Category Archives: recession

GDP and a Culture of Consumption

Many have the misconception that a true advocate of the free market (a condition where individuals are free to exchange, invest, and economize without coercion) is necessarily an advocate of our consumer culture.  Nothing could be further from the truth.

Gross Domestic Product, or GDP, as it is commonly known, measures three indicators: consumption, investment, and government spending.  GDP is the most commonly used indicator of economic strength among the mainstream.  As consumption is a presumed sign of economic strength, governments around the world perpetually create schemes and concoct incentives to try and boost consumption, for according to this measurement system (which I strongly disagree with), as consumption increases, so does the overall economic health of the nation.

Our culture of consumption is not a product of the unfettered free market, but is largely a result of state interventionism, including unholy alliances between governments and businesses of all stripes.  This is nothing new: the Austrian School of Economics has been preaching this for decades.  Economists of various flavors have been preaching this for centuries, if not millenia.

I clearly do not support increased government spending as a measure of economic strength.  Quite the opposite.  Investment alone (this would include what we call “saving”) is the prime indicator of economic health, in my mind.  As the government can do nothing constructive to assist this (except to protect individuals from acts of aggression), there is really no constructive purpose to measuring GDP.

One argument against measuring investment alone is that investment is bad for the economy in the short-term.  In a sense, this is true.  A consumption-oriented culture and economic system has a capital structure centered around perpetual consumption.  When that ceases, it is true that jobs are lost and companies go under as the capital structure is modified.

As opposed to consumption, investment is a long-term, rather than a short-term objective.  In the long-term, investment leads to stable growth.

Money saved now (and not consumed) will one day be invested in some capital expenditure of value and benefit to society: a car, a house, an education, etc.  Unfortunately, our consumption-oriented corporatist culture diverts resources from where they are most useful (i.e. investment) and puts them in an area where they have short-term gains at the cost of long-term rewards.  That money is diverted from its proper use to purchase some expendable and often non-essential good.  (When such purchases are made on credit, the consequences are even worse.)

Would consumption exist in a country with a small government and no measurement of GDP?  Of course: people still need to eat, shower, brush their teeth, and enjoy recreation.  But there would be less frequent frivolous purchases and more long-term planning and saving.

In short, capitalism gets a bad rap for our government-encouraged corporatist, consumer-driven culture.  My advice: stop measuring GDP, get government out of the business of business, and let the market go to work. In other words, stop interfering with every transaction between individuals: and let them economize and exchange freely, rather than being bound and fettered by onerous regulation, heavy taxation, and myopic incentives.

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Bold Automotive Predictions

With President Obama’s proposed upgrade of car fuel efficiency standards (government-mandated standards, of course), I have a few bold predictions to make:

1. The administration’s estimate of an average increase of $1,400 per vehicle is far too low.  A more accurate estimate would be an extra $4,000 or $5,000, what one would pay extra (at least) for a hybrid car.

2. Materials in cars would move increasingly towards polymers (plastics) and aluminum and away from steel and cast iron.  Conventional illumination systems will be increasingly replaced by high-end, expensive LED systems.  This could be good news for some small companies in the South, West, and Northeast, but will probably hurt even more the rust belt, which still has a fair share of iron and steel plants which primarily serve the auto industry by producing low-cost, high-quality, ultra-reliable parts.  They will be driven out in a hurry.  Too swift a movement towards these lighter materials will likely mean a safety problem and almost certainly a quality compromise.

3. The value of some used cars will increase as their demand will as well.  A reliable gas guzzling vehicle purchased in 2014 may depreciate lower than one purchased in 2002.

Let it always be remembered that, as Henry Hazlitt would say, a good economist looks for all effects of a certain policy, and a poor economist looks at a narrow window of scope, ignoring the complete picture.  Sadly we have neglected wisdom and we continually look to our tunnel-vision minded political machine to set our course for us.

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Filed under Austrian Economics, fiscal policy, Paleoconservatism, politics, recession, role of government

Recession and the Austrian School

All is vanity. -Ecclesiastes 1:2

Who is right about the current recession?

Most economists from the Austrian School of Economics have been saying since the beginning (before most mainstream economists admitted we were even in a recession) that this economic downturn would be long and prolonged, likely a depression.  They are still saying this.  None of the failed Keynesian economic policies will change this for the better.  They will only prolong the agony, as Hoover and FDR’s interventions created and prolonged The Great Depression.

The Cold War taught us this: governments are not only unjust stewards of resources, but they are tragically inefficient as well.  Tens of millions died, for instance, due to Communist failures to allocate food properly.  If governments cannot even allocate food properly, the most basic of necessities, what makes us believe they are able to allocate capital, education, the environment, and health care (to name just four examples) more effectively than we as individuals are?

Mainstream economists have said, and some still say, that the recession will start to end this year.  This is tom-foolery.  We are already starting to see some mainstream shift in opinion (i.e. this news article).  This shift will only continue, validating the conclusions of the Austrian School of Economics.

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Responsibility Problems

We have a responsibility problem in this country.  It is everywhere, from the voters that voted for President Obama because he would pay their mortgage and utility bills for them (I do not recall him refuting this oft-repeated argument, by the way) to the auto bailouts to local and state governments clamoring for federal stimulus money.

I recently read this interesting and insightful statement in an article regarding record deficits and federal borrowing: “The deficits … are driven in large part by the economic crisis inherited by this administration,” budget director Peter Orszag wrote in a blog entry on Monday.

This follows the pattern: no responsibility.  The deficits are driven by government spending, pure and simple.  It may be true that such spending was seen as necessary by some.  However, to blame the economic crisis for irresponsible and reckless government spending is at least irresponsible and sounds nearly reckless.

Yesterday on the radio, I heard a story about how the Postal Service was needing to increase stamp rates (probably annually) to make up for lost revenue (over $1 billion this quarter alone).  At the end of the story, the reporter mentioned how that people who use email and make purchases online are largely to blame for this rate increase, but that such individuals will likely persist in their behavior.  Again, this sounds completely irresponsible.  Blame is shifted from who is truly responsible (the U.S. Postal Service for not providing a service whose costs are covered by individuals who will voluntarily pay) to those who are not (individuals acting freely, economizing to save money in hard times, or increase convenience in good times).

Lest you be concerned that I am pounding on democrats alone, I find that the GOP blame games which we have seen repeatedly over the years show a similar trend: the mainstream associated with both major parties shows major irresponsibility.

Contrast this with us, with you and I.  In a time of frozen credit and economic hardship, none of us can afford to make reckless personal economic decisions.  We can blame whoever we choose, but ultimately, it is our own individual responsibility to make sure that we are economically healthy.  None of us have the political clout and lobbying power to bend Washington to our will, nor should we.  Instead, we are to rely on tried and true principles of budgeting, economizing, and hopefully saving, consistent with provident living.

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Some Simple Numbers

I’m a mathematical simpleton: I like numbers, but not too many and only when I can understand them and how they all fit together.

For instance, let’s consider the federal budget since 1996:

2010 United States federal budget – $3.6 trillion (submitted 2009 by President Obama)
2009 United States federal budget – $3.10 trillion (submitted 2008 by President Bush)
2008 United States federal budget – $2.90 trillion (submitted 2007 by President Bush)
2007 United States federal budget – $2.77 trillion (submitted 2006 by President Bush)
2006 United States federal budget – $2.7 trillion (submitted 2005 by President Bush)
2005 United States federal budget – $2.4 trillion (submitted 2004 by President Bush)
2004 United States federal budget – $2.3 trillion (submitted 2003 by President Bush)
2003 United States federal budget – $2.2 trillion (submitted 2002 by President Bush)
2002 United States federal budget – $2.0 trillion (submitted 2001 by President Bush)
2001 United States federal budget – $1.9 trillion (submitted 2000 by President Clinton)
2000 United States federal budget – $1.8 trillion (submitted 1999 by President Clinton)
1999 United States federal budget – $1.7 trillion (submitted 1998 by President Clinton)
1998 United States federal budget – $1.7 trillion (submitted 1997 by President Clinton)
1997 United States federal budget – $1.6 trillion (submitted 1996 by President Clinton)
1996 United States federal budget – $1.6 trillion (submitted 1995 by President Clinton)

So here we have over a doubling of government spending in 14 years.  Is this in anyway sustainable?  Do we need twice the government now we needed 14 years ago?  Some of these increases year-to-year may seem slight, but for me, $200 billion is no chump change!

And consider this: if President Obama thinks a $780 billion stimulus package would help the economy, I suggest he slash the federal budget by $2 trillion dollars and see what kind of stimulus is really possible!  In fact, let’s do an exercise to see what would happen if he did.

President Obama says that the $780 billion is justified to save or invest in 2.5 to 3 million jobs.  Let’s suppose that it results in 2.5 million new jobs (highly unlikely, in my opinion).  Let’s calculate the price per job: $312,000 of taxpayer money.

Now, let’s consider how much those jobs cost when done voluntarily.  US GDP (a measure of total economic power) is roughly $13.7 trillion.  There’s about 130 million employees, if there’s full employment.  With unemployment running at about 8 percent, let’s call it 119,000 employees in the U.S.  Total cost per employee: $115,126.  That’s about a third of the price per job.

Now let’s say he puts $2 trillion back in the economy (for me, government spending is money taken out of the economy) by slashing government.  Based on the price per employee of $115,126, how many jobs would be created from this type of stimulus?  17,372,270.  That would solve our unemployment problem and then some.

What does this tell us?  At the very least, it illustrates the idea that the market is much more efficient at allocating resources than the government (roughly three times as much). 

Also consider that if the $2 trillion of government spending was pulled from areas which hamper job growth and restrain businesses from starting and growing, how much easier it would be for a small business owner to get going and hire people.

Now that’s a stimulus package.

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In the News

This shows a little of what the media is talking about: these are the hits from a simple search on Google News.

Inflation  59,315
Drug War  13,620
Mexican Cartel   5,039
Drug Cartel  15,222
President Obama 358,539
Ron Paul   7,869
Ben Bernanke  48.539
Timothy Geitner  90,383
Recession 248,246
Depression  51,058
Stimulus 181,847
Fiat Currency   1,519
Dollar  239,267
Euro  472,390
Yen   43,565
Yuan   21,119
Pound   64,662
Money     113,171,655
Gold  190,262
Silver   69,013 
Democracy  47,078
War  591,255
Iraq   69,109
Afghanistan 129,434
Iran   85,760
Israel  120,954
Russia   97,320
China  524,282
India  266,180
Brazil   49,832

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Sharing a Few Articles

These three are recommended: the first two are short:

Miracles we Take for Granted

Pitchfork Time

Money and Interest

I find the last, along with Mises on Money by Gary North, to be excellent explanations of the business cycle, and answer the following questions (among others): why do we get recessions?  What’s a central bank?  How does our banking system really work?  What’s the big deal with gold?

Read and be enlightened.

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