Comments (24)

• Lukas

  I understand that governments succeeded in convincing the public of need for tobacco or alcohol taxation, but what is the reasoning behind the sugar-sweetened beverage tax? Sugar alone? Will the salt be following?
  Excellent article. Thanks.

  Published: July 8, 2009 9:02 AM

• greg

  I agree that the stimulus package was not needed and grossly misdirected. However, I disagree with your anaylsis of the market's reaction.

  Gold is down $10 today to $918.

  Oil is down $1.00 to $62

  The 10 year Treasury is currently 3.43%

  Yes it is true that 30 year fixed went up slightly (off all time lows), but that was more a factor of an increase in demand for refinances.

  The question should be why the markets are not reacting to the huge increase in government spending and money supply. The answer is in the markets where these prices are set, you really need to understand the futures markets.

  The futures markets are completely out of control. More contracts are sold than there is the actual supply of the commodity, the same applies to calls and puts. So the prices are not based on the actual supply and demand for the commodity, it is based on fiat contracts. Some people say this can't happen, well it has and last example is the wheat futures.

  On the stimulus, the government needs to expand the housing tax credit of $8,000 to everyone that is buying a house. The money the government will get in taxes off the transaction will more than offset the money they spend.

  25% of all homes sold is new construction.

  The average price of a home is $200,000.

  10% transaction fees for all resales that go to real estate commissions, loan fees, inspections, insurance and legal fees. That is $20,000 in income from the sale which should generate $5,000 in taxes.

  New construction generates $120,000 in direct income to labor and suppliers. That amounts to about $30,000 in taxes. Index it by 25% and you have $7,500 in taxes.

  That leaves the government collecting on average, $12,500 in direct taxes for every home sold.

  This does not include and income resulting in the velocity of money.

  Basically, if you stabilize housing, you will stabilize the markets.

  Published: July 8, 2009 9:15 AM

• RyanC

  This is the most intelligent, informed and well-written synopsis and commentary on the so-called "stimulus" package--and government spending in general--that I've read. I hope it gets widely circulated. The thought that the administration is even considering a another "stimulus" bill is frightening.

  Published: July 8, 2009 9:42 AM

• A Pax

  With all due respect, you have such a wide range of criticism about fiscal stimulus and monetary expansion that serves no practical purpose. For a change devote your knowledge and intellectual prowess for a CONCRETE PLAN to address the economic woes of the U.S. economy. Spend your energy constructively. Why doesn't the Austrian economics group come up with a solid blueprint with political viability and make a case on how to handle the current situation. Quit harping on the past and the mistakes made.
  

  Published: July 8, 2009 10:50 AM

• Jeremy

  A Pax,

  How can proactive policies be implemented if the cause of problems are not understood? "Harping on the past" is essential, as people must come to know and understand the causes of problems before solutions can become politically viable.

  And anyway, aren't the solutions implicit within identification of the causes of problems?

  Published: July 8, 2009 10:56 AM

• Tom Woods

  A Pax: You must not read many articles on this site. The vast bulk of them discuss what should in fact be done.

  Leaving that aside for a moment, though, why on earth would you think it "serves no practical purpose" to point out that the regime is making the situation worse with its juvenile "stimulus" packages? If you saw a house on fire, wouldn't you yell "fire" even if you lacked a blueprint for a new house?
  

  Published: July 8, 2009 10:57 AM

• Keith

  A Pax

  So you want concrete plan that both agrees with Austrian theory AND is (currently) politically viable? You may as well ask to suspend the law of gravity.

  I am very confused when you say that we do not have policy recommendations in our criticisms of government fiscal and monetary policies. In almost every article outlining a given governmental policy misadventure, the cause and course of correction is laid out very clearly.

  And even if it were not, there WAS a story with specific policies which should be adopted to fix this mess.

  http://mises.org/daily/3316

  The problem is that the whole idea of a specific "blueprint" that the government can follow to fix things is by it's nature impossible. To assume this can actually work, one must believe that the government can successfully manage an economy. It. Can. Not. There is no other way of saying it.

  There is are 2 fundamental things the government can do if it truly wanted to create lasting prosperity.

  1. Stop stealing the purchasing power of it's citizens (either through direct or indirect taxation).

  2. Allow the market process to work unfettered. This means no subsidies to anyone and no bailing out failing companies. All those things do is screw around with the market signals that naturally make free enterprise successful.

  Published: July 8, 2009 11:10 AM

• Glenn O'Dell

  Excellent article. I read the mises daily Email, always searching for much-needed jargon-free clarity. I am usually sadly disappointed. This article is outstanding. Shawn Ritenauer should write the textbook to teach the non-academic masses the principles of real (Austrian) Economics.

  Glenn

  Published: July 8, 2009 12:14 PM

• Bogart

  I've been stimulated, I received $250 from the VA as part of the package and the letter congratulated me on it. As if they really owed it to me. The funny part is they do owe it to me along with the money the take in taxes and through inflation. But the immorality of these destroyers of civilization to actually think that my labor is their property and that unlike some other bureaucrat they are generous enough to give me some of it.

  Published: July 8, 2009 12:24 PM

• Inquisitor

  "With all due respect, you have such a wide range of criticism about fiscal stimulus and monetary expansion that serves no practical purpose. For a change devote your knowledge and intellectual prowess for a CONCRETE PLAN to address the economic woes of the U.S. economy. Spend your energy constructively. Why doesn't the Austrian economics group come up with a solid blueprint with political viability and make a case on how to handle the current situation. Quit harping on the past and the mistakes made."

  LOL So please don't point your finger at the culprit who is still in the midst of perpetrating their errors, no ignore that, be constructive and engage in some rah-rah boosterist activism. Mirite?

  Published: July 8, 2009 12:25 PM

• Lucas M. Engelhardt

  A Pax,

  At risk of giving too many responses to your comment...

  The fact is that if you believe that NO ACTION is better than the action being analyzed, then it is sufficient to simply criticize the action being taken - and offer no particular alternative. If the policy proposal is worse than nothing, then one only has to propose nothing. You are implicitly assuming that "Anything is better than nothing" (the typical mode of expression is "we have to do SOMEthing"), which means that any plan can only be sensibly defeated if there's an alternative offered. This assumption is quite strong, and therefore should sensibly require proof. What Prof. Ritenour has shown is that things "with" stimulus are worse than things "without" stimulus. This suggests that, in fact, "some" things are WORSE than nothing - and, in particular, that what we are doing is worse than nothing. So, in absence of another proposal, let's just assume that Prof. Ritenour is suggesting that government do nothing. Doing nothing is certainly technically possible. The only question then is political viability.

  So, why should political viability be a constraint? If the majority of policymakers believe that the sky is lime green, then isn't the first order of business to convince them (and the interests that put them there) that the sky is, in fact, blue? As long as they believe that the sky is lime green, any "politically viable" options that rely on the color of the sky will be nonsense.

  So, asking Austrians to stop trying to convince people that Austrianism is true, and instead offer "politically viable" options to people who believe in some combination of Keynesian and Monetarist garbage is equivalent to asking Austrians to knowingly offer nonsensical Keynesian/Monetarist "solutions" to our problems. We refuse to do so because it would be hypocrisy - and, moreover, damaging to society's well-being - for us to lend support to such a program.

  Every Austrian can tell you what the government should "do":

  (1) Slash government spending.
  (2) Switch away from monopolistic fiat money. (We don't totally agree to what you should switch TO. But, we do agree that the current system is definitely not the best, and that the options that Austrians offer are basically all better than the current system.)
  (3) Eliminate the moral hazards in the financial system. This entails, for example, "no bailouts".

  The list goes on. But, I know for sure that all of these have been suggested - or at least implied - by various Austrians. Tom Woods, for example, discusses that the 1920-1921 "Depression" was short because Coolidge slashed government spending. The implication for today is obvious. Numerous Austrians have written about the banking and money systems recently. Probably the most comprehensive plan you can find on monetary/banking issues is in Huerta de Soto's book on Money, Bank Credit, and Economic Cycles. This site offers a pdf of the book for free. His last chapter (if I recall) is all a big plan for how to fix the system while minimizing the pain of transition.

  I agree, these plans are not currently politically viable. But, rather than take "political viability" as a given and modifying plans until they become viable, we take the goodness of the plans as given - technically shown - and try to make them politically viable by education.

  So, if the basic goal is to pass a good, politically viable economic plan, then Prof. Ritenour's piece definitely moves toward that goal. But, it does so through changing what is politically viable - however slowly - not by changing the plan.

  Published: July 8, 2009 12:30 PM

• S Andrews

  Here is a clever stimulus analogy - the difference between rhetoric & reality

  Published: July 8, 2009 1:40 PM

• Nick Bradley

  Great article, but I dsagree with the premise that borrowing is worse than taxing. It depends on how distortionary the tax is.

  For instance, the economy would be much better off if the government eliminated the corporate income tax --perhaps the most inefficient and distortionary tax out there -- and simply borrowed the money from the capital markets. Firms would still pay for the tax through higher capital costs, but all of the inefficiencies associated with the corporate tax would be gone.

  Another example is the payroll tax. The payroll tax is a direct tax on labor productivity. For the cost of the stimulus, employers and employees could be rebated their entire payroll tax contribution -- about $900B total. For a worker earning the median $42,000 a year, that would represent an extra $275 a month -- and since his hourly take-home pay is higher, he would also be more likely to work additional hours; this would increase total productivity in the economy. On the employer side, they could use the money to make capital investments or hire on more workers at a cheaper price -- with both activities increasing total productivity.

  With capital gains taxes, why not just borrow that as well? Why not tax capital through higher borrowing costs instead of inefficiently taxing through the tax code?

  Published: July 8, 2009 2:19 PM

• greg

  A Pax,

  I agree with you, most Austrians are not willing to work within the system that exist, they want to it changed to the purest form of a free market system. Even Ron Paul chooses to lecture the members instead of laying out a workable plan within the society he serves.

  For example, the US is NOT going to adopt a gold standard. So if you are talking about reforming the US monitary system, start with working within the system to make changes. Saying you are going to throw the system out, you should spend your energy passing out books that the world is going to end.

  And on the fire example, the common man should act to control the fire, an economist should be able to forecast beyond the event. If you can't produce a blueprint, then you are not an economist.

  As far as this article's ability to forecast, it isn't even breaking even. Just today, the 10 year Treasury fell to 3.3%. The bond market doesn't seem to be worried about inflation.

  Published: July 8, 2009 4:25 PM

• Jeremy

  greg,

  Is not Ron Paul working within the system to audit the Fed? Are places like the Mises Institue not upending preconceptions and changing minds? Just because large changes aren't going to be made immediately does not mean that efforts to educate are futile and it does not mean that these efforts are futile.

  As far as forecasting goes, have you not been paying attenttion to Austrians? They always say that forecasting specific events is futile - there are too many variables. This means that one cannot predict the price of gold next week Tuesday, for example. However, one can predict patterns, just as many Austrians were warning of an impending bust after years of credit expansion.

  What exactly are you expecting? What do you think would be the ideal course of action?

  Published: July 8, 2009 4:46 PM

• Gerry

  Greg,

  The US can convert to a gold standard quite easily, and the Austrians have proposed it, though I can't recall who just know. The Feds are holding 100+ Billion in gold in Fort Knox. Works out to about 3000.00 per person, roughly. That means each family of four would receive 12,000.00 in gold. Release the gold to the people who rightly own it. A new currency, bank notes backed by this "new" supply of gold would enter the economy. You could choose gold notes or Federal Reserve Notes. The FRN would go the way of smellovision.

  In this economy, how politically infeasible would it be to tell every family that they will be given 12,000.00 in gold? Even the Democrats would look bad if they opposed it.

  And, yes. The political plan put forth by the Austrians is government should do nothing but defend us from foreign invasion and protect our liberties. Oddly, as an American, I am considered unrealistic if I endorse those ideas.

  Sad. LIberty is politically infeasible in America!

  Published: July 8, 2009 6:21 PM

• Shay

  "I agree with you, most Austrians are not willing to work within the system that exist"

  By "work with the system that exists", apparently you mean "provide a solution with the constraint that it cannot fix the problems with the current system, as the causes must be left alone in order to avoid upsetting the current system". What kind of solution is possible without changing the way things are done?

  "The Feds are holding 100+ Billion in gold in Fort Knox. Works out to about 3000.00 per person, roughly."

  Supposedly holding, that is.
  

  Published: July 8, 2009 8:12 PM

• joebhed

  central government planner here
  pax, I totally agree.
  And it can be seen by the comments that it is very difficult for the mesmerized to even consider that there could be anything like an Austrian Plan that you are calling for.
  This article does nothing but say that there are real results from having a non-functioning money system, it does not function. As in, the debt-money system is broke.
  http://www.financialsense.com/fsu/editorials/2005/1212b.html

  But the comments go to the cause being the government. So, any government will do.
  It is difficult for the Mises readers to say what THEY would do if they had the power to do anything because they would never be the government, they do not want the power and they do not care to be the government; they are extremely comfortable in denying those who do believe in government from achieving any further collective benefits that manifest as anything they do not believe in.
  Where they are correct is that the economic advisers to the two parties ALL went to the same business school, as far as the curriculum goes.
  How 'bout this for a plan?
  Abolish the Fed and put the bankers on a full-reserve banking system.
  Friedman's "Fiscal and Monetary Framework for Economic Stability".
  respectfully

  Published: July 8, 2009 9:52 PM

• s burgess

  the difference i see between the austrian school and other schools of thought is that the austrians would rather be right than be popular. and shouldn't economists scholars seek the truth do they serve public by telling the public what they want to believe instead of seeking the truth.is it really surprising that so many austrians saw the bust coming and other schools did not. we may only achieve a little influence in policy at least in the present but i would rather the austrians have a little power and do good than alot of power and do evil

  Published: July 8, 2009 11:22 PM

• Anita Vacca

  Excellent article.
  I wish to add some words on why citizen prefere to save than spend the stimulus money.
  Alan Greenspan in a 2008 Financial Times article said:
  "The cause of our economic despair, however, is human nature's propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today's crisis, has never been able to eliminate history's crises"
  Those words I read quoted on the July issue of "the Socionomist" by Euan Wilson, Alan Hall and others. I suggest everyone who wants to know more to visit their website. www.socionomics.net

  Published: July 9, 2009 1:30 AM

• Brad

  I guess those who criticize Austrians for "not having a plan" operate within the confines that the government is suppose to HAVE a plan in the first place. If your reference point of the function of government is already well along the curve of having socialist money and some form of market intervention and someone doesn't offer one, because one is so far back up the curve pre-dating such conceptions, then we are effectively talking two different languages. Also, Austrianism is ECONOMIC, not political. It speaks about allocations of resources and liberty. Politics, in today's parlance, is about constraints and forced allocations, typically to well connected people. The two don't mix.

  The success of socialist education is that it shapes the minds of people at a young age to accept government interventions and doesn't provide anything outside that box. That's why so few people actually think outside such a box and why "viability" is low. It's a shame because Austrian forms of thinking were much more common a century ago, and dare I say, relatively similar "ideoligies" likely held the majority. But socialist education has succeeded in capturing the minds of the vast majority of the people who now fall into two Statist camps - soft left and soft right. And both sides have been galvanizing and shaping the Apparatus over the last century into what we have today - a full fledged Apparatus which will soon combine with the collapse due to massive economic misallocations which will pave the way for a hard left or hard right infiltration. The only question left his who will be on the wrong side of the razor wire.

  But anyway, it stands that those who advocate a limited Federal Government, Constitutionally bound, which does its appointed duties well are now pin-wheel eyed radicals portrayed as a bewhiskered loons in patchwork jackets holding "Gold Standard Now!" plackards. Again, it is a testimonial to the success of socialist education to having beaten the Statist mantra into the people.

  Such success takes the detailed form of making people fearful and that the government is the only solution. Then when those who advocate a dismantling of the system are then seen as SUPPORTING those things that people fear - that is where the rejection and "non-viability" comes into the picture. The default notion is that without our dear leaders leading us around we will all be milling around aimlessly and die of thirst and starvation. From what I can see, not being a full Austrian initiate or pundit, the idea, first and foremost, is to convince people that State interference, especially at such root levels such as money and its supply, is not necessary. That the flower of civilization is in its people, unfettered, and that culture is the strongest cohering "force" that exists, not naked brute Force of the State. ANY interference that ultimately has offensive Force and Coercion behind it is bad and is the indicator of a misallocation of resources.

  There is no compromise with such conceptions. Compromising with evil is not possible. This isn't some sort of theocratic "evil", it is evil defined by those who use of offensive Force and Coercion against productive, peaceful people to Force them to act and behave to another's conception of right and wrong. THAT is pure evil in a secular, operational definition, and it cannot be compromised with. A little such evil has, too many times, rolled up into huge numbers of people ending up charnel houses.

  Of course, Mises.org rarely, if ever, goes to such lengths in its content. It sticks with economic analysis and leaves extended conjectures of political policies either to the commenteriat or "sister sites" (e.g. lewrockwell.com). Mostly the content implicitely states that we do not need Force and Coercion as the default setting for governance, and that the economic answer is truly unfettered free markets. It advocates extremely limited government combined with free markets instead of dictatorial government combined with Planned Economies. Ergo why "plans" aren't offered up. It may become clearer if one were to toss of the conditioning of socialist education.

  Published: July 9, 2009 8:45 AM

• Lucas M. Engelhardt

  "most Austrians are not willing to work within the system that exist"

  It depends what you mean by "system".

  Suppose that geography departments were dominated by "Flat-Earth"ers, and one geographer suggests that the Earth is, in fact, roughly spherical - and then refuses to bend to the popular notion that the earth is flat. Is such a person refusing to work within the system that exists?

  In some sense, yes. They are likely to find it very difficult to publish in top academic journals. They probably won't get invited to many Geographic Society seminars or dinners. They will likely only be able to find an academic position at some small, unranked, no name college in the middle of nowhere.

  But, does it then follow that they should "work within the system that exists"? I'm not going to answer the question - as I think it's really an ethical one, and I'm not going to argue ethics here. But, I have a strong idea as to what most people would say - though there are always exceptions.

  What I'm going to suggest, though, is that if we define "system" somewhat differently, then we can actually say that the Flat-Earth Establishment refuses to work within the system that exists.

  Rather than thinking of the system as the "academic system", think of it as the "geography system". This system is a part of reality, and has a set of rules. Sensibly, the purpose of the discipline of Geography is to understand and apply those rules.

  Now, if we, for the moment, assume the Round Earther to be right, then it is obvious that he's a more succesful Geographer than the Establishment is. He has actually discovered an unrecognized Truth about Geographic Law. In fact, we can say that, by their bullheadedness, the Establishment is refusing to work within the geographic system that actually exists. All the advice they give assumes that the Earth is flat, and they continue giving this advice even when it turns out that the results aren't quite what they expect.

  I trust you can fill in the gaps and see that the statement "The Keynesian/Monetarist policymakers are refusing to work within the economic system that exists because they refuse to acknowledge the true Laws of Economics" follows through a clear analogy.

  All I can say is that I'm glad that Austrian Economics is more acceptable than Flat Earth Geography.

  Published: July 9, 2009 12:53 PM

• Walt D.

  Second Stimulus Package!
  
  http://news.yahoo.com/nphotos/slideshow/photo//090709/ids_photos_wl/r3356552547.jpg/
  
  A normal human response from Barack Obama (and Nicholas Sarkozy)!
  
  "We only arrive at a meaningful discourse when we accept man for what he is, rather than what we would like him to be" - David Hume, Scottish Economist

  Published: July 10, 2009 12:26 PM

• Sonic Ninja Kitty

  Excellent article! I agree with RyanC and Glenn, and would add that it distills a wide swath of info into a very understandable package. As soon as I started reading it, I thought it would be perfect to send to all my friends and neighbors.

  This article should be published in the NYT--in place of Krugman's column, perhaps? (LOL)

  Published: July 13, 2009 10:46 AM