"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Sunday, May 15, 2011

Rebuttal to Our man Blinder, appropriately named.

Quick one line intro. Austrian Economics is not about Austria. It's what Peter Schiff and others have called the only true economics, started by people who lived in Austria, thus the name.

And now for the meat and potatoes:

A Nov 15, 2010 Wall Street Journal article lays out why it thinks Ben Bernanke is so wonderful and why only the silly dare disagree with what he's doing. Smiling Dave's Gentle Sarcasm will rebut. I'll quote a bit from Mr. Blinder, former vice chairman of the Federal Reserve, in italics, and then refute in normal type.

For months, we have witnessed the spectacle of people arguing that Keynes was wrong. Somehow, additional government spending actually reduces employment—even when the economy has huge amounts of spare capacity and unused labor desperate for work; even when the central bank will prevent interest rates from rising to "crowd out" private spending. Really?

Let's explain how govt spending reduces employment, even under the conditions Blinder thinks it doesn't happen.
First, lets make this point. When the govt spends, say pays people to build houses, then there is an increase of employment in the housing industry. The moment they stop buying, off toddle the jobs. So we are talking about an eternal injection of govt money into the housing industry. 

This is in contrast to when private people decide they want more houses. After all, there must be a reason they want more houses suddenly. Maybe prices of houses went down, or a new use has been found for houses. But there is a reason. And as long as the reason is there, the jobs will be there. When the reason stops, the workers will get laid off, as they should be.

And of course govt spending indeed reduces employment. Because for every dollar they take away from us and use to hire someone, we have a dollar less of our own to spend. So people who used to work for us will lose their jobs.
Now one may say that it's a trade off, gain one job here, lose one job there. So that the worst we can say about the gov is that it does not help. But why do we say there will be less jobs, not the same amount as before?
That's a deep question. The answer is that there is a huge difference between a govt job and a regular job. The govt job is always to make something nobody wants. After all, we are talking about the govt building houses because nobody is buying them. Which by definition means the govt is building houses nobody wants. A result of that is that resources like factory space, raw materials, and labor, have been wasted. They cannot be used to make things people really want, because they have been turned into houses.
When a country has less resources available, it is poorer. People cannot afford to hire others like they used to. So of course there will be more unemployment.

 Our man Blinder may agree with all this in principle, but thinks we have failed to grasp the important special case we are living in. He asks us if we think govt spending cause unemployment...

even when the economy has huge amounts of spare capacity and unused labor desperate for work?

What does he mean by "spare capacity"? I assume he means that GM has this big factory for making SUVs and nobody is buying SUVs. So there is a spare capacity for SUV manufacture. And he proposes that the govt keep buying those SUVs to keep the factory open.
By this thinking, when cars were invented and the buggy factories had spare capacity, the govt should have given them money to keep on making buggys. Or when electricity was invented, the govt should have given money to the whaling ships to keep on bringing in blubber.
The point is, if a factory has "spare capacity", there is a reason for it. Always. And just like the whaling ships and the buggy factories, if no one is buying, they have to shut down.

As for "unused labor desperate for work", I guess he is saying the govt should get these people hired, by buying blubber and buggies. Is there not a flaw in this picture? There sure is. In a sane economy the workers would stop working for GM and get jobs doing something else. No more blubber, no more buggies, but something else.
The reason they cannot find other jobs in our insane economy is because of govt regulations and taxes that prevent people from hiring new workers.

Mr. Blinder hints at another reason govt spending, in this particular case, will not create unemployment:

even when the central bank will prevent interest rates from rising to "crowd out" private spending[?]

So low interest rates ensure that private spending will keep on happening. Whatever the private sector was spending until now it will keep on spending, plus we have the new govt spending, so the whalers will keep their jobs.
But if the private sector is spending the same amount, that means that of course it still HAS all its money to spend. Meaning no new taxes are being imposed. In that case, where is the govt getting the money to spend? I guess they are borrowing it from someone outside the USA, since the Americans will have all their money to spend. Which means one day we will have to pay it all back with interest. I wonder where the money will come for doing that?
But we all know where the money will really come from. Hot off the printing press on the QE2. Which by the law of supply and demand applied to money, means inflation. Meaning the private sector will lose purchasing power. Which means the private sector will NOT keep on spending.

Getting long, so we'll stop here. A lengthier rebuttal of Blinder's absurd article is right here on the Mises forum, Smiling Dave style.

Don't forget guys, keep those favorable comments coming. 

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