Austrian Economics Valhalla

by S.J. Masty

Thanksgiving Friday, 2108 – Will America survive economic meltdown? To find out, we took our time machine 100 years into the future to Auburn, Alabama, home of The Ludwig von Mises Institute and the new national shrine.

Lew Rockwell founded his institute 126 years ago in 1982. Brought back to life by cloning, he pointed at Friedrich Hayek struggling to light the barbeque. The Nobel laureate looked surprisingly spry at 209, but that’s science for you.

A portly and jovial "Noo Yawker," Murray Rothbard, tossed a cold beer to Eugen "Call me Gene" von Böhm-Bawerk. What looked like a faculty picnic was Economics Valhalla.

Cloned, alive and teaching in the future are all the greats from the Austrian School of Economics. It champions small government and sound money, and by 2108 has been the world’s sole, economic orthodoxy for fifty years.

"Whatever you do," cautioned Rockwell, "save room for Carl Menger’s macaroni salad, and ‘Bill’ Röpke’s sweet-potato casserole."

"It must look dire to you people back in 2008," explained Ludwig von Mises, "but the Great Meltdown, as we now call it, permitted today’s freedom and prosperity. Isn’t that right, Fred?"

"Mmmph!" replied Frédéric Bastiat over a mouthful of pretzels. "Governments are small and money is sound, so most nations are now thrifty, economically productive and wealthy. It never would have happened without stupid Washington turning the 2008 market crash into a 25-year global depression."

"Who were those numbskulls again?" asked Hans Sennholz. "The dumb-headed white guy and the wrong-headed black guy?"

"Bush and Obama," said Rockwell. "They thought they could cure everything by massive government spending."

"They squandered 25 trillion before the whole charade collapsed. Then came more private sector contraction, evaporating credit, plummeting tax revenues, monstrous inflation through government printing money, no possibility for funding the bloated welfare state – and no cash for American imperialism, invasion and occupation. Big, bullying, manipulative and costly government ran out of fuel and stopped – and guess what? People slowly grew happier, more free and productive without it."

Arriving late, W.H. "Bill" Hutt asked "How much do I owe for the beer fund?"

"About five Walbucks, three Toyotayen or half of one of those new, Brazilian company's plastic doubloon-thingies backed by gold. Amazoners," Rothbard replied.

In 2042, government-issued money was replaced by Hayek’s idea of competing private currencies. "It ended financial manipulation and crooked tricks by which government spent money it did not have," Rockwell explained.

"That ended credit bubbles and economic meltdowns. Now, if one private sector currency is manipulated, people use another. That was impossible when governments monopolised money production."

Professor von Mises said, "Say, has our guest been to the shrine?"

Jean-Baptiste Say said "No, but The National Shrine to Victims of American Socialism is very moving."

"America had a national socialist state since the 1930s, but only as it collapsed did it attack its own people," von Mises continued. "In 2010 it started civilian conscription, a Hitler Youth Movement without Hitler. The enormous state security apparatus turned viciously against its own law-abiding citizens. Children were turned against parents by the state. Low-level bureaucrats were empowered to punish without trial, often brutally."

"Government nationalised most jobs, so political correctness determined employability. Many unemployed died of hunger, often in political re-education or labor camps," added Fritz Machlup. "Today, millions visit their shrine every year, based here in Auburn because of these far-sighted economists who warned us, back when too few would listen."

"Good thoughts for Thanksgiving," added von Mises. "Now, everybody try my wife Margit’s pumpkin pie, but save a piece for Ron Paul."

Big Spending And Long Slumps

Economy: Before forging ahead to a new New Deal — without the dams — President Obama should ponder the poor record of big-government stimulus plans, starting with Japan in the 1990s.

When times are tough, politicians talk infrastructure. That's what the president-elect is doing now, and there are powerful political reasons for doing so.

Spending on public works will always be popular with the people who get the jobs and the money for local economies where the work takes place. The public also likes seeing its tax dollars "at work," as the signs say, on tangible benefits like roads and bridges.

And it's just common sense the economy can't thrive without modern, high-capacity roads, rail lines, seaports, electric power, aqueducts, reservoirs, natural-gas lines, the Internet and all the other things that help the private sector produce goods and services.

But the big question right now is how to get a stricken economy moving again, and infrastructure spending is not the answer.

Critics have already noted an obvious problem of timing. Even a crash public-works program will take a while to reach the point where people are put to work on construction sites or in factories.

And don't forget the greens. Obama certainly can't. The environmental movement has never let the health of the economy get in its way, and there's no reason to believe it has changed its ways.

This isn't the 1930s, when the federal government altered much of the American landscape with massive reclamation projects. A New Deal today would have no dams — and, if the enviros get their way, it would lack new highways and anything to do with nuclear power.

Figure politics to get in the mix when the government spends money, even if it claims to have only economics in mind.

In the marketplace, money naturally gravitates toward real needs, signaled by the willingness of people to pay for goods and services out of their own pockets.

In government spending, money follows power. It is channeled by key officeholders to favored constituencies. So when a national government tries to breathe life into an economy with massive spending, the result is massive economic inefficiency.

It's an undying Democratic Party myth that Franklin Roosevelt's New Deal spending helped end the Great Depression (or at least relieved suffering). The hard fact is that unemployment stayed well into the double digits until the early stages of World War II.

There seems less argument over a more recent case of failed big-government stimulus, that of Japan in the 1990s. The incoming administration should study that lost decade well, because it started with disturbing parallels to our own time and place.

Japan got into trouble with the collapse of a real-estate bubble and a subsequent breakdown of its banking system.

The Japanese government made one mistake that U.S. policymakers are at least trying to avoid now: It did not move aggressively to clean up the bad debt on banks' balance sheets.

Then it made another error that the pending Obama administration seems tempted to repeat. It tried to revive the economy by increasing the government's share of it.

The result was plenty of pork and almost no growth. Japanese government spending (at all levels) grew from 31% during the '90s to 38% of GDP more recently.

Meanwhile, average Japanese annual economic growth fell from 4.1% in the '80s to just 1% in the '90s. From '92 to '99, industrial output grew only 0.7% compared with nearly 40% in the U.S., which spent the decade reducing government spending as a share of GDP (this was the era of a GOP Congress that took its job seriously).

There's a cautionary tale here for Barack Obama, but also a reminder that he has a choice. The current crisis is serious enough to excuse, even demand, changes in positions he had staked out during much different conditions on the campaign trail.

He also can find precedent for sound policy in his own party's history. FDR is not his only model in the Democrat pantheon. He should take his cue in this case from a liberal with whom he is often compared, John Kennedy, who chose tax cuts as a way to spur growth by freeing up private capital.

Members of Obama's party, along with his own ideas on tax "fairness," will be pushing him toward the slow lane of big spending. As JFK knew, there's a better way.

Missing The Story On 2.5 Million Jobs

Stimulus: Media are fawning over Obama's plan to create 2.5 million jobs in two years. But as usual on Democratic proposals, they aren't doing their homework. By historical standards, Obama's goal is quite modest.

The president-elect has directed his economic team "to come up with an Economic Recovery Plan that will mean 2.5 million more jobs by January of 2011." And right on cue, the media have described the plan in glowing terms.

The Washington Post called the goal "more expansive than anything proposed so far." Reuters described it as "bold" and "aggressive," and NPR called it "an ambitious economic stimulus package." "Obama pumps up his economic stimulus proposal" was the headline over the Los Angeles Times story.

Obama hasn't released any details about the plan, other than to say it will be "a two-year, nationwide effort to jump-start job creation in America," and that it will be "big enough to meet the challenges we face."

It will also involve creating a lot of government jobs "rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels; fuel-efficient cars and the alternative energy technologies."

So the only thing "bold" about the plan, as far as anyone knows, is the number of jobs he hopes to create. But while 2.5 million might look impressive, it's not. In fact, when measured against trends, Obama has set his job-creation sights fairly low.

Every presidential candidate in recent times has claimed that his policies will lead to the creation of millions of new jobs — often making promises far bolder than Obama's.

In 1988, George H.W. Bush promised 15 million new jobs. In 1992, Bill Clinton said his economic plan would create 8 million. In 2000, Al Gore promised 10 million new high-tech positions. That same campaign, George W. Bush said his tax cuts would add 5 million to payrolls. In 2004, John Kerry pledged 10 million.

Earlier this year, Hillary Clinton offered up a plan during the primaries that she said would create 3 million jobs just "through increased investments in the nation's infrastructure."

Such promises are easy for politicians to make because a growing economy creates enormous numbers of new jobs, no matter who sits in the White House.

Since Eisenhower's first term, the economy has created an average of 1.5 million new jobs each year. Since Reagan's first term, the average has been about 2.5 million a year. And Reagan, who inherited an economy as bad if not worse than the current one, saw 6.3 million new jobs created four years after he entered the White House.

If Obama just manages to hit the post-World War II average, there would be 3 million more jobs by 2011.

What's more, Obama's promise doesn't keep pace with projected growth in the labor force. The BLS projects that roughly 2.6 million new workers will enter the labor pool over the next two years.

If that's the case, Obama's plan would leave the unemployment rate slightly higher in 2011 than it is now. Moreover, Obama's stimulus plan could eventually total $700 billion, the Washington Post reports. So, as former Council of Economic Advisers chief Gregory Mankiw notes, each job Obama "creates" will cost $280,000.

Obama can hardly be faulted for continuing the tradition of presidents promising millions of new jobs. And he's free to describe his plan as bold and brave. But that doesn't excuse the media for parroting such claims without at least a modicum of fact-checking.