The Brothers Austrian

This mission is for Obama guys!

In case you missed it, there was some hulla balloo in downtown New York City Monday when the federal government sent Air Force One (along with its paparazzi) on a secret mission.  It seems like the secret mission included a photo op flyby of the Statue of Liberty.  The planes logically took a path most similar to the ones taken on 9/11.  Genius.

Like any good Austro-libertarian I asked myself if a private company, say XYZ Company, would have the hubris to complete such a mission.  In all honesty you know what, perhaps it would.  It’s impossible to know for sure.  One thing that we do know is that there would be immediate backlash from potential consumers of XYZ Company.  In other words, they would be accountable.  In this case, however, other than some trumped up anger from the president (and likely a fired employee), the government will go unscathed.  After all. what can we really do?

To top all of this off, the government spent $328k on this folly.  That should sicken each and every one of you.  As Federal Reserve inflates our money supply by the trillion, the same government still has the pretense to send Airforce One on this special mission.  Can’t say I’m surprised.

Teacherman General, Government Spending 9/11, airforce one, Federal Reserve, government, money supply, obama

I was perusing the internet this morning while simultaneously watching a History Channel episode called The Black Blizzard which chronicles what life was like during the 1930s Dust Bowl.  I decided to find out more about this tragedy.

Supposedly the book to read on the subject is called “The Worst Hard Time” by Tim Egan for those that are interested (disclaimer: I have not read the book), however the documentary was narrated by Egan and it would seem he has harvested some solid facts.

As the History Channel started to draw more of my attention, my Austrian wheels began turn: How did the Dust Bowl came about? How did the Midwest become over cultivated? Why did so many people move to Western Kansas to farm? In the The Worst Hard Time Egan writes:

“Why did families settle in the and western half of the Great Plains–land described as ‘the flattest, driest, most wind-raked, least-arable part of the United States?’ The government and the media of the day undoubtedly played major roles in “selling” the land to unsuspecting settlers. Congress encouraged settlement of “the last frontier in public domain” and, in 1909, passed the Homestead Act, a desperate move offering inexpensive land and attractive incentives for settlement. Newspaper editors, bankers, politicians, and speculators distributed fliers, broadsides, and brochures advertising ‘the most alluring body of unoccupied land’ in the country, and the government termed it ‘the last frontier of agriculture’ Brochures described areas with paved, tree-lined streets, clean water, and railroads but, when the settlers arrived, they found only stakes in buffalo grass.”

Hmmm, the Homestead Act, sounds like another populist undertaking, where did this legislation originate and what’s it all about?

The Homestead Act of 1862 was passed by the U.S. Congress. It provided for the transfer of 160 acres (65 hectares) of unoccupied public land to each homesteader on payment of a nominal fee after five years of residence; land could also be acquired after six months of residence at $1.25 an acre. The government had previously sold land to settlers in the West for revenue. As the West became politically stronger, however, settlers increased pressure on Congress to guarantee free land. Several bills providing for free distribution of land were defeated in Congress; in 1860 a bill was passed in Congress but was vetoed by President Buchanan. With the ascendancy of the Republican party (which had committed itself to homestead legislation) and with the secession of the South (which had opposed free distribution of land), the Homestead Act, sponsored by Galusha A. Grow, became law.

This is what I would call one of Hazlitt’s half truths. In the short term the Homestead Act seemed like a great undertaking: revenues for the government and land for the people to farm, but what were the long term affects of the government providing land to the people for essentially nothing? What were the “whole truths” of the government legislation? One might ask, “How could they have possibly known what the “whole truth” was going to be? But that’s just it, no man, no group, no human….no government can provide us with whole truths. No one person can have that kind of foresight and that’s why doing nothing may be better than doing something. But then again doing nothing is not what gets you elected.

Wendall Wilkie History, Interventionism black blizzard, dust bowl, half truths, Hazlitt, history channel, homestead act, tim egan, wheat

David Adolf Axelrod

Senior White House advisor David Axelrod apparently thinks that some manifestations of the first amendment are healthy and others are not.  On the recent Tea Party Protests Axelrod said, “I think any time you have severe economic conditions there is always an element of disaffection that can mutate into something that’s unhealthy.”

Wow, this sounds incredibly familiar.  In 1919, Attorney General A. Michell Palmer, using J Edgar Hoover as a proxy, employed similar sentiments to enact a series of raids on political dissidents.  “There could be no nice distinctions drawn between the theoretical ideals of the radicals and their actual violations of our national laws,” Palmer claimed in 1920.

In the ‘Palmer Raids’, Hoover targeted mostly communists and anarchists.  In 1919, they rounded up 249 citizens, including Emma Goldman and Alexander Berkman, and sent them ‘home’ (to Russia) aboard the Soviet Arc. The next year over 6,000 were arrested in a raid against the radical IWW workers union.

Now in all fairness, some of these raids were in response to a series of bombings (not simply ’severe economic conditions’ – though government inflation was causing a severe recession after World War I).  Perhaps Axelrod does not believe in instituting the Holder Raids, but his statement does indicate a generally dismissive and arrogant tone toward dissenting voices.

High ranking government officials, simply through veiled statements, can influence how ordinary Americans interact.  Axelrod’s ‘unhealthy’ could be translated by some boob into shunning the tea party protester.  Get a few boobs together, all fearful of ‘unhealthy’ dissent, and you have a de facto suppression of speech.

Teacherman Liberty 1919, alexander berkman, attorney general, david axelrod, emma goldman, j edgar hoover, palmer raids, soviet arc

It is estimated that the paper industry will receive around $6 billion in funds designated to foster development in alternative fuels.  That’s around $20 from every Americans (including children).  Congress designed the original bill to encourage the paper industry to use biofuels to fuel their paper plants.  The companies realized, however, that they could also use a loophole in the legislation to use a diesel blend to fuel the plants.  International Paper has already received $71 million and could receive over a billion dollars thanks to this legislation.  In fact, the legislation has benefited the paper companies so much, that it is being seen as an industry saving bail out.  With Americans being bled to death with social security, income, state, and property taxes, this is a shameful unintended consequence of interventionism… yet another sad example of failed economic planning.

Teacherman Government Spending, Interventionism biofuels, congress, diesel, economic planning, international paper, Interventionism

On April 9, President Barack Obama requested an extra $83.4 billion for the wars in Iraq and Afghanistan.  The president does not use the term ‘war on terror’, but that is just another semantic ruse that he has perfected.  This misallocation of additional funds, while not surprising, marks another sad day for peace and liberty.

Along these lines, I am amazed still to hear people discuss war spending as some sort of economic perquisite.  As most Austrians know, Frederic Bastiat’s broken window parable in That Which Is Seen and That Which Is Unseen (popularized by Henry Hazlitt) demonstrates this fallacy.  War spending represents money that cannot be allocated to other resources (food, shelter, technology, whatever).  While certain sectors of the economy benefit (my friend at Lockheed Martin perhaps), those immediate benefits are scored at the expense of the rest of the economic agents down the line.

Teacherman Government Spending afghanistan, bastiat, Hazlitt, iraq, obama, president, war

I said this months ago (U.S. to Offer Aid to Life Issurers), the government has to bailout these insurers because they are ones that own the most financial services paper. This is no different than what happened in 1929-30, everyone owned each others paper. Once the average policy holder realizes this, they may seek to redeem the cash value of the policy.  This ten causes a solvency problem for the insurers.

As a bond trader this is positive, and an Austrian…

Wendall Wilkie Interventionism bailout, insurers, life insurance

As I prepared for my lesson on the Great Depression this semester, I turned to our textbook and read the following (this is not a joke):

“Why did the country sink further into depression [after the stock market crash]?  Farmers and coal workers had suffered all through the 1920s from low prices, and the farmers were the first group in the 1930s to plunge into depression.  But other economic sectors also lurched out of balance.  Two percent of the population received about 28 percent of the national income, but the lower 60 percent got only 24 percent.  Businesses increased profits while holding down wages and the prices of raw materials.  This pattern depressed purchasing power.  Workers, like farmers, did not have the money to buy the goods they helped to produce.”

Hmmm.  After dismissing plans to systemically remove this section from the textbook of every student, I put together a very brief overview of the Austrian business cycle and presented this version to the students as my lecture on the subject.

As juniors in high school, most of my students are economic novices.  That is to say, both explanations were drawn onto a tabula rasa.  The overwhelming comment from my classes centered on two stark realities: 1) “we’ve already discussed similar economic downturns previously and this one sounded very similar” (ergo why didn’t we learn); 2) “this sounds a lot like toda” (ergo why didn’t we learn).  Ironically, Mises had a daily article yesterday about the economic downturn in 1819, following a similar theme.

Generally, the Austrian theory appealed to most students.  As we move into the New Deal, most students will struggle with the idea that the government cannot be a savior.  As our textbook will trump the various New Deal program up, I will balance it with Hazlitt’s first chapter (the lesson).

Teacherman History austrian theory, business cycle, great depression, Hazlitt, new deal

A co-worker of mine recently put me on to a great op-ed that was in WSJ Monday morning by on Bubble economics by Steven Gjerstad and Nobel Laurelate Vernon Smith. The whole article is fantastic but I want to focus on one small part of it that really baffled me:

“In 1983, the Bureau of Labor Statistics began to use [for CPI] rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.

With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since “owners’ equivalent rent” is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.

With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off. As measured by the Case-Shiller 10 city index, the accumulated inflation in home-ownership costs between January 1999 and June 2006 was 151%, but the CPI measured a mere 23% increase. As the Federal Reserve monitored inflation in the early part of this decade, home-price increases were no longer visible in the CPI, so the lax monetary policy continued. Even after the Fed began to slowly raise the fed-funds rate in May 2004, the average rate remained low and the bubble continued to inflate for two more years.”

So what does owners equivalent rent really mean according to the BLS?

“(The) BLS asks each homeowner for their estimate of the house’s implicit rent and what occupants would get for their rent (how many rooms, etc.) if the owner did rent their home.”

When the Bureau of Labor and Statistics do their surveying for shelter index portion of CPI they ask the following question (verbatim):

“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

Man I would love to get one of these calls.

If you ask someone about their home value, that is something they probably know about, but if you ask someone about their house’s implicit rental equivalent is, now that is a different story. Most people do not understand the economics of rental properties well enough to give such an opinion. Furthermore, how many people living in Mc-Mansions can even contemplate what their monthly rent would even be when they live in a neighborhood that may not even have on housing unit that charges on a monthly rent basis?

I think Gjerstad and Vernon know what Hazlitt knew decades ago: inflation numbers are blatantly cherry picked and scrubbed to make it seem like the COLA estimates are much lower then they really are.

Furthermore the BLS states that, “Because rents are not volatile, the CPI can use a longer interval between pricing observations than it uses for other consumer items.” I guess we will have take that statement about volatility at face value.

Click here for more information regarding the housing index and CPI

Wendall Wilkie Inflation, Real Estate, Uncategorized cpi, Hazlitt, housing bubble, Inflation

The Forgotten Man, a popular essay by William Graham Sumner.  The idea of which was used by Hazlitt and even by Amity Shlaes in her recent book on the Great Depression.  Sumner’s work, penned in 1883, is all too relevant today:

In hard times, insolvent debtors are a large class.  They constitute an interest and are able to attract public attention, so that social philosophers discuss their troubles and legislatures plan measures of relief.  Insolvent debtors, however, are an insignificant body when compared with the victims of commonplace misfortune, or accident, who are isolated, scattered, ungrouped and ungeneralized, so are never made the object of discussion or relief.  In seasons of ordinary prosperity, persons who become insolvent have to get out of their troubles as they can.  They have no hope of relief from the legislature.  The number of insolvents during a series of years of general prosperity, and their losses, greatly exceed the number and losses during a special period of distress.

Indeed these are the forgotten men, of as Sumner corrects, the man who is never thought of.

Who are the forgotten men of 2009?

Teacherman Interventionism, Politics great depression, Hazlitt, william graham sumner