The Brothers Austrian

With talk of a second stimulus package already in the works, many are wondering who is going to pay for all of this?  Well, as William Graham Sumner famously said, it will be the “Forgotten Man.”  Well, certainly we will all have to pay for stimbailtarpitis, in some way or another, but it is the Forgotten Man who will pay the most.  This will likely come in the form of inflation.

As any good Austrian knows, inflation will hit the Forgotten Man (especially the poor Forgotten Man), first and hardest.  Many will counter and say, what about all of those people who got jobs from the stimulus package?  Well, yes, but they are not the forgotten ones.  If one were to take a cynical view they are merely the ones closest to those wielding influence over policymakers.  Nevertheless, they will benefit from the stimulus, but only at the cost of the rest of society.  As Henry Hazlitt eloquently explains, those who receive additional money (from the stimulus) will be willing to pay more for goods and services.  Anyone who understands basic supply and demand will agree with this.  Stimulus receivers now have more of something (dollars) and therefore each will inherently mean less to them.  This will lead to price inflation.

The Forgotten Man, however, is now stuck in an even worse situation.  Now, not only does he feel worthless for not getting stimulated, he also has a lower standard of living than before.  Why?  He did not receive an immediate impact from the stimulus, but higher prices stared him in the face shortly after the dole was passed out to his neighbor.  His standard of living will go down.

I will leave with a parting shot from Mr. Sumner.  Keep in mind how relevant this is and remember, he is writing in 1883, not 1983.

In all jobbery the case is the same. There is a victim somewhere who is paying for it all. The doors of waste and extravagance stand open, and there seems to be a general agreement to squander and spend. It all belongs to somebody. There is somebody who had to contribute it, and who will have to find more. Nothing is ever said about him. Attention is all absorbed by the clamorous interests, the importunate petitioners, the plausible schemers, the pitiless bores. Now, who is the victim? He is the Forgotten Man. If we go to find him, we shall find him hard at work tilling the soil to get out of it the fund for all the jobbery, the object of all the plunder, the cost of all the economic quackery, and the pay of all the politicians and statesmen who have sacrificed his interests to his enemies. We shall find him an honest, sober, industrious citizen, unknown outside his little circle, paying his debts and his taxes, supporting the church and the school, reading his party newspaper, and cheering for his pet politician.

Teacherman Inflation, Interventionism austrian, forgotten man, Hazlitt, stimbailtarpitis, stimulus, william graham sumner

What haunted Henry Hazlitt, still haunts us today: Governments focusing on only what the immediate effects of a policy will be. He refers to their actions as “half truths”. The seen and unseen. The seen of this bailout is that a few hundred thousand auto workers are still employed and the employees/retirees will have benefits.

The unseen: What about the workers that are not part of the auto industry that did get laid off? What about the worker whose 401k is down 40% with no pension plan? What about the guy who saves and saves and saves, only to have the value of savings dwindle via inflation in order to pay for the bailout of the auto worker (I am sorry let’s be honest here, this is a bailout of a group of people that have political pull, not the saving of a so called iconic “American” industry)?  What about the capital resources that are redirected to the auto sector versus another, more viable sector? What about the effect on bond investors?

In a NYT op-ed piece James Glassman claims that this might  “Drive the bond market to ruin”. This is the what I call the “Obama Button”.  It’s like the reset button. What would happen if we pressed the reset button? Who knows right? All bets are off! If I am a bond investor I have to price in whether or not an industry will be “bailed out”.  While the immediate effect is saving a few hundred thousand jobs, the long term effect is that there will be more market volatility because we never no who is next to be part of our “bailout nation” or even how to price the possibility of a bailout. Will the bailout lead to the bonds being “made whole” like they were for Citigroup or will do I price in huge discount in case the government tries to super cede me in the capital structure (think Chrysler secured bondholders).

Wendall Wilkie Government Spending, Inflation, Interventionism, Taxes, Uncategorized auto industry, bail out, bond market, citigroup, henry hazlitt, obama button

The Obama administration told the American taypayer this weekend to just accept it.

First and foremost is the acceptance of General Motors bankruptcy.  The American taypayer now has an 60 percent ‘equity’ investment in the company.  Sweeet.

Next, and perhaps the president needed to pad his May expenses a little bit, but his excessive ‘date’ to New York City cost the American taxpayer a pricey penny.  How many press and media members needed to follow this ‘event’?  One, two, ten, one plane full, how about two planes full.  Just accept it.

I couldn’t believe how lame McCain’s celebrity ads were when he ran them during the campaign, but perhaps he was onto something….

Any ideas for what we’re to accept next.

Teacherman Government Spending, Interventionism bankruptcy, general motors, investment, mccain, obama, taxpayer

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

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

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

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

My brother has posted a few times lambasting the higher education system, especially at the elite level, for propagating a broken economic system.  Worse, their temerity leads them to believe that they can diagnose and fix macroeconomic systems.

The seminal work underpinning my brother’s revulsion is The Pretense of Knowledge, by Friedrich A. Hayek.  This is the name given to a speech by Hayek in 1974 in a lecture to the memory of Alfred Nobel.  In it, Hayek explains the limits of human knowledge, especially in relation to the infinite variables of a macroeconomic system.  As he says, “Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones.”  Nevertheless, political economists tend to use rigid formulas, in a manner like the physical sciences, to analyze highly fluid macroeconomic settings.  Hayek notes, “Yet the confidence in the unlimited power of science is only too often based on a false belief that the scientific method consists in the application of a ready-made technique, or in imitating the form rather than the substance of scientific procedure, as if one needed only to follow some cooking recipes to solve all social problems.”

The inane pretense of the Federal Reserve and the Obama (and Bush, etc) administration that they have the knowledge to manipulate the monetary system without consequence is absurd. 

But when it doesn’t work, we can just blame the ‘free market’ — right?  Talk about moral hazard…

Teacherman Federal Reserve, Interventionism, Politics Federal Reserve, hayek, macroeconomic, monetary system, pretense of knowledge, sciece

Jobs, Jobs, jobs politicians say. We must put the people back to work, however this is only temporary they say. Merely to fill the “gap” left by the private sector, but I would put this question to President Obama, whats your exit strategy? What jobs will the government provide that can be seamlessly absorbed by the public sector when the crisis is over?

Does the government have the foresight to train employees in area’s of business that the private sector will deem to be viable and productive in the future? Once the government builds their bridges and railroads where do the employees go from there? If the government can figure this all out maybe they can give me some stock tips while they are at it. I mean we all know how the government is a viable, efficient, and profitable entity that can balance a budget, so we will be ok, right?

Again, I don’t think that the government has an exit strategy for this mess. Once they start putting people to work it will be awfully hard (politically) to lay them off and let the private sector try to absorb them. These former government employees will not be trained in the skills they need to be useful in the private sector and they will continue to demand unsustainable wages. The government will succumb because ultimately these employees vote. This in turn will in turn increase the velocity of our country’s downward productivity spiral.

If the government wants to stimulate, I say pour money into mathmatics, science and law enforcment. Perhaps upgrade our rail system but thats it. Let prices come down, let banks fail, and watch productivity go up.

Wendall Wilkie Government Spending, Interventionism, Politics employment, government, jobs, obama, private sector, stimulus

In case you missed this classic story in the news yesterday, Secretary of Education is encouraging local school districts to spends the stiumlus money fast (emphasis added).

The Department of Education’s ‘five-page guidance’ manual actually says, “Spend funds quickly to save and create jobs…”

I was thinking of some more appropriate endings to that statement, here’s my top 5:

1) Spend funds quickly to ensure there is nothing left when the dollar becomes worthless.

2) Spend funds quickly before Congress realizes cuts in education spending actually may improve school efficiency.

3) Spend funds quickly to let China know that we are putting its money to good use.

4) Spend funds quickly so we can hurry up and get some more!  This is way better than actual budget balancing!

5) Spend funds quickly before people realize that more money doesn’t actually mean better schools.

Teacherman Government Spending, Interventionism, Politics arne duncan, budget, china, education, stimulus