All About Mises, from the Wall Street Journal

November 7, 2009 8:19 AM by John Cochran

From last evening in the Wall Street Journal, a very good piece. Nothing new for readers of Mises.org but still very encouraging.

The Man Who Predicted the Depression
Ludwig von Mises explained how government-induced credit expansions led to imbalances in the economy.

By MARK SPITZNAGEL

Ludwig von Mises was snubbed by economists world-wide as he warned of a credit crisis in the 1920s. We ignore the great Austrian at our peril today.

Mises's ideas on business cycles were spelled out in his 1912 tome "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit"). Not surprisingly few people noticed, as it was published only in German and wasn't exactly a beach read at that.

Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

Ordinarily, any random spikes in credit would be quickly absorbed by the system--the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse....

See the entire article.

Krugman wrong again

July 13, 2009 11:32 AM by John Cochran

Paul Krugman in the Sunday Denver Post, "Obama needs to tell it straight with stimulus," is again using faculty economic theory and an erroneous interpretation of economic history to persuade the political establishment that the current stimulus package is not working, not because it was misguided, ineffective by design, and failed to meet the administrations own guidelines for a good stimulus package; timely, targeted, and temporary, but because it was too small. The huge, nearly $800 billion, did not increase government spending by enough!

Let's remember, however, over 200 prominent university economists, in a Cato Institute sponsored add (http://www.cato.org/fiscalreality) run in numerous newspapers across the country in late January 2009, correctly argued,

"we ... do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the U.S. economy out of the Great Depression in the 1930s. More government spending also did not solve Japan's 'lost decade' in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the United States today."

The job loss and continuing economic decline has been driven by lack of business confidence and 'regime uncertainty' as exhibited by the precipitous drop in Gross Private Domestic Investment of nearly 30% from its most recent peak. Economic performance and job growth will not rebound without a rebound in business investment.

The prospects for such a rebound are bleak in the current policy environment. We see massive expansion of government spending and huge deficits as far as the eye can see, a guaranteed massive tax increase when the 2001-2003 tax cuts expire automatically in 2010, threatened (and actual in some states already) tax increases on the rich (those making over $250,000), a proposed cap-and-trade policy to fight global warming, which is in fact a massive tax increase on production and on any consumption activity that uses fossil-fuel-based energy. Instead of privatization, we see major government takeovers of private business in the automotive and financial sectors, which are often conducted in ways that violate contracts and supersede the rule of law. We see wasteful government mis-directions of production through subsidies and directives such as an energy policy that promises "green jobs," but is an energy policy missing one key ingredient: delivery of affordable reliable energy. What we have is a significant assault on freedom and the market, which has predictable short and long-run negative impacts on the economy.

The way to recovery was correctly highlighted by the above mentioned economists, "To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment, and production. Lower tax rates and a reduction of the burden of government are the best ways to use fiscal policy to boost growth."

If we are going to make another attempt, let's please get it right!

Return of the Dead Hand

June 24, 2009 6:45 AM by John Cochran

A major significant failure of the resurgence of market-oriented policies was a failure to reform the monetary system. This failure left significant control and direction of all aspects of money, credit, and financial flows under central-bank planning and control. The resulting monetary and financial crisis is not a market failure, but a central-planning failure -- an artificial boom is a centrally controlled misdirection of production. FULL ARTICLE