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

Jack Welsh’s on the Economy: Past the Point of No Return title describes how I have thought about monetary policy after I picked up on the Austrian Business Cycle Theory (his piece is a must read). We have gotten so out of control with credit expansion, by every measure, that I fear the consequences of unwinding it. Again, think of the last pargraph of chapter 23 of Hazlitt’s Economics in One Lesson.

“Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.”

Wendall Wilkie Federal Reserve business cycle, credit, economics in one lesson, Hazlitt, monetary policy

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

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

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

There are many, many, micro inputs that collectively have combined to culminate into this massive credit crisis. The creation of the Federal Reserve, coming off the gold standard, the invention of the credit card, the invention of asset backed bonds, subprime lending, etc etc etc. Who could have ever thought that all of these things would culminate into a crisis this big? Well Hazlitt knew the problem was on the horizon in the 1950’s and make no mistake, Hazlitt was woefully aware of how devastating inflationary policies could be.  Have we forgotten about what the fall of the German mark  ultimately lead to? The below statement actually strikes the fear of god into me!

“Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.”

-Henry Hazlitt (Economics in One Lesson)

· Discourage prudence and thrift- government encouraging spending ?

· Gambling and speculation -Flipping houses, LBO’s-?

· Desperate remedies-monetizing debt-?

I believe that the above statement by Hazlitt not only summarizes how we got into this “credit crisis” but also summarizes where we will end up. Monetizing debt is just the start of the desperate remedies. I fear that the impudence of the governments of the world will lead to further instability. Now, as brutal is this instability may end up being it is my job, I still look for future investing opportunities.  That’s why I have coined the GGO Investment Theory- Guns, Gold & Ordinance (perhaps we should substitute oil for ordinance?). That is not to say that I recommend running out and buying stocks, because I actually wholeheartedly believe that equity indexes will cough up another 40%–that’s right I said 40%–within a year. When the cough up comes, however, I will be ready to pick up some defense stocks on the cheap. As far as gold goes, well you better have some of that before that cough up comes, because otherwise you will be paying up to own the bullion.

Wendall Wilkie Gold, Inflation, Stock Market defense stocks, economics in one lesson, Gold, Hazlitt, Inflation, oil

Have you ever stopped to think about how much efficiently you could have learned something? Or what about when you realize everything you thought you knew was wrong? I am sure some very smart people were convinced the world was flat and were quite perturbed when learned the world was actually round. Well I would say I just realized everything that I had been taught/thought about the history of the U.S. was dead wrong.

At Syracuse University, as a history major, I was taught that it was Roosevelt’s quarterbacking in the 30’s that helped the U.S. recovery from the depression. I was essentially taught, like the rest of us, that fiat monetary system created by the Federal Reserve was necessary to provide the economy the “flexibility” to soften the blows that were supposedly considered a natural occurrence of the market (this is painful to think about). If you are reading the blog, you probably have had the experience that I had when I discovered the plethora of readings that come from what is known as the “Austrian” school of economic thought. My first reading was Economic Policy: Thoughts for today and Tomorrow. From there it all just snowballed for me. Hayek, Hazlitt, Rothbard. But honestly it really only took me about the first 25 pages of that first Von Mises book and I was hooked. Like I had discovered a new religion and that I was saved….and then I immediately felt as if I had been robbed.

I thought to myself, “How could I not have heard of this school thought…I was a double major.” One would think that if you majored in both political science and history that I would have come across this “Austrian” school of thought. This just did not make sense.

What I do realize is that history is written by the victors. America came out of the WWII the strongest nation which had seemingly won WWII (no one really won, everyone lost in my opinion). We had amassed an enormous amount of wealth throughout the 19th and early 20th century. Subsequently although Roosevelt was in charge during the majority of America’s most prolonged down turn he and his “brain trust” are viewed as saviors.

What’s my point? I honestly believe that Mr. Obama and Mr. Bernanke are two of America’s best and brightest, however their current “humanactions” are a mold/consequence  of their life experiences. Obama happened to attend a college that teaches its students to believe that they know better than the collective. They believe can smooth out market upheaval with their policies rather than recognizing its their policy  their school of thought that caused the problems.   What if Mr. Bernanke was scientist that could have cured cancer but he was instead taught that cancer can’t be cured but merely slowed down and then at very end of his life he realizes he could have cured cancer all along but he was taught it can only be slowed down.

This is my glass have full post. I will try not to succomb to the idea (at least not tonight) that this mess came about because politicians and other self interested individuals were/are trying retain their power through inflation and wealth redistribution.

Wendall Wilkie Entrepreneurship, Federal Reserve, Free trade, General, History, Real Estate austrian, education, Federal Reserve, hayek, Hazlitt, syracuse university

On the Borderline, notes the sick twisted irony of President Barack Obama’s stem cell message earlier this week.

“Promoting science is about letting scientists like those here today do their jobs, free from manipulation or coercion, and listening to what they tell us, even when it’s inconvenient – especially when it’s inconvenient.”

Right, now clearly every Austrian is jumping up and down saying, “that’s it you buffoon … How can someone so intelligent be so incredibly obtuse!”

Of course, the Austrian point wouldn’t be to dump federal money into research institutions, but to allow the market to sort out our current economic troubles, even when it’s inconvenient.

As Hazlitt demonstrates, it is rather ‘inconvenient’ for the politician to perform economics appropriately.  For to do that, he must look not just at the immediate effects of his policy, but also the long term effects.  He must review not just how this policy will affect one group, but he must look at its effects on all groups.

If politicians were to do this, the answer would likely be quite ‘inconvenient.’  Much as it is, apparently, terribly inconvenient to apply one principle to multiple situations.

Teacherman Politics Hazlitt, obama, politicians, stem cell