The Puzzle of Trump

Anyone familiar with Austrian Economics can see the direction the economy is going, and know that it is not a good direction. Anyone familiar with Libertarian Politics can figure out how most politicians are going to try to fix the economy, and how those solutions will not work.

That applies to almost every career politician, as they have long records showing where they stand on the issues. What they say doesn't matter nearly as much as what they do, especially since the two are often at odds and what they do has the most direct and relevant impact.

Trump has no such record. Guesses can be made, but he doesn't have a record of public service and his statements can be construed to cover almost any possible position.

There are two things that can be known for sure. The first is from the closest he has to a record, which is his very long record of friendship with the Clinton family before he dared to oppose her for the presidency. The second is the advisors he is surrounding himself with, which are very traditional Republican. The two indicators are, unfortunately, opposite, which makes reading Trump even more difficult.

It is still a given that economic trends are not good, but what might be done about these trends is very difficult to determine.

Economics as Medicine

It is interesting the way people react to various economic proposals on what should be done about the current economic malaise. The two most divergent proposals are those of the Keynesians and the Austrians, with most other proposals being somewhere on a spectrum between the two.

It is interesting because of the disaster that Keynesian economists predict were Austrian proposals to be implemented. If an analogy were to be made between economics and medicine, with the economy being a sick patient, it highlights the absurdity of some of the Keynesian predictions of doom.

Imagine a patient is brought to a hospital with a broken leg. The patient is in pain and unable to walk. Doctor Keynes wishes to give large doses of pain killers, while Doctor Hayek wishes to set the bone before applying a cast. Hearing what Dr. Hayek plans, Dr. Keynes interjects with "There will be a lot of pain while you set the bone. I am interested in treating the patient's pain, your proposals only cause more pain."

Or if a patient is brought in with operable cancer, Dr. Hayek would suggest surgery and a few weeks of recovery. Dr. Keynes would point out that there will be harm caused by the scalpel going in, harm caused to the skin and muscle covering the tumor, and great difficulty for the patient in recovering from the tumor.

These comparisons are absurd, because if the subject were medicine there would be no argument about setting a bone or operating to remove a tumor. But the comparison is also valid.

The Austrian method of ending a recession or a depression is to allow malinvestments to liquidate and to remove barriers to growth. The Keynesian method of ending a recession is to stimulate aggregate demand through fiscal policy, as well as by any other interventionist method since no Keynesian in practice is confined to fiscal policy. Therefore failing industries would be subsidized until theoretically they are no longer failing, and prices that need to fall would be propped up through loose fiscal and monetary policy to prevent the specter of deflation.

Every Keynesian proposal treats a symptom. But what of the actual cause of the ailment? It is the well known "animal spirits", which are not a rational explanation of the cause. Austrian economics, on the other hand, tries to do a diagnosis.

Yes, transition to sound currency and balanced budgets would cause economic turmoil during the transition, and yes some people - especially those who depend on unbalanced budgets and fiat currency - would be hurt. In the long term the short term pain would lead to long term health, like setting a bone.

Recession or Depression

Even though economic difficulties continue, supporters of President Obama insist that the Great Recession is over. The problem is, technically they are correct. A recession has a technical definition of consecutive quarters of negative GDP growth. A single quarter of miniscule GDP growth and the recession is considered to be over, so that even if there is negative GDP growth in the quarter after that it is not the same recession anymore.

Of course one could access Shadowstats to argue that there have been continued quarters of negative GDP growth but that only leads to an argument over which set of numbers is more accurate with most conservatives and all liberals trusting government numbers. The real problem is that even though the definition of "depression" isn't as firmly settled as is the definition of "recession", it is clear that the two are not the same.

This is important when discussing the dismal economic situation with supporters of whoever is in office, of whatever party. Supporters of whoever is in office will argue that the recession is over, and that the recession ended during the term of their own person in office. Even though technically the recession ended a long time ago.

The best way to illustrate to supporters of the current administration is with a concept from trigonometry, a simple Sine wave.



There are four distinct parts to the wave that can be used when discussing economics. The first is when the value and the slope are both positive, the second is when the value is positive and the slope is negative, the third is when the value and the slope are both negative, and the fourth is when the value is negative and the slope is positive.

Recession would then be when the slope is negative, and growth would be when the slope is positive. Prosperity would be when the value is positive and depression would be when the value is negative.

Understanding it from this point of view can explain why the Great Recession (as it is commonly known) can actually be over, while the negative effects of the Great Recession aren't over, that the United States is still in Great Depression II. It still won't convince any supporter of a current administration, but it might be enough to educate the neutral observer and make the supporter seem foolish in denying reality.

Corporatism really isn’t Capitalism

Every so often, on websites like In These Times, arguments are made that appear to be against Capitalism. The problem is, ever time, the detail of the argument isn’t against Capitalism but is instead against Corporatism. The difference between the two should be immediately evident. Yet no matter how often it is explained, those making the argument insist on conflating the two.

It should be easy to differentiate between the two. Although what follows are not the textbook definitions of various economic systems, they serve as a good way to differentiate the various economic systems.

Capitalism – no government interference in the economy
Monetarism – government interference in the economy through manipulation of the money supply
Keynesianism – government interference in the economy through manipulation of fiscal budgetary policy
Corporatism – government interference in the economy through benefits to the wealthy
Welfarism – government interference in the economy through benefits to the poor
Supply Side – government interference in the economy through stimulating aggregate supply
Demand Side – government interference in the economy through stimulating aggregate demand

Of the seven economic systems listed, one of the stands out as starkly different from the rest. Yet it is often inexplicably lumped with various others, most often Corporatism. There is an actual relationship between Corporatism and Capitalism. It is akin to the relationship between a parasite and a host. A host does not need a parasite, and Capitalism does not need Corporatism. But those making the argument are trying to insist that the host and the parasite are the same thing.

There is an attempt to justify such a conflation by saying that one is the natural outcome of the other, that Capitalism eventually evolves into Corporatism. But that does not justify the attack.
Interestingly, those making that argument seldom argue against freedom in other areas. If their argument on Capitalism is to be believed and extended, then tyranny is late stage liberty. Those making the argument are keen to support other areas of liberty, but to reject it in the case of economics. They could be consistent and say that since they believe liberty to be hopeless they do not support it in any area. Instead they support it in all other areas except economics, and say that since liberty is hopeless in economics they choose a tyranny different from Corporatism to replace the liberty of Capitalism.

Rejecting Capitalism on the grounds that it eventually becomes Corporatism should lead the person making that argument to reject free speech on the grounds that it eventually becomes censorship, reject freedom of religion on the grounds that it eventually becomes a state church, reject the fourth amendment on the grounds that it eventually becomes warrantless searches, reject the sixth amendment on the grounds that it eventually becomes secret courts, etc.

The argument is horribly inconsistent. And, after all these years of people pointing out the difference between Corporatism and Capitalism, there is no excuse for making the argument in the first place.

American Economic Fascism in Action

By now everyone who actually reads the news, as opposed to watching Fox News or CNN, is aware that Intrade is currently unable to do business with anyone in the United States. The Commodity Futures Trading Commission is the responsible agency, and has issued two edicts that are often considered separately but together paint a full picture of how fascism works in the United States today.

The first edict is that Intrade cannot offer its services without a license from the United States government. The second edict is that Intrade cannot get a license from the United States government.

It is yet another example of Backdoor Forbiddance, the only thing surprising about it is how blatant it is. One might think that those who rule this country are starting to no longer care about keeping up appearances and fooling people into thinking they are free.

Very little in the United States is actually forbidden. According to the United States government, marijuana is even legal provided one can get the tax stamp for it, the only problem being that nobody can get the tax stamp for it. In many jurisdictions, concealed carry is legal, provided one can get the permit. The catch is that nobody can get the permit. Also in many jurisdictions simple gun ownership is also legal only with a permit, and nobody can get the permit.

Even the IRS has gotten into this act, working to forbid people who are delinquent on their taxes from getting passports. Those people are not forbidden from leaving the country, but they need a passport to do so and they cannot get a passport.

Whatever the motives, and there is actually good analysis of that by Michael S. Rozeff, the action would not have been possible were the economics and politics of the United States so far descended into the fascist model. Anything is allowed, with a permit, but no permits are given if the leaders do not like the activity in question.

Collapse in Motion

For some reason there exists a belief that economic collapses are sudden events. Because the collapse isn’t happening all at once, those who see what is happening must be wrong. This is true even in the rather fast collapse that started in 2008 with the housing collapse.

People generally think that the Great Depression of 1929, which started officially in, happened all at once with the stock market crash of 1929. Contrary to conventional wisdom, the crash was not the cause of the Great Depression, but was instead the trigger.

The same is true of the Great Depression of 2008 in that it was not caused by but was instead triggered by the collapse of the housing market. The second Great Depression actually started in late 2007, but the effects weren’t noticed until the housing market was no longer able to disguise the symptoms in the rest of the economy.

Collapses take time. This is true even of rapid collapses like in 1929 and 2008; it takes time for the many failed institutions to wind through and finish - longer if the government attempts intervention to rescue failed institutions.

Political collapses take even longer. The reason people do not believe that the current United States imperium is not in decline is because the decline has been going on for several decades. If the several years of an economic decline are too long for the average observer, then the several decades of political decline are beyond notice for the average observer.

Like an economic collapse, political collapses aren’t single events but often have a single event trigger. The collapse of the Roman Empire didn’t occur when barbarians invaded, but was made real when barbarians invaded. Until the invasion, Rome looked as might as ever, but was a hollow shell.

This decline, economic and political, will not be visible to someone who hasn’t studied history. Because it is not apparent on the surface it is something that won’t be believed, especially since so many people have an emotional investment in the current greatness of the United States. Reality doesn’t care of people don’t believe in the collapse.

An Economic Bump

A tiny bump of economic good news has supporters of President Obama crowing about how this will guarantee his reelection. The conventional wisdom is that the best chance the Republican Party has of capturing the presidency is by running on the economy.

Although reports conflict on what is actually happening, the official numbers on unemployment have dipped slightly. If the CPI is to be believed, the number has actually dipped under 9% for the first time since 2008.

Running on this meager improvement in the economy would not be a good idea if the goal is to win in November. In spite of statistical improvements and a climbing stock market, these improvements are not reflected in the experience of those outside the government-financial complex. It presents the Obama administration as detached and aloof, disconnected from the concerns of the average American. Ironically that is probably the campaign attack Obama wishes to use against Romney should Romney become the Republican nominee.

The thing to watch is inflation. The inflation that Austrians have been predicting (and Keynesians have laughed because it didn’t instantly appear) is arriving. It is expressing itself most heavily in energy prices at this time, above the rises that would be expected simply from the saber rattling going on. It is also expressing itself in the stock markets, but people consider that to be good when stocks are up.

President Obama will probably win in spite of the economy, not because of the economy. Hyping up his achievements with regards to the economy seems like an odd strategy as a result.

Social Security Default

In an interesting turn of events, the Congressional Budget Office has declared that Social Security will run out of money by 2020.

For years there have been two interpretations on when Social Security will actually be bankrupt. Those who believe in government also believed in the Social Security Trust fund, and therefore believed that when the Social Security Administration started disbursing more funds than it takes in that it would simply liquidate the treasury bonds and keep the program solvent for decades to come. Originally the end date was 2043, but it was moved up to 2036 due to deteriorating economic conditions.

Those who are less likely to believe the promises of politicians have long said that the due date for the bankruptcy of Social Security is 2018, the day that revenues start to exceed expenditures, and that would be a bankruptcy because the alleged trust fund does not exist. When Great Depression Two started that was moved up to 2017, and then moved up even further. Currently expenditures and revenues are nearly equal and all it will take to break the system will be a small jump in expenditures or a small drop in revenues.

But for the Congressional Budget Office to predict disaster for Social Security in the year 2020 is a startling admission. These people are paid to believe that the trust fund exists, so if they are predicting that the trust fund will be depleted that soon the situation must be pretty dire indeed.

The economy is deteriorating at an accelerating pace, but most people do not notice it at this time. This one item of news should be sending up alarm flags across the country, especially since it involves one of the most active voting blocs. This really is big news about how advanced the decay of the United States economy really is, since even the Congressional Budget Office is admitting to it and even CNN is reporting it.

Economic Principles outside Economics

Although most people would deny it, economic principles apply in many areas of human life, beyond the labor market and the shopping market. Most people do not think of it in this way, but exchanges of value occur in every aspect of life. Perhaps that is why Ludwig von Mises referred to the subject as "Praxeology" instead of "Economics" because Praxeology is the study of human action. Praxeology studies what people do, in contrast to Psychology which studies what people think.

The simple act of who a person chooses as a friend to spend time with is in this sense an economic decision. When a person chooses a friend, the person says "you have sufficient value to me that I consider you worthy of the investment in time and emotion." As Ayn Rand noted, a person would not choose a friend who does not reflect the values of that person, but this can be expanded through an economic perspective.

A person would not invest with someone beneath them, and would be unlikely to achieve that investment from someone far above them. Of course value is relative, so therefore the terms "above" and "beneath" are relative as well, so that statement does not imply that there is an objective system of values that says some people are intrinsically better than others.

This is even more true in more intimate relationships. It is true that if someone were desperate enough that a sexual partner could be easily found, but there are many who would never lower themselves to the necessary level simply for some physical satisfaction. A persons body is a commodity that is not shared freely, but is instead traded with those who a person feels worthy of the trade.

Social activities outside of work and family reflect economic decisions as well. Some people are involved in religious activities, others in athletics, others in community artistic endeavors, and yet others in politics. The choice one makes are an investment of time at the expense of the opportunity cost of other activities.

This isn’t news to anyone who has studied the basics of economics, which includes all libertarians. Why therefore does it need to be stated? Because while most people have various economic beliefs other than laissez faire, they do not practice those other beliefs in their own lives. And their failure to do so, and what they actually practice, should be noted to them.

There are some ways this is done contrasting capitalism and socialism, such as various stories about students sharing grades. But that fails to capture the full range of economic ideologies, leaving out most notably Kenyesian and Welfarist economics. That leaves only the question of how one would apply those decision making theories to the decisions that take place outside of the labor market and the shopping market.

The Downfall Begins in Earnest

The economy has been in a state of flux ever since the recent debt showdown. Before the deal was made it was obvious that Keynesians would use the lack of a deal to describe any downturn that might have occurred had no deal been made. But there was no indication as to what Keynesians would blame for a downturn if a deal is been made.

A deal was made at the last minute. There were some attempts to blame the lateness of the deal, but those attempts fell rather flat. Then S&P downgraded the credit rating of the United States from AAA to AA+. As Lew Rockwell pointed out, this would not cause a crash unless people knew matters were much worse.

Are matters worse? A trip to the grocery store can answer that. Prices on food are going up. The official inflation rate is measured by a basket of goods that underrates the impact of food and energy. Those are the areas that are more important on the budget of the middle to lower classes. As Gonzalo Lira pointed out only some prices rise in an hyper-inflation. Food, energy, medicine all rise in price, while the price of everything else collapses.

The creditors of the United States did not view the increase in the debt limit, without any actual accompanying reforms, as a financially sound thing to do. The view was instead that the Unites States continued to live beyond its means.

Food prices are rising. This is obvious to anyone who actually have to consider the price of food. Utility prices are trending upwards as well. The cost of health care is in an even greater state of uncertainty due to the phenomenon called “regime uncertainty.”

Although the decline has been going on for a long time, and the point of no return was passed a long time ago, the decline has started to accelerate to the point where the average person is beginning to notice. And they notice just as it has started to accelerate in earnest.

Indirect Subsidies

Sometimes the activities of the government can be truly mystifying when trying to understand. The whole subject of tobacco is one where nothing done makes sense. The product is both subsidized and taxed, subsidized so that the producers can make profits, and taxed to discourage people from the activity. The states simultaneously encourage people to quit smoking but depend on the tax monies generate from people smoking.

Moreover, in the 1990's, when lawsuits against tobacco companies by the states were popular as a way of recouping healthcare expenditures by the states, there were even more inexplicable complications. One company, subject to a lawsuit for the crime of selling a legal product to the citizens of a state, offered to stop selling the product in the state at all. The state responded by filing an injunction to force the company to conduct business while simultaneously suing them for conducting business.

The combination of supports to the activity and restrictions on the activity may seem puzzling, especially given the combination of subsidies and taxes. From an accounting point of view alone, removing both the subsidies and the taxes will result in savings through efficiency. The lack of subsidies will raise the price of tobacco to somewhere near the taxed price, but since the government isn't doling out money with one hand and collecting it with the other then there will be no transaction costs.

The reason this is not true though is because the layer of government that subsidizes the activity is not the same layer that taxes the activity.

In the federal system of the United States is that the states do not receive their income from the federal government but are instead responsible for their own budgets, their own revenue, and their own expenditures. Like any principle in modern government it is full out countless exceptions, most often in the form of directed funds for special projects, such as giving money for the construction of a community center. But unless there is a bailout of a state by the federal government, federal expenditures are not directed into the general fund of state revenues.

But if the federal government artificially lowers the price through subsidies, and the state government artificially raises the price through taxes, then the final effect is of the money being funneled through intermediaries to be received by the states. The consumer pays basically the same price, approximately, but a portion of that money is going to the states instead of to the farmer, and the federal government is paying the farmer so that the states can receive the money. So yes, the federal government does supply funds to the general revenue of the states, yet another way to prevent the states from gaining any ideas that they have any independence to stand up to the federal government when the federal government acts in an unconstitutional manner.

Keynesian Economics and Regulation

It may seem rather odd to say this, but it is actually true that Keynesian Economists are not automatically advocates of the regulatory state. By definition, Keynesian economics is concerned with fiscal policy, using federal budgetary policy to moderate the economy. There is nothing about that which would indicate that a Keynesian must embrace regulation - it is theoretically possible to encounter a Keynesian who is only concerned about fiscal policy.

The reason it appears that Keynesians must be in favor of regulation and the attendant bureaucracy is because all Keynesians are. There is no economic activity they are content to leave alone.

The right-Keynesians and the left-Keynesians differ on who should be the beneficiary of the demand pushing government spending. Right-Keynesians would prefer to benefit the upper classes, leading to supply side economics as the outgrowth. Left-Keynesians prefer to benefit the lower classes, leading to demand side economics as the outgrowth.

The unnecessary (from a textbook point of view) embrace of the regulatory state has a similar division. Right-Keynesians prefer regulations that benefit the upper classes, leading to Mercantilism or Corporatism as the outgrowth. Left-Keynesians prefer to benefit the lower classes, leading to Progressivism as the outgrowth.

When cornered in a debate, it does happen occasionally that Keynesians will admit that regulation is not part of Keynes’ General Theory. Perhaps it would be more interesting to corner the Keynesian on that and try to force an admission about how far from Keynes’ writing they have gone in their embrace of regulation.

The Economically Pivotal Presidency

When looking over the statistics on which president was the most irresponsible spender, an interesting feature of the data became apparent. The first time the data was presented, the most obvious thing to note was that George W. Bush was the worst spender. Further analysis presents another interesting fact – the pivotal role in history of Herbert Hoover. Every president before Hoover had smaller deficits than Hoover. Every president after Hoover had larger deficits than Hoover.

-99,776,642,401.45	Bush Jr Term 1
-96,408,875,337.91	F Roosevelt Term 3
-90,255,665,689.94	Bush Sr
-63,508,876,217.31	Clinton Term 1
-60,226,092,484.91	Bush Jr Term 2
-55,620,058,613.77	Reagan Term 2
-37,083,571,857.12	Nixon
-34,590,184,231.84	Reagan Term 1
-31,541,432,371.56	Clinton Term 2
-30,632,171,603.66	Nixon / Ford
-30,513,251,062.43	F Roosevelt / Truman
-25,169,881,466.50	Carter
-22,277,279,516.03	Wilson Term 2
-19,947,226,430.95	L. Johnson
-14,907,433,625.97	Kennedy / Johnson
-9,064,312,546.96	F Roosevelt Term 1
-8,064,456,770.95	Eisenhower Term 1
-7,979,119,959.91	Eisenhower Term 2
-5,516,035,432.17	F Roosevelt Term 2
-4,087,245,363.90	Truman
-2,006,485,523.53	Hoover
-1,750,942,082.69	Lincoln Term 1
-845,903,480.62	Lincoln / Johnson
-738,552,212.80	Wilson Term 1
-366,738,464.61	McKinley
-362,676,610.68	T Roosevelt Term 2
-241,610,193.89	Taft
-181,124,526.17	Cleveland Term 2
-126,862,797.32	T Roosevelt Term 1
-82,125,195.84	Madison Term 2
-32,869,749.98	Buchanan
-23,583,209.73	Polk
-19,154,479.48	Taylor / Fillmore
-18,210,776.96	Tyler
-6,534,247.41	Washington Term 2
-3,535,830.77	VanBuren
-3,450,826.53	Jefferson Term 1
-1,764,448.14	Washington Term 1
745,788.38	Monroe Term 2
785,877.72	John Adams
19,986,580.07	Madison Term 1
21,230,802.91	Jefferson Term 2
22,794,733.90	John Quincy Adams
24,284,722.13	Jackson Term 2
34,226,803.81	Pierce
36,319,367.59	Monroe Term 1
43,152,808.69	Jackson Term 1
59,905,475.18	Hayes
72,820,997.22	Grant Term 2
104,415,146.68	Harrison
137,703,187.95	Cleveland Term 1
289,746,134.16	Garfield / Arthur
408,388,139.06	Grant Term 1
3,647,830,832.07	Coolidge
4,686,460,530.01	Harding / Coolidge

It was Herbert Hoover who created the programs that Franklin Roosevelt eventually collected in to the New Deal, and it was the New Deal, more than any other political-economic event that permanently cemented the government’s role in the economy.

Although other presidents can be credited with laying the necessary ground work for the New Deal, it was Hoover who took the final step and make it happen. F. Roosevelt’s only contribution was to make it permanent, an important step but not nearly as creative as what Hoover did. Economically speaking, Herbert Hoover was the pivotal president in American History.

Economic Power

In Behavior Psychology, there are four options available for modifying behavior: apply reward, withhold reward, apply punishment, and withhold punishment. To promote desired behaviors, one can either reward the behavior or punish the lack. To deter undesired behaviors, one can either punish the behavior or fail to punish the lack.

These are understood in analogy with the "carrot and stick" analogy, wherein one can get a donkey to pull a cart either by offering a carrot or beating it with a stick. One is considered a positive motivator while the other is a negative motivator. The driver can either offer or withhold a carrot, and can either apply or withhold the stick.

Although both reward and punishment can be used to bring out a desired behavior, and both reward and punishment can be used to suppress an undesired behavior, the difference between them is crucial.

Since people insist on equivocating between public employee unions and real unions, the protests in Wisconsin have people discussing the power of corporations and why this country needs unions to protect the workers from corporations. This always accompanies an argument about the dangers of economic power. Then there is an appeal for the government to protect the people from corporations.

But what exactly is economic power and how is it different from political power? Economic power is entirely the power of reward, the "carrot." A multi-billionaire, no matter how much economic power he has, cannot force anyone to do anything. All he can do is keep offering more money, more incentive, until people agree to do what it is the multi-billionaire wants.

This stands in stark contrast to political power which is entirely the power of punishment, the "stick." When a political official wants something done, the form it takes is a command with the threat of punishment to back it up. It is true that sometimes the government offers subsidies, which appear like gifts or bribes, but the only time the government has "carrots" to offer is when it has taken "carrots" from others first.

This is illustrated best by Rockefeller Center and by Phizer Corporation in New London, Connecticut. When Rockefeller wanted to build his center, he purchased the property to do so. This was done in 1930, which although after the "gilded age" was still before the modern regulatory state and according to modern conventional wisdom there was nothing to restrain the wealthy from doing whatever they wanted.

There were two holdouts. One property owner wanted far more than John Rockefeller was willing to pay, and the other simply didn't want to sell. For all his wealth he was not able to force the two property owners to sell him for the price he offered.

In the modern age, where the government acts to protect people from the rapacious rich, Pfizer simply bribed the city council of New London to seize the property of the homeowners and deliver it to Pfizer. It is true that modern corporations do have some stick power, but only because some sticks are given to them by the government.

The abuses of modern corporations are a direct result, instead of a cause of, government intervention. Anyone who is arguing that government intervention is needed to protect the people from the power of the corporations is either equivocating economic and political power, or is reversing cause and effect.

Bush Never Cut Taxes

Recently there was much discussion on the extension of the Bush tax cuts. Republicans and Democrats were both giving President Bush credit for cutting taxes when president, and Republicans were accusing the Democrats and President Obama of trying to raise taxes.

Leaving aside the fact that the tax cuts were actually the result of hundreds of congressmen in addition to President Bush and giving him credit, and leaving aside the debate over whether the expiration of the tax cuts constitute a tax increase there is still one big problem with the whole debate. Under President Bush taxes never went down. President Bush never cut taxes.

That is because as any Austrian economist can tell you, Total Taxes are always equal to Total Spending. It is true that some taxes were cut under President Bush, but that only means that other taxes went up even more.

What confuses the average person is that Total Taxes is the sum of Direct Taxes and Indirect Taxes. Deficit spending is therefore considered a tax. It can be paid by higher interest rates as the government crowds out other borrowers, or it can be paid by inflation as the government taxes away the wealth of those who hold cash. In both cases value is being transferred from the private sector to the public sector, and that is a tax.

Taxes shot up under President Bush, which is why the Tea Party Movement started in late 2007. The Tea Party movement has always had government spending as a major focus.

Now the debate is coming up as to whether or not the debt ceiling will be raised. A portion of the Republican takeover of the House of Representatives was based on Tea Party support. If the Republicans raise the debt ceiling, that will be an increase in taxes, which will be a repudiation of the support that got them elected.

Debt to GDP

Government debt as a percentage of GDP is a popular measurement to determine if a government is spending too much, with various "thresholds" given for when the debt gets too excessive. Unfortunately it is not a good measure in itself.

The first problem is with the items being measured. GDP is measured with the formula "Y = C + I + G + ( X - M )", or GDP is equal to consumption plus investment plus government spending plus exports minus imports. Although there are many criticisms of GDP the worst is that it includes government spending as a positive component.

Government spending is, at best, a transfer instead of an actual investment or consumption. A measure of the GDP that leaves that out would be "Y = C + I + X - M". But given that there’s inefficiency in the process, every government dollar spent is actually a drain on the economy. They Keynesian "multiplier effect" is a myth unsubstantiated by actual results. To measure the full effect of GDP would be to subtract government spending, giving "Y = C + I + X - M - G".

The other part of the ratio, the debt, is also a problem. The government debt is not a stationary target, but is moving, which means to get an effective measurement includes the deficits. That means government spending is on both sides of the ratio. Increasing government spending will increase both GDP and Debt, making all ratio measurements unreliable.

The second problem is that debt to GDP is used to measure a government's ability to repay the government debt. That implies that the government has a claim on the GDP of a country, which implies that the government has a claim on the whole of the wealth of a country. Any attempt to claim that wealth in an effort to pay off the debt would destroy the economy and deplete the wealth of the country.

Third, given that both parts are moving targets, an 'improving' ratio doesn't necessarily show any greater or lesser responsibility on the part of politicians. If the debt increases slower than the GDP climbs, or if the debt decreases but the GDP decreases by a smaller amount, the result is the appearance of improvement. Reverse the ratios and it gives the appearance of economic degradation. In the first half of each example, debt increased. In the second half of each example, the GDP declined. None of those are good, but two of them give the appearance of a better economy.

Fourth, the measures can be manipulated. Take a country with a debt to GDP ratio far in excess of 100%, such as 130% or higher. That country's government can use the central bank to monetize the debt and borrow money a thousand times more than owed before, such as a country that owes trillions can create quadrillions. The government can then spend the money. That would surely alter the GDP equation, with G increasing by an exponential amount while C, I, X, and M trend towards zero, leaving Y increasing while basically equaling G. Debt would also be basically equal to the newly created money, leading to a debt to GDP ratio of approximately 100%. By those who favor debt to GDP as a measure, that leads to the conclusion that the economy of that country has improved, while any objective measure would show hyperinflation and the collapse of the economy.

There really is little use in debt as a percentage of GDP. It doesn't measure what it is supposed to measure, it is very prone to manipulation, and its components aren't very as reliable as one would desire in an economic measure.

Prison Normal

Andy Dufresne: I just don't understand what happened in there, that's all.
Heywood: Old man's crazy as a rat in a tin shithouse, is what.
Red: Oh Heywood, that's enough out of you!
Ernie: I heard he had you shittin' in your pants!
Heywood: Fuck you!
Red: Would you knock it off? Brooks ain't no bug. He's just... just institutionalized.
Heywood: Institutionalized, my ass.
Red: The man's been in here fifty years, Heywood. Fifty years! This is all he knows. In here, he's an important man. He's an educated man. Outside, he's nothin'! Just a used up con with arthritis in both hands. Probably couldn't get a library card if he tried! You know what I'm tryin' to say?
Floyd: Red, I do believe you're talking out of your ass.
Red: You believe whatever you want, Floyd. But I'm tellin' you these walls are funny. First you hate 'em, then you get used to 'em. Enough time passes, you get so you depend on them. That's institutionalized.
Heywood: Shit. I could never get like that.
Prisoner: Oh yeah? Say that when you been here as long as Brooks has.
Red: Goddamn right. They send you here for life, and that's exactly what they take. The part that counts, anyway.

- The Shawshank Redemption

One of the more amazing things about people is their ability to adapt to almost any circumstance. No matter how unusual the situation people develop means of coping and new routines to accommodate the extremes that they face. Some people even move towards considering the unusual situation as the normal situation.

In "The Shawshank Redemption" the character of Brooks had been in prison for fifty years. Hearing that he was about to be paroled he snapped and attacked another inmate. He did this because he knew no other life than prison, and he wanted to stay inside. According to the character Red, Brooks had become institutionalized. Prison was normal for him.

After a century, most people in the United States have come to believe that an unbacked fiat currency is normal. People have come to expect an average of three percent inflation per year is normal. In the course of one century the dollar has lost ninety-eight percent of its value, and people have come to think of that as normal.

People have come to think of it as so normal that they have come to think of other arrangements as being completely abnormal. It is argued that a modern economy cannot grow without a constantly inflating fiat currency. They are experiencing "Prison normal".

The real miracle of the United States economy is that it has been prosperous for so long in an abnormal situation. It takes a long time to drain the wealth of a wealthy nation, which is why the abnormal situation was able to continue for long enough to become a Prison Normal situation. The steps that are necessary to return the economy to a truly normal state are considered abnormal, extremist. The average American has become institutionalized.

Against Milton Friedman

Upon seeing "Fear the Boom and Bust”, the Keynes versus Hayek rap video, the following email was sent to the producers of that video:

On Thu, Apr 22, 2010 at 11:39 AM, Ayn R. Key wrote:

Having Keynes versus Hayek was great. Loved the imagery of alcohol and hangover, and the reference to Tim and Ben.

Next, Hayek (or Rothbard or Mises) versus Friedman (or Fisher, where Friedman got all his ideas from) please.

I'm tired of people thinking that Chicago School Monetarists are some sort of libertarians.

The following response was forthcoming:

On Thu, Apr22, 2010 at 9:16 AM, John Papola wrote:

Thanks for the note! Explaining the differences of the two schools of thought is useful and we'll be getting to it in our extended content via interviews. It's a little too nuanced for a rap song.

Have you read Roger Garrison's "Time and Money”? There is much more in common between the Austrian theory of the business cycle and Milton's monetarism than meets the eye. If we can't call Milton a libertarian, we're doomed. I'm not big on libertarian factionalism. Compared with our opponents on the Keynes/Marx statist side, the differences between Hayek and Friedman are inconsequential in my opinion. Friedman was also very successful in moving public opinion and the profession away from Keynes. For that we should all be grateful.

Friedman, Hayek, Mises and Rothbard are all awesome in different ways.

For reasons unknown, Milton Friedman is considered to be a libertarian thinker, especially in matters economic. He is often used as an example of libertarian thinking by those who are not libertarians but wish to reference libertarians to support a point.

The problem is, Milton Friedman was a Monetarist. As pointed out, Monetarism is not the same thing as Capitalism. When compared to Keynesianism then of course it appears to be more libertarian, but that is an awfully low bar to measure against.

There are many critiques libertarians can make against Friedman, such as his relationship to Pinochet or how he instituted income tax withholding, but the most fundamental one is that he, like Irving Fisher, advocated central banking.

If Keynesians are to be considered as saying that two and two make eight, and Austrians are to be considered as saying that two and two make four, then Monetarists try to position themselves as moderates by saying that two and two make six. They may be closer than Keynesians, but they are still quite wrong. Central banking, the defining position of Monetarists, is causing yet another catastrophic collapse, and people actually are calling it libertarian? Calling it so is a gift to the statists that they couldn't even hope for.

Capitalism

There appears to be a debate in some libertarian circles on whether or not libertarians should embrace or reject the word "capitalism."

Those who would reject the word do so on the basis of the baggage that comes with the word. It was first popularized by Marx to describe not just the free market but also economies in which the government interferes in favor of businesses.

Those who would keep the word do so on the basis of there being no better single word. Other terms are less widely known or are more cumbersome. The word itself, they argue, actually describes best the economic system advocated by libertarians in spite of its baggage.

It really is a simple choice, and capitalism is the best word for a free market economic system, but if it is to be used it must be fought for. A simple pronouncement is far insufficient.

People are doing that. Garry Reed, the Libertarian News Examiner, did so recently with the article Corpratism – equally loved by left and right.

Those who would disparage Capitalism are always confusing it with other ideologies, including but not limited to Corporatism, Keynesianism, and Monetarism. Some go so far as to say Monetarism, the economic ideology of Friedman and the Chicago School, is a libertarian economic ideology.

A few moments of honest thought would dispel any confusion over whether or not these other ideologies are included in Capitalism as is meant by libertarians. Monetarism has a central bank. Corporatism has protective tariffs and bailouts. It's not even necessary to describe the many differences between Capitalism and Keynesianism. And yet the myths persist.

That is because detractors want to lay at the feet of Capitalism the faults of the other systems. In Corporatism, failing businesses get bailouts, in Capitalism they do not. Yet if the two are the same then bailouts are a feature of Capitalism. In Monetarism the dollar loses value every year to the point where a 2010 dollar is worth a few cents compared to a 1910 dollar. Yet if the two are the same then an inflationary monetary policy is a feature of Capitalism.

Every fault that detractors name in the real world, as opposed to pure theory, comes from departures from the free market and government interference in the free market. Therefore it is not the fault of the free market. The only way to blame Capitalism is if other ideologies are lumped together with it.

Those who wish to preserve the word "Capitalism" have the right idea, but they must remember that they must fight for it. It's a good word but it has to be defended. The attempts to add baggage to the word are continuous.

Update: It was pointed out that Marx only popularized the term "capitalism", he didn't coin the term. Correction noted.

The Temporal Fallacy

Although it really cannot be done, there are those who attempt to find an era in some country in which libertarian ideas reigned. But there are valid attempts to show how certain eras qualify in one manner or another. Part of the problem is that conditions always change.

The United States, for example, has advanced liberty in some areas and degraded liberty in other areas. In the past there was much more economic liberty, but that was before slavery ended and before women and minorities were given the right to vote.

But generally it is assumed that the late nineteenth century in the western world, for all its flaws, had many of the characteristics of a libertarian society.

Many statists will immediately point to the flaws and say that it is the flaws that libertarians advocate. They are not interested in a true discussion or debate, only trying to find some ammunition, no matter how ludicrous, with which to try to tar libertarianism.

Then there's the temporal fallacy.

Due to advances in technology, there are amenities available today that were not available then. But there were advances then that were not available before then. True, compared to a modern factory, an earlier factory from the late 1800s would seem rather crude and dangerous – but it is better than what existed before then.

The fallacy is that everything that happened then is judged by today's standards. Thanks to advances in technology and worker productivity, companies can afford many more safety features than they were able to in the past. Those advances were not available then; therefore they were not implemented then. To the person committing the fallacy, that those advances were not implemented then is an unforgivable sin.

The fallacy is judging a factory from the 1880s by the standards of the 2010s. Of course it won't measure up. The factory must be judged in the proper context.

The factories of the day were, in general although there were exceptions, as safe as they could have been given the resources they had. People worked there because they were safer than other occupations and paid more than other occupations.

Yes, they didn't have closed circuit computer controlled safety systems. Of course those who commit this fallacy, when hard pressed, will admit that they don't expect closed circuit computer controlled safety systems, but then immediately turn around and deplore unmentioned safety protocols available today.

Conditions then were still an improvement over previous conditions. The economic liberty of the late 1800s created greater prosperity. And it is that same prosperity created then that enabled the more advanced technology available today - and the same prosperity that enables people to commit the temporal fallacy.