perhaps the most intelligent man in England, during the reign of Henry the VIIIth, but intelligence and even sainthood is no guarantee against falling for the dangers of utopianism:
=> Utopia, by Thomas More
Roger Garrison has much more on utopianism and Keynesianism, here:
=> Keynes was a Keynesian
For the hard stuff, you do of course have to turn to Murray N. Rothbard:
=> Keynes, the Man
Andy,
I think there are many problems with your own point of view. You write: “There must be a hard recession and economic pain to clear out the malinvestments”. Hayek himself later admitted that he was wrong about this. “Purging” doesn’t have a proper microeconomic basis.
Read the Fractional-Reserve Free-banking Austrians such as Larry White and George Selgin, and you come to quite different conclusions.
To Current
I think the problem with Hayek is that his Prices and Production does implicate deflation as the clear out mechanism of Malinvestment. He did not proactively put a positive solution in place (other than a suggestion here and a suggestion there) to give enough rigour to the post bust analysis as he did to the pre bust analysis i.e. his build upon the Mises business cycle which became under Hayek the full blown Austrian Theory of the Business Cycle (ATBC).
Naturally I think my Plan, heavily built upon the shoulders of great men provides a proactive “Austrian” vision of the way forward post a classic ATBC event. I am just not that happy to accept the tenets of Monetary Equilibrium Theory of Selgin and White to do the job that they set out to do. Whilst I accept it is a zillion times better that what we have today and would campaign for it if I had a binary choice of today’s system or their one, I still prefer my solution over theirs for all the reasons we have debated over.
> I think the problem with Hayek is that his Prices and Production
> does implicate deflation as the clear out mechanism of
> Malinvestment. He did not proactively put a positive solution in
> place (other than a suggestion here and a suggestion there) to
> give enough rigour to the post bust analysis as he did to the pre
> bust analysis i.e. his build upon the Mises business cycle which
> became under Hayek the full blown Austrian Theory of the Business
> Cycle (ATBC).
I agree Hayek never built it into a fully-fledged theory like his theory of the boom.
I don’t think that those who advocate “purging” are right though. There are many problems with it. One of them is that the bust doesn’t really hit only those who have misallocated capital.
Certainly those who have large outstanding loans and thin profit margins are hit. That is “purging” to some degree. But, they would be hit anyway, even if the quantity of money were adjusted to meet demand.
Apart from that though the bust hurts those businesses that depend on spending that is highly discretionary. The capital in those businesses isn’t necessarily misallocated.
> Naturally I think my Plan, heavily built upon the shoulders of
> great men provides a proactive “Austrian” vision of the way forward
> post a classic ATBC event. I am just not that happy to accept the
> tenets of Monetary Equilibrium Theory of Selgin and White to do the
> job that they set out to do. Whilst I accept it is a zillion times
> better that what we have today and would campaign for it if I had a
> binary choice of today’s system or their one, I still prefer my
> solution over theirs for all the reasons we have debated over.
I’m sure we’ll have some other opportunity to discuss the finer points of this another time. I’ll just say a little bit now…
One of my fears about your plan is the possibility of depression. Let’s suppose that there is a recession abroad. In that case people in Britain will want to hold a larger cash balance as a hedge against the extra uncertainty. Now, if the supply of money is fixed then each person cannot do this straight away. With a fixed supply of money one person can raise their holding only if another allows his to fall. The only way an overall rise in the real value of money can occur is through price deflation. That is a painful process which cause recession and mass unemployment. Why should we put up with that? Rothbardians don’t provide a robust case for why this is necessary. Why can’t money be created to serve the demand for it? All of the complaints Rothbardians have about this target the situation where the central bank create more money than it demanded.
‘Current’, from my point of view there are many problems with Fractional-Reserve Free-Banking. But I’m sure we’ll get to that another day on the Cobden Centre, and there may even be some here at the Cobden Centre who believe in it, as we are a broad church. Alas, I’m afraid I don’t have the bandwidth right now to write the 15,000 word essay necessary to respond. Suffice it to say, my response would largely be of the ‘What Murray Rothbard said’ variety, with lots of links to Mises.org, though I do have an awful lot of time for Roger Garrison and I know he is less Rothbardian hardcore than I am to the George Mason free banking viewpoint.
If you would like to write an article about the merits of free banking, from an Austrian perspective, and send it to us, I’m sure our editorial team would love to print it; I would love to read it.
What might also be interesting, is an article on whether Austrianism itself is a religion, with its own determined sub-sects which may eventually break apart completely to become the Rothbardian (Auburn) School and the Hayekian (George Mason) School, rather than the ‘Austrian School’.
I personally don’t think we are a religion largely because we are prepared to criticise previous God-like figures, as Rothbard criticises Mises, and Kinsella criticises Rothbard, usually to the delight of those criticised. In religions, such criticism is taboo. But within Austrianism, it is expected and almost required for the student to break free from the professor.
> Current’, from my point of view there are many problems with
> Fractional-Reserve Free-Banking. But I’m sure we’ll get to that
> another day on the Cobden Centre, and there may even be some
> here at the Cobden Centre who believe in it, as we are a broad
> church. Alas, I’m afraid I don’t have the bandwidth right now to
> write the 15,000 word essay necessary to respond. Suffice it to
> say, my response would largely be of the ‘What Murray Rothbard
> said’ variety, with lots of links to Mises.org, though I do have
> an awful lot of time for Roger Garrison and I know he is less
> Rothbardian hardcore than I am to the George Mason free banking
> viewpoint.
Fair enough.
> If you would like to write an article about the merits of free
> banking, from an Austrian perspective, and send it to us, I’m
> sure our editorial team would love to print it; I would love to
> read it.
Thanks, I may do that in the future.
> What might also be interesting, is an article on whether
> Austrianism itself is a religion, with its own determined
> sub-sects which may eventually break apart completely to become
> the Rothbardian (Auburn) School and the Hayekian (George Mason)
> School, rather than the ‘Austrian School’.
If it divides into sub-sects that doesn’t necessarily make it a religion. Very non-religious academic groups do this often.
I don’t know if there’s really enough of a difference between the LVMI group and the others to cause a permanent split like that. The main sticking points are monetary theory and degree of agreement with utilitarianism. I suppose we’ll see if that’s enough to cause a split, but I doubt it.
> I personally don’t think we are a religion largely because we are
> prepared to criticise previous God-like figures, as Rothbard
> criticises Mises, and Kinsella criticises Rothbard, usually to
> the delight of those criticised. In religions, such criticism is
> taboo. But within Austrianism, it is expected and almost required
> for the student to break free from the professor.
I generally agree. But, the gold-bugs are a different matter, they seem to me to be quite religious these days.