Tuesday, January 13, 2009

2009, A Return to 1932 Economic Policy?

I do not normally post a blog that is simply the writing of another author; however, the following article is, in my opinion, an excellent parallel between some of the economic situations that lead up to the FDR election win in 1932 (and after) and Obama's election win in 2008 (and what is predictably to come). This article is also a much better comparison than I had made previously - America cannot afford another 1932.

Daily Article by This article can be found at Mises.org.

How This Happened

For years, many of us puzzled about how something so stupid and destructive as the New Deal could have happened. The stock market crashed because it was overinflated. That's nothing new. History is filled with credit bubbles that pop. Resources are reallocated to reflect economic reality and we move on.

The New Deal was different. It actually began under Hoover, who initiated new spending programs, jobs programs, and tried to inflate the money supply and bail out the banks. He was blasted by FDR for his big government policies, and FDR won the election. Once in power, FDR went nuts, instituting a program of central planning that combined features of the Soviet and Fascist models.

It was one idiotic program after another. They tried to raise wages when they should have fallen. They tried to save banks that should have collapsed. They destroyed resources when they were most needed. They encouraged spending when people should have been saving. They smashed the dollar at a time when it needed to be shored up. They cartelized business when competition was most necessary.

What were the results? Economic growth went nowhere between 1933 and 1939, with real gross domestic product per adult still 27 percent below trend at the end. Per capita GDP was lower in 1939 than in 1929. Unemployment was at 17.2 percent in 1939. This was actually higher than it was in 1931. This is despite 100 percent increases in monetary expansion. Taxes had tripled. Employing people became ever more expensive due to unions and national income guarantees. Every time the economy would bottom out and genuine recovery would begin, policy would knock it back down again. Other seeming upturns were entirely artificial: make-work instead of real work, for example. Regimentation was everywhere so that business couldn't compete, farmers were destroying livestock and crops on command, and dissidents were being ferreted out through police-state tactics......(complete article)

Sunday, January 11, 2009

If Deflation is the Enemy than Reflation (Inflation) cannot be the Hero

The following is a quick highlight of the differences between deflation and inflation as outlined in the essay, Deflation & Liberty, by Jorg Guido Hulsmann.

First, let’s start with the basic notion that both deflation and inflation are “monetary phenomena”, and occur as a result of central banking (the Federal Reserve) monetary policy.

Inflation or inflationary policy is the vast increase in the quantity of paper money over the increase in production. Thus, as a result of this increase in paper money over production prices will rise (i.e. reduce the purchasing power of existing paper money). However, this rise in prices does not occur all at once nor does the reduction in purchasing power impact all of the citizenry at the same time. Herein lies the inequality (that government claims to be a defender of); those who receive the new money first, before prices in general have risen, benefit from the inflationary policy. Inflation is a redistributive governmental practice.

The relentless influx of paper money makes the wealthy and powerful richer and more powerful than they would be if they depended exclusively on the voluntary support of their fellow citizens…….inflation puts a brake on social mobility

Deflation, no less, is merely the opposite, where the supply of money “disappears” and prices drastically fall as a result. In the case of deflation, much like with inflation, there are also winners and losers as the final outcome. However, the fear of deflation seems to be based on a fallacy, which is the disappearance of money will lead to the disappearance of “physical structure” and wealth (wealth equals previously produced capital goods not yet consumed). This fallacy seems to have been placated by the producers of money and policy (the policy of deficit financing).

But our tools, our machines, the streets, the cars and trucks, our crops and our food supplies – all this is still in place. And thus we can go on producing, and even producing profitably, because profit does not depend on the level of money prices at which we sell, but on the difference between the prices at which we sell and the prices at which we buy. In a deflation, both sets of prices drop, and as a consequence for-profit production can go on.

Therefore, if inflationary policy (i.e. easy credit) leads to the boom in the business cycle, which inevitably must come to correction as a result of exuberant misallocation of resources, then the deflation that occurs during a market correction only serves to speed up the correction process much like inflation speeds up the (illusory in this case) market expansion. “…Rothbard’s analysis of deflation, which demonstrated in particular the beneficial role that deflation can have in speeding up the readjustment of productive structure after a financial crisis.”

In short, the true crux of deflation is that it does not hide the redistribution going hand in hand with changes in the quantity of money…..Both deflation and inflation are, from the point of view we have so far espoused, zero-sum games. But inflation is a secret rip-off and thus the perfect vehicle for the exploitation of a population through its (false) elites, whereas deflation means open redistribution through bankruptcy according to the law.


So, is deflation really so bad for the aggregate economy or harmful only for those who have benefited from inflationary policy? Which, inflation or deflation, is more in-tuned with liberty?

If we tie this up with our comparative analysis of free and compulsory production of money and money substitutes, we come to the conclusion that deflation is not a mere redistribution game that benefits some individuals and groups at the expense of other individuals and groups. Rather, deflation appears as a great harbinger of liberty. It stops inflation and destroys the institutions that produce inflation. It abolishes the advantages that inflation-based debt finance enjoys, at the margin, over savings-based equity finance.

Energy Efficiency is Market Efficiency

While I am not a fan of Time magazine, for reasons I do not know I receive Time magazine at my home – so I read it most of the time. The January 12th edition’s front page leads the reader to a story about energy efficiency, by Michael Grunwald. The beginning of this article is pretty much, in my opinion, an accurate perspective of the differences between energy efficiency and conservation. Energy efficiency is ideal when the cost to benefits reveal positive alignment with free market forces (prices).

However, were Grunwald goes wrong is his implicit disregard for market forces and how the free market is the best approach to bringing about efficiency (of all productive capacities). Specifically, Grunwald writes: “History has shown that when the government mandates efficiency, the market figures out how to achieve it.” The processes of government mandates already reduce the possibility of market efficiency. That is these mandates distort market prices, which market prices are the best way to decide whether a given action is worthwhile.

“The efficiency of a given machine is defined as the ratio between the usable work that comes out of the machine to the energy that went in. But, again, no machine can be made to be perfectly efficient.” (Energy: The Master Resource) Additionally, Grunwald calls for innovation and incentives to spur energy efficiency. Again, markets are what spur innovation to deal with solving the problems that people face. Government mandates fail to fully optimize the productive abilities of free people.

Moreover, while Grunwald does mention the destructive outcomes of subsidizing inefficient energy alternatives he fails to mention why government involvement in the market creates impractical incentives for impractical solutions. Government mandates simply create a market for pressure groups that simply absorb and misuse large amount of economic resources.

“Mandates provide a big stick, but money is still the best carrot, and Obama has suggested that he wants to spend lots of it to promote efficiency.” writes Grunwald. The spending of large sums of money by the government only takes away from the private market’s ability to be productive – thus innovate to achieve efficiency as a result of market incentives.

The free market is still the best way to evaluate the most efficient ways to use our scarce resources in the most productive capacity. Furthermore, if we are to become more efficient in the way we produce and use energy resources, look to the free market to innovate (here are examples by Chris Brown and Murray Rothbard) not the government. A good book to read that is educational on the subject of markets, efficiency, and energy, in my opinion, is Energy: The Master Resource. “Market incentives lead people to balance these trade-offs to make the best use of available resources”.

Sunday, January 4, 2009

An Opportunity for Change

The current economic situation presents a great opportunity for yielding a very positive outcome --- a resurgence of economic freedom. While much of the current economic and political agendas are merely more of the same, that is a Marxist and Keynesian approach to solve an economic collapse - no less brought on by much of the same government intervention - there does exist a real opportunity for pushing forward free-market ideas. We can either choose to adapt to ways that provide the best paths for equality and prosperity or instead opt for political rhetoric dressed in failed socialistic ideas.

I will certainly admit that my view is of pure optimism - given the current political environment, however, I feel very confident in suggesting that economic times such as the current is ideal for teaching the truth about economic freedom and its correlation to liberty for all. Just as the bust in business cycles serves to rid the market of malinvestments, now is the time to reverse the tide of economic thought and policy and move in the direction of economic freedom.

As economics remains the topic Du Jour more attention is paid by the masses. With the ongoing talk and clamor, ad nauseum, regarding more bailouts, market failures, recessions, inflation, deflation, socialism, nationalism, protectionism, energy independence, car czars, government interventionism, government debt, and so on – the U.S citizenry now appears poised for truth. During robust times, however, many seem to turn a blind eye to the very principals and economic foundation that has allowed so many to obtain such a high standard of living. Herein lays the great opportunity to ameliorate the understanding by the masses; we must persevere to ensure the connection between economic freedom and liberty is fully comprehended.

While these very truths, prevalent in securing equality and prosperity, have been used before as weapons in the battle of ideas, again more than ever need echoing. Equality of opportunity over equality of outcome; rights to private property and voluntary exchange; free markets and trade; the elimination of government intervention into markets; the removal of pressure groups and government means for confiscation of private wealth (i.e. inflationary policy); and the installation of laissez faire capitalism.

As Ayn Rand had so well stated: “Is there any hope for the future of this country? Yes, there is. This country has one asset left: the matchless productive ability of its people. If, and to the extent that, this ability is liberated, we might still have a chance to avoid collapse. We cannot expect to reach the ideal overnight, but we must at least reveal its name. We must reveal to this country the secret which all those posturing intellectuals of any political denomination, who clamor for openness and truth, are trying so hard to cover up: that the name of that miraculous productive system is Capitalism.”