War is the health of the State, but is it good for the economy too?

One of the memes that has been floating around lately is that the economy would benefit from more command and control. A secondary and related meme that has also been replicating lately is that the economy would benefit from a war or wartime buildup. In fact, Nobel Prize Economist Paul Krugman has worked to insert both memes into the social consciousness along with a third, and again related, meme that the economy would quickly come out of recession if we faced an alien threat which necessitates a wartime buildup.

Krugman states:

World War II is the great natural experiment in the effects of large increases in government spending, and as such has always served as an important positive example for those of us who favor an activist approach to a depressed economy.i

and

If we discovered that space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better…ii

Is Krugman right? Will another great wartime buildup, like WW2, help the economy? Moreover, should our benevolent leaders take the advice of Krugman and under the guise of knowing what is best for the subjects of the State implement a policy to produce some kind of false alien threat to ramp up worldwide aggregate demand for our own good?

Before answering those questions, it should be stated that Krugman is basically a Keynesian. In Keynes’s General Theory he asserts that increased government control of the economy, inflation to depress wages (in order to increase employment) and loose monetary policy are the solutions to depression. Inflation is brought about by increased government spending or loose monetary policy or both. Therefore, Krugman in calling for a massive military buildup, is basically suggesting the Keynesian solution of boosting aggregate demand and inflation through increased government expenditure.

Fortunately, war is an unproductive affair, otherwise nations would probably go to war more often, and Krugman errors greatly in believing otherwise. WW2 was no boon for the economy. It conscripted 10 million while millions of others joined voluntarily. It reoriented the capital structure to produce instruments of war. These instruments were in turn used to destroy the capital structure of other geographic areas. WW2 was basically the natural progression of FDR’s economic policies.

What Krugman doesn’t understand is that commercial bank credit expansion leading up to the Depression facilitated by the Federal Reserve created excessive maturity mismatching which caused discoordination between the term structure of real savings and investment. In layman’s terms, centralized planning in the banking sector resulted in investments not in line with consumer demands. The result was the stock market crash when the monetary expansion and short term debt covering long term debt could no longer keep pace.

Centralized planning caused the stock market crash and the response by Hoover was to engage in more centralized planning to fix the problems caused by centralized planning. FDR like Obama, continued and ramped up the government intervention from the previous administration. This caused the depression to continue. The only choice left for interventionist policy was more command and control which war facilitated; however, this did not fix the underlying problems of the economy. As Dr. Higgs points out, what restored the economy to health was the relaxing of the economic command and control after the war along with decreased government expenditure and less uncertainty about the future status of private property rights which resulted in greater investment outlays.

Although the reader can probably see by now that there are some serious flaws in Krugman’s argument, let’s go along with Krugman’s ridiculous proposal and pretend that his fake space alien invasion fantasy came true. What would be the possible economic and political consequences of a faked alien attack? First, unlike WW2, a fake alien attack against earth would likely be much more damaging to the economy than WW2. Perhaps, to make the public believe the invasion real, the government fires some futuristic space-based lasers to demolish Cleveland and Detroit. Actually, a progressive liberal such as Krugman might not recommend this policy as this would be against the stated progressive liberal agenda of helping the poor. So maybe the government would instead fire the lasers to demolish the mansions of the rich in Orange County. Then again, maybe this wouldn’t be a good idea either because the poor might cheer on the aliens for demolishing the homes of their betters. Likely the government would probably just go with plan A and blow up Cleveland and Detroit, riding the blight while rousing the masses through fear.

Even if the government just blew up foreclosed homes in Cleveland and Detroit and only produced minor collateral damage, the faked alien invasion would still likely be worse than WW2. First, the government just can’t fake an invasion to boost aggregate demand then come clean when the economy is supposedly back on track. The government would lose all legitimacy in this scenario. In fact, the government would have to perpetuate the lie in order to perpetuate the government. Furthermore, imagine the effect of a faked alien attack on the public. During 9/11, when the brainwashed masses of school children learned of the attack but not the perpetrator, they defaulted to the memes the mass media implanted in them. For example, it was Saddam launching missiles. Logic did not prevail at that time. Later the media and the government identified the correct enemy to direct their emotions towards.

Once the public would learn about the alien attack, they would acquiesce to the demands of the government in a degree and scale perhaps never seen in human history. Freedoms would be willingly surrendered without much of a thought. Martial law would not be objected to. Command and control economics would prevail. Who would dare not lend 100% of their energy an incomes to fighting for the survival of the human species? The capital structure would massively alter. No longer planning for the relatively distant future, capitalists and entrepreneurs would divert their investment and production efforts to the immediate task of defeating the alien threat. Living standards would plummet. The division of labor would revert in specialization aimed at satisfying the demands of the military industrial complex instead of the varied demands of private consumers. The State, maybe at this time a single world State, would be in virtual total control of the economic and political realms. Why would it relinquish its control?

Krugman did not originate the alien invasion idea. In fact, he picked it from an episode of the Twilight Zone. One wonders if we are not living in an episode of the Twilight Zone where a wartime president gets the Nobel Peace Prize and a Nobel Prize economist is suggesting the panacea to the Depression is a faked alien attack and where the only Congressman (Ron Paul) pointing out such absurdities is marginalized by the media.

-G.S.,Geoff@OhioFreedom.com

ihttp://krugman.blogs.nytimes.com/2011/08/15/oh-what-a-lovely-war/

iihttp://blog.independent.org/2011/08/15/paul-krugman-space-aliens-could-save-u-s-economy/

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Why Capitalism Is Worth Defending

By: Lew Rockwell

As Obama demonizes the wealthy and pitches a dozen plans to restructure the economy, opponents of this program need a reminder of what exactly we’re fighting for. We are resisting bureaucracy, central planning, and encroachments on our freedom and communities. But this does not get to the heart of the matter. We are not only an opposition movement, countering the president and his partisans’ agenda. More fundamentally, we stand in defense of the greatest engine of material prosperity in human history, the fount of civilization, peace, and modernity: capitalism.

Many regard “capitalism” as a dirty word, and it is tarnished most of all by its supposed guardians. Wall Street giants fancy themselves capitalists even as they live off the taxpayer and thrive on the state’s gifts of privilege, inflation, and barriers to entry. In the military-industrial complex, they champion capitalism by name as they produce devices of murder for the state. In the Republican Party and every conservative institution, they talk it up while making such vast exceptions to the principle as to swallow it whole. When many think of capitalism, they think of the corporatist status quo, leading even some who favor economic freedom to abandon the term.

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When a Cut is Not a Cut

By Ron Paul

One might think that the recent drama over the debt ceiling involves one side wanting to increase or maintain spending with the other side wanting to drastically cut spending, but that is far from the truth.  In spite of the rhetoric being thrown around, the real debate is over how much government spending will increase.

No plan under serious consideration cuts spending in the way you and I think about it.  Instead, the “cuts” being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases.  This is akin to a family “saving” $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.  But this is the type of math Washington uses to mask the incriminating truth about their unrepentant plundering of the American people.

The truth is that frightening rhetoric about default and full faith and credit of the United States is being carelessly thrown around to ram through a bigger budget than ever, in spite of stagnant revenues.  If your family’s income did not change year over year, would it be wise financial management to accelerate spending so you would feel richer?  That is what our government is doing, with one side merely suggesting a different list of purchases than the other.

In reality, bringing our fiscal house into order is not that complicated or excruciatingly painful at all.  If we simply kept spending at current levels, by their definition of “cuts” that would save nearly $400 billion in the next few years, versus the $25 billion the Budget Control Act claims to “cut”.  It would only take us 5 years to “cut” $1 trillion, in Washington math, just by holding the line on spending.  That is hardly austere or catastrophic.

A balanced budget is similarly simple and within reach if Washington had just a tiny amount of fiscal common sense.  Our revenues currently stand at approximately $2.2 trillion a year and are likely to remain stagnant as the recession continues.  Our outlays are $3.7 trillion and projected to grow every year.  Yet we only have to go back to 2004 for federal outlays of $2.2 trillion, and the government was far from small that year.  If we simply returned to that year’s spending levels, which would hardly be austere, we would have a balanced budget right now.  If we held the line on spending, and the economy actually did grow as estimated, the budget would balance on its own by 2015 with no cuts whatsoever.

We pay 35 percent more for our military today than we did 10 years ago, for the exact same capabilities.  The same could be said for the rest of the government.  Why has our budget doubled in 10 years?  This country doesn’t have double the population, or double the land area, or double anything that would require the federal government to grow by such an obscene amount.

In Washington terms, a simple freeze in spending would be a much bigger “cut” than any plan being discussed.  If politicians simply cannot bear to implement actual cuts to actual spending, just freezing the budget would give the economy the best chance to catch its breath, recover and grow.

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The Inevitable Debt Default

Writing over half a century ago, Ludwig von Mises, one of the most consistent advocates of liberalism, explains in his magnus opus, Human Action, the dangers of long-term government debt. We provide the following excerpt here because it is relevant to our own time as the debate over the debt compromise continues.

The state, this new deity of the dawning age of statolatry, this eternal and superhuman institution beyond the reach of earthly frailties, offered to the citizen an opportunity to put his wealth in safety and to enjoy a stable income secure against all vicissitudes. It opened a way to free the individual from the necessity of risking and acquiring his wealth and his
income anew each day in the capitalist market. He who invested his funds in bonds issued by the government and its subdivisions was no longer subject to the inescapable laws of the market and to the sovereignty of the consumers. He was no longer under the necessity of investing his funds in such a way that they would best serve the wants and needs of the consumers. He was secure, he was safeguarded against the dangers of the competitive market in which losses are the penalty of inefficiency; the eternal state had taken him under its wing and guaranteed him the undisturbed enjoyment of his funds. Henceforth his income no longer stemmed from the process of supplying the wants of the consumers in
the best possible way, but from the taxes levied by the state’s apparatus of compulsion and coercion. He was no longer a servant of his fellow citizens, subject to their sovereignty; he was a partner of the government which ruled the people and exacted tribute from them. What the government paid as interest was less than the market offered. But this difference was far outweighed by the unquestionable solvency of the debtor, the state whose revenue did not depend on satisfying the public, but on insisting on the payment of taxes (p. 266).

In the next passage Mises hints at part of the problem with our current system. That is, entrepreneurs who no longer turn to the market to gain wealth from satisfying consumer wants. In our current system this results in regulatory capture, a predictable outcome of government intervention creating distorted incentives.

The entrepreneur, grown old and weary and no longer prepared to risk his hard-earned wealth by new attempts to meet the wants of consumers, and the heir of other people’s profits, lazy and fully conscious of his own inefficiency, preferred investment in bonds of the public debt because they wanted to be free from the law of the market (p. 227).

The problem with entrepreneurs turning to investment in bonds is that they are paid from the taxation of citizens in the future. No longer are they creating new wealth. The government in turn is likely to spend the loans on current expenditure and not investment in higher productivity (assuming the government can invest without misallocation of resources). Lastly the resources lent to the government by the entrepreneur, being squandered, must be paid back by taxing productive members of society. In Mises’s words:

However, even the most ruthless government in the long run is not able to defy the laws determining human life and action…But if the government invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditure , the capital borrowed shrinks or disappears entirely, and no source is opened from which interest and principal could be paid. Then taxing the people is the only method available for complying with the articles of the credit contract. In asking taxes for such payments the government makes the citizens answerable for money squandered in the past. The taxes paid are not compensated by any present service rendered by the government’s apparatus. The government pays interest on capital which has been consumed and no longer exists. The treasury is burdened with the unfortunate results of past policies (pp. 227-228).

We can see the perneciousness of this process on productivity, but can it continue indefinitely? Mises did not think so.

The long-term public and semipublic credit is a foreign and disturbing element in the structure of a market society. Its establishment was a futile attempt to go beyond the limits of human action and to create an orbit of security and eternity removed from the transitoriness and instability of earthly affairs. What an arrogant presumption to borrow and to lend money for ever and ever, to make contracts for eternity, to stipulate for all times to come! In this respect it mattered little whether the loans were in a formal manner made irredeemable or not; intentionally and practically they were as a rule considered and dealt with as such…In the heyday of liberalism some Western nations really retired parts of their long-term debt by honest reimbursement. But for the most part new debts were only heaped upon old ones. The financial history of the last century shows a steady increase in the amount of public indebtedness. Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract (p. 228).

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Bernake’s Blind Side

By Detlev Schlichter (Cobden Center), on 22 July 11

The world financial system is skating on thin ice, and that ice can crack at any moment.

The instabilities of the global paper money economy are evident everywhere. In Europe, the debt crisis is picking off one euro-member after another like the protagonists of a teenage horror movie, leaving us in no doubt what the final destination for the core is going to be. Yet – bizarrely and inexplicably – German Bundesanleihen still play the role of safe haven. In the U.S. of A., years of near-zero interest rates and two rounds of unprecedented “quantitative easing” have engineered a suspicious-looking rebound in equity markets and other financial assets, yet the victory of the interventionists over market forces looks hollow. Three years into the recovery, the economy is still sick. Manipulating financial markets seems one thing, generating prosperity quite another – only on Wall Street are the two the same. But according to the central bank’s chairman, if a policy fails it means you simply have to do more of it.

Only the intellectual and institutional inertia of the bloated financial industry, overfed on a rich forty-year diet of cheap money and ever-rising asset prices, is – for now at least – preventing a widespread rush for the exit. The industry is sitting on such a massive pile of inflated paper assets that there seem to be few alternatives to further feeding gluttonous governments and their clueless politicians. Additionally, things have gone from pretty bad to mind-blowingly worse too fast for most portfolio managers to comprehend – leading many to cling to the straws of time-worn investment routines and established asset allocation patterns. Did they not all learn back in money-manger school that government bonds were “safe assets”?

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Statement on the Cut, Cap and Balance Act

Mr. Speaker, I rise to speak against HR 2560, the Cut, Cap, and Balance Act.  This bill only serves to sanction the status quo by putting forth a $1 trillion budget deficit and authorizing a $2.4 trillion increase in the debt limit.

When I say this bill sanctions the status quo, I mean it quite literally.

First, it purports to eventually balance the budget without cutting military spending, Social Security, or Medicare.  This is impossible.  These three budget items already cost nearly $1 trillion apiece annually.  This means we can cut every other area of federal spending to zero and still have a $3 trillion budget.  Since annual federal tax revenues almost certainly will not exceed $2.5 trillion for several years, this Act cannot balance the budget under any plausible scenario.

Second, it further entrenches the ludicrous beltway concept of discretionary vs. nondiscretionary spending.  America faces a fiscal crisis, and we must seize the opportunity once and for all to slay Washington’s sacred cows– including defense contractors and entitlements.  All spending must be deemed discretionary and reexamined by Congress each year.  To allow otherwise is pure cowardice.

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