Dr. James Smith, Chief Economist, Parsec Financial, makes the case for the continued success and sustainability of the American economy, praises George Washington and Abraham Lincoln, and argues that Ben Bernanke is the greatest Federal Reserve Chairman.
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| Hi, everybody. It is Stefan Molyneux from Freedomain Radio. | |
| I have Dr. James Smith in the box to my right. | |
| He is the Chief Economist for Parsec Financial Management in Asheville, North Carolina, and an adjunct professor at the Kenan Flagler Business School at the University of North Carolina. | |
| His economic forecasts are regularly quoted in USA Today, the Wall Street Journal, and other media around the world. | |
| During his 35-year career, he's been an economist and analyst at the Federal Reserve Board of the National Association of Realtors, Sears, Roebuck& Company, the Society of Industrial and Office Realtors, Union Carbide Corporation, the University of Texas at Austin& Wharton Econometric Forecasting Associates now. | |
| He is also a member and past president of several professional economic associations, including the National Association for Business Economics, the National Business Economic Issues Council, and was co-chair of the European Council of Economists from 2001 to 2003. | |
| And he's currently slumming with us today. | |
| So thank you so much for taking the time, Dr. | |
| Smith. Delighted to be chatting with you, Stefan. | |
| Now, I've had a number of economic thinkers from Mark Faber to Peter Schiff to Doug Casey on this show who seem to view the future economic situation or potential of the United States with a somewhat jaundiced eye verging on problematic to apocalyptic. | |
| And I did dig around on the web to find people who had a bit of an alternate opinion and I really wanted to make sure I presented both sides of the case to my audience. | |
| Most of whom are fairly familiar with Austrian economics, as am I, though of course I'm not an economist. | |
| And I was quite intrigued by your bouncy optimism, if I can put it that way. | |
| And I was wondering if you could take us through the case for hope and butterflies and bright light coming through the tunnel that is not a train. | |
| Well, let's hope it's not a train. | |
| Probably the basic reason is I happen to be a native Texan, and most Texans are very optimistic people, so I probably come by it naturally. | |
| To be a little more point on in an economic sense, if you look at U.S. economic history in any timeframe you like, you know, start in 1789 or start in 1929 or start in, | |
| you know... Six months ago or five years ago, what you will find, but it's better if you start a long time ago, what you will find is that over the last 157 years, business cycles have been getting, in general, shorter, not the last one. | |
| But in general, much shorter, and periods of expansion much longer, so that the ratio of months of economic growth to months of economic decline has been getting bigger and bigger and bigger or longer as we go. | |
| And you can visit NBER.org, the National Bureau of Economic Research website, and click on business cycle dates and satisfy yourself that that is indeed a true statement. | |
| If you look over the last 28 years and one quarter, so 117 quarters now, you'll find one of them with the amazing result in terms of Change in real gross domestic product GDP of precisely 0.0. | |
| You'll find 10 with a negative number, and the other 106 are all positive. | |
| So that's a little better than Ten quarters of growth for every one quarter of decline over the last 28 years, and I personally don't see any reason not to expect something like that going forward for the next 20 or 60 or 100 years, I suppose. If you want a really long-run There's a great tale. | |
| I have no idea whether it's true or apocryphal, but fits his character perfectly. | |
| Winston Churchill, when he was first Lord of the Admiralty, at question time, and the Parliament being forced to come up with the estimate of how much Her Majesty's Navy, or His Majesty's Navy at the time, was spending to modernize the Navy. | |
| And he said he would have to go back to his office and get the answer, but would bring it back the next day. | |
| And he gathered his staff and he said, how long will it take us to come up with the answer to... | |
| The members questioned, and the staff caucused and concluded, probably 25 years, sir. | |
| And he said, perfect, I know the exact answer. | |
| I will testify on it tomorrow, with the idea being, of course, that who cared? | |
| Nobody would remember what he said, or everybody would be dead. | |
| So if you have a very long-run time horizon, you can be... | |
| Quite bold. Or to paraphrase Keynes, I suppose, in the long run, we're all dead, right? | |
| In the long run, that's not even a paraphrase. | |
| It's an exact quote. | |
| In the long run, we're all dead. | |
| But I suppose some people on Saturday, if you want to believe those people. | |
| But in any case, the history is on my side. | |
| We've had the The gloom and doom people out there repeatedly, and we certainly had a nasty recession from June... | |
| December 2007 until June 15th of 2009, but now we've had almost two years of decent economic growth. | |
| Not spectacular, but decent, and I don't see any reason we won't have another six, seven, eight, maybe ten years. | |
| We will indeed have another recession down the road. | |
| And I can tell you exactly how to know for sure that it's coming, or reasonably for sure that it isn't. | |
| And the way you know for sure is, at some point, the members of the Federal Open Market Committee, Part of the Federal Reserve System that sets monetary policy will become so alarmed about the threat of inflation down the road that they will raise the target for the Fed funds rates above wherever long-term rates are at the time, | |
| creating what's called an inverted treasury yield curve, which just means that 91-day Treasury bills are yielding more than 10-year Treasury notes. | |
| Whenever you see that, And it persists for four months or longer. | |
| That's a very important caveat. | |
| You can bet the farm, the ranch, the radio show, whatever, that we will have a recession, usually within nine to 17 months. | |
| It was a little longer the last time around, but we've had that That signal of an inverted yield curve that lasted four months or longer 17 times since 1901, and all 17 of those events were followed by a recession. | |
| We had four that weren't preceded by that signal, but those were all very special circumstances that we're unlikely to see again. | |
| Right, right. And can you just break down, I'd like to say for my listeners, but I think that also includes me, what the logic is. | |
| So why the shorter yields that are higher than longer yields? | |
| What specific policies are being pursued to rein in inflation that is indicative of a looming recession? | |
| What causes that? | |
| Perfect. Wonderful question. | |
| The people who run monetary policy The Federal Open Market Committee, that's all of the members of the Board of Governors of the Federal Reserve System who are appointed by the President of the United States and are nominated by the President of the United States and confirmed by the United States Senate, | |
| and all of the presidents Of the 12 regional Federal Reserve Banks who are selected by their shareholders, who are the member banks in their districts, those 19 people, if we have all seven governors, constitute the Federal Open Market Committee. | |
| Only 12 of them get to vote at any given time, but they all talk. | |
| The way that What they're actually doing is deciding whether to speed up or to slow down the rate of growth of the money supply, the broad M2. The late Milton Friedman taught all of us that inflation is always and everywhere a monetary phenomenon, | |
| and so the Federal Reserve's FOMC controls money supply growth primarily by raising or lowering The target for the federal funds rate, which is the interest charge that banks and other financial institutions charge each other for overnight loans to meet their reserve requirements at the Fed. | |
| And is it right to say that that slows down the borrowing, in other words, the creation of money through the banking institutions? | |
| Yes. As they raise the target for the Fed funds rate, the demand for loans goes down because the prime rate is directly related to that with a spread currently around 3 percentage points or 300 basis points. | |
| And all other interest rates are priced off that Off that phenomenon one way or another. | |
| Small business loans, automobile loans, home mortgages, you name it. | |
| And as interest rates go up, normally economic activity slows. | |
| At some point... | |
| Don't hit that button. | |
| At some point... And sorry, just to clarify, again, according to Austrian economic business cycle theory, the slowdown is going to occur first in the capital and then in the consumer markets because, well, for reasons that the Austrians go into great detail explaining which... | |
| But is that sort of the phenomenon that you're talking about as well? | |
| Right. I mean, as so long as you... | |
| We include consumer investment and housing as capital investment. | |
| That's obviously what occurs. | |
| Normally, housing leads us in to recessions and housing leads us out, closely followed, yes, by business fixed investment, obviously. | |
| Housing is not leading us out this time, and there are a lot of special reasons for that. | |
| But it doesn't... | |
| The inverted yield curve is an empirical regularity. | |
| It's not a theory. | |
| It's simply an observed fact. | |
| Every time we've had one that lasted four months or longer, we've had an ensuing recession. | |
| Right, so the sequence is that there's inflation which the Fed wants to control, so it limits the growth in the money supply by upping the domestic rate or the local rate for short-term loans, and that eclipses the long-term yields on the bonds, and that means that there's going to be a contraction in the money supply. | |
| It's going to hit housing slash capital and then consumer, you know, at some point... | |
| And consumer durable, so housing, autos, washers, dryers, etc., And obviously before very long, as those things decline, oh, what a shock, people start losing their jobs. | |
| And there's an old joke that the definition of a recession is when your neighbor loses his job and a depression is when you lose yours. | |
| So we certainly have many millions of people around the country who lost their jobs between The peak in November 2007 and the trough in June of 2009, and there's about 6 million fewer people employed today than there were in November 2007, although we're certainly moving in the right direction, namely positive job growth. | |
| But we got that That signal at the very end of June in 2006 when the FOMC went to 5.25%. | |
| Now, the other part, of course, is that long-term Bond investors become quite enthusiastic when they see the FOMC targeting, one hopes, future inflation rather than a current. | |
| If they wait until there's a problem with inflation, then you're revisiting the horrible great inflation of the 1970s. | |
| I'm pretty sure that's never going to happen. | |
| I'm 99.44% certain that will not happen again. | |
| Now, for those who don't recognize that, who haven't seen the ivory soap commercials from the 1950s, that's your percentage, right? | |
| Because they didn't want to say 22 over 50 or 11 over 25 because that would just be confusing. | |
| Now, you've quoted Professor Dombok, the late Professor Dombok of MIT, who says that expansions in the U.S., at least since 1953, have never died of old age. | |
| They've always been murdered by the FOMC or the Fed. | |
| I wonder if you could talk a little bit about that, as well as Milton Friedman's, I guess, Nobel Prize winning insight that this sort of monetary policy is always terribly laggy relative to the movement of a relatively free market. | |
| Well, yes. Let's deal with Dornbusch first and Friedman second. | |
| Dornbusch, who died much too young, was an extraordinarily witty MIT prof who was German originally and made all his reputation in the international trade and finance area. | |
| But he was so funny that he just, like the late Herb Stein, couldn't resist Some of us are rather dry and dull, | |
| but Rudy was not one of those, nor was Uncle Miltie, as we fondly called him. | |
| And I hope I'm not either, but in any case... | |
| All he meant was that they normally, they, the FOMC members, they do wait too long. | |
| And, of course, there's a lot of people worrying they're doing it again. | |
| They're doing it again. | |
| I don't think so for a lot of special reasons, but time will tell. | |
| But in any case, what... | |
| What happens is that they do get alarmed about... | |
| Inflation getting too high. | |
| Too high in the United States means a number above 2.0% on the implicit price deflator for personal consumption expenditures. | |
| It's a broader index than the consumer price index, which everybody knows about, and it's harder to explain, but it's a more accurate index. | |
| Measure of inflation. | |
| Currently, it's at 1.8% on a year-over-year basis. | |
| The latest data we have, which were for March, and presumably that's why the FOMC members are having such a strong discussion of when to start raising rates. | |
| There are a number of members Of the FOMC who expect that if that number stays at 1.8% for three months or so, they'll be raising rates in September, October. That's way ahead. | |
| Well, that seems to be what the Fed funds futures are saying, but it's way ahead of what most forecasters, many people say. | |
| We're saying sometime in 2012 or perhaps even 2013. | |
| So that's the Dornbush critique. | |
| It's 100% accurate. | |
| As I said, not just... | |
| Since 1953, but in 17 out of 17 instances since 1901. | |
| We have had four recessions that were not preceded by that indicator, 1938, 1945, 1946. | |
| 1952-53, and there was another one, which were either inventory problems or obviously the mid-1940s was just the enormous changeover from producing goods to fight and win World War II to educating all which were either inventory problems or obviously the mid-1940s was just the enormous changeover from producing goods to fight and win World War II to educating all those GIs coming home so we could have the productivity boom | |
| Since 1946, the Friedman critique is much more complicated. | |
| There were three reasons that he won the Nobel Memorial Prize in economic science in 1976. | |
| One was the inflation is always and everywhere a monetary phenomenon. | |
| One was monetary policy operates with long and variable lags. | |
| The third one which we're not going to go into probably today was his work on The permanent income hypothesis, which is a very accurate view of how consumers actually plan spending and saving over their lifetimes. | |
| But the long and variable lag problem simply means a lot of people use the analogy of comparing what the FOMC does at any given meeting with trying to steer an oil tanker between the You know, | |
| say the Persian Gulf and Los Angeles, that if the captain wants to change the course, he has to start about two and a half miles before the ship actually changes direction. | |
| So translate that into monetary policy. | |
| And the long and variable lag problem, it can be anywhere from six months after they do something to as long as three years before you see the economic impact. | |
| Now, no one is clairvoyant. | |
| Many people claim to be, but no one is. | |
| And so the FOMC needs to be making decisions about the future course of inflation long before we have any evidence. | |
| Of what that is going to be. | |
| Similarly, they don't know when a recession will begin. | |
| Typically, all but the last case, the solution to every post-1953 recession has been cut interest rates, cut interest rates, cut interest rates. | |
| If that doesn't work, cut interest rates some more. | |
| Well, now we're down to Interest rates are essentially zero, so they cannot cut any further, so they have to engage in what's called quantitative easing, which is simply an offset for the fact that they can't have negative interest rates. | |
| Switzerland, periodically, interestingly enough, has actually had I think we're going to have negative interest rates, simply because it is the only country I'm aware of whose currency is totally backed by gold. | |
| It's pretty hard to come up with any way that its currency could depreciate dramatically. | |
| I think every gold bug in my audience just went, gold standard, gold standard, I'm going to move to Switzerland. | |
| Yeah, there you go. | |
| Well, it's not a gold standard. | |
| They just back the currency. | |
| It's a fiat currency, but it's tied to how much gold they have, I would assume, with current gold prices. | |
| It's not freely exchangeable, but it's tied to, right? | |
| Yes. I mean, they have the Swiss National Bank has more gold. | |
| I started saying its vaults, but I also would bet that most of it is actually in the The Federal Reserve Bank and the York vaults which have about half of all the gold in the world. | |
| It's a great tour if you can get it. | |
| The people from, I believe it was Die Hard 3 that had the plot of going after the gold in the New York Fed was all made up. | |
| But it's 12 stories below the bedrock of lower Manhattan. | |
| And most countries store their gold reserves But in any case, Switzerland has more gold in reserve than it has currency outstanding. | |
| But periodically, foreigners want to have a bank account in Switzerland, and so many of them do. | |
| It's rare, but it has occurred within the last 30 or 40 years that you put $100 in the bank and immediately the bank You only have 99.50 or something. | |
| It's a lot easier for countries that don't get involved in world wars to stay on or similar to the gold standard because, of course, wars are always paid for, at least in the modern age, through fiat currency. | |
| Let me throw a couple of... | |
| They were paid by clipping the currency. | |
| Same idea. Go ahead. | |
| I want to throw a couple of arguments at you around exceptionalism to the historical trends for the future. | |
| There seem to be, and I'm paraphrasing the people I've had on this show, so hopefully they'll forgive me if I've misstated their positions, but there seem to be a number of reasons that people think the future is different from the past. | |
| There are things like, of course, the demographics of the aging baby boomers associated with Costs of health care and reductions in taxes and increases in Social Security, all the stuff that economists are very well aware of and have been for some time. | |
| Increased regulatory burden, size of government, and the debt, of course, of the U.S. government, which is pretty staggering, although, of course, still better than a lot of countries in Europe. | |
| And last but not least, the unfunded future liabilities, everything from Social Security to the billions and billions of dollars that the government owes to retiring public sector workers who aren't And this is one reason why people feel that the future isn't going to be the same as the past, because there's a constellation or aggregation of factors that appear at least to be without precedent. | |
| So I wonder, you know, I'll fire these out and you can give me your response as to why they're less important than people think. | |
| What about the demographics, the lowered birth rate in the U.S. and the aging of the population? | |
| Do you feel that's less important than people believe? | |
| It's really going to be determined by what we do with immigration policy. | |
| If we have a relatively open immigration policy, as many people recommend, we'll have plenty of workers to... | |
| To pay the bills of all of the baby boomers retiring. | |
| My personal recommendation would be that we, as quickly as possible, merge with Mexico and solve that problem overnight. | |
| But that's more of a joke than anything else, but I don't think it's likely to occur. | |
| Well, economically there's a strong argument for it, but you might run up against some people's nationalism, which is always a problem, of course. | |
| Well, yes. | |
| I mean, the people who refuse to think about the fact that every single person who is a U.S. citizen today, either that person individually or his ancestors were immigrants. | |
| The only question is, how long ago did they come here? | |
| American Indians might have had ancestors who came here 12,000 years ago, so that was a very long time. | |
| But still, we don't have people like you find in Europe or There also may be some significant influx in immigration requests from Europe, as the European economy seems to be going through some hardship. | |
| I know that here in Canada there's been a huge influx of people trying to get out of Ireland and into Canada. | |
| Because, of course, the economic tiger of Ireland has turned into a rather anemic and debt-ridden monstrosity. | |
| So it may not be Mexico itself. | |
| It could be, I think, what many Americans would prefer for a variety of reasons, more of an influx from Europe. | |
| Well, Mexico was more of a joke than anything else. | |
| I mean, if you... If you think about what are the most prosperous parts of Mexico today, we call them Arizona, California, New Mexico, and Texas. | |
| So maybe a peaceful merger would be a little better than the last time around on that one. | |
| But sure, again, I'm in favor of We're good to go. | |
| In American history when we didn't. | |
| But I think that's the number one solution to that problem. | |
| Probably number two is to do something like Representative Ryan has suggested and make Medicare an affordable system. | |
| You know, almost all of our problems relate to health care. | |
| Social Security is very easy to fix. | |
| Raise the retirement age and change the indexation from prices to wages and you've solved the whole thing with no tax changes. | |
| You know, just actuarially raise The retirement age, not make up a number, but do it by actuarial science. | |
| The other... | |
| Sorry, let me just make sure I understand that. | |
| So, of course, as we all know, the Social Security was put in... | |
| It was like a bonus dollar for making it past the average life expectancy, which was in the low 60s, I think, when it first came in. | |
| So use some sort of actuarial measure to try and capture the bulge of the population... | |
| That currently is exceeding the 65 or where it's lower in the public sector, I think. | |
| Right. And try and sort of make it a ratio that it's not just everybody who goes over that bulge who gets it, but it's relative to some life expectancy that you could get from the actuarial table. | |
| No, no, that's way too detailed. | |
| Okay, good. Let's make it less detailed. | |
| Don't tailor it to each individual's. | |
| Life expectancy. | |
| But it was 65 from the time it started in 1942 until three or four or five years, maybe seven years ago. | |
| And it's gradually moving up to 67. | |
| But actuarially speaking, it should be 73 today. | |
| And I don't do it For people within 10 years of retirement, lest your listeners all have a stroke and say, wait, I can't retire when I've been planning on it for the last 40 years. | |
| Actually, if my listeners have a stroke, that would be another way of solving some of the... | |
| Anyway, go on. So let's not take that approach. | |
| You're saying your demographic skews to the older side? | |
| I think I'm sort of a barbell. | |
| I have lots of youngers and lots of olders. | |
| The middle ages, like me, not so much, but... | |
| Okay, so it would be sort of a collective ratio based upon some actuarial tables. | |
| Right, right. Well, I mean, move it. | |
| Do exactly what we're doing now. | |
| But say starting, well I know the Medicare reform suggestion says anybody who's under age 55 today would be moved into this different system. | |
| Simply also for anybody under 55 today, start raising the retirement age. | |
| I'm not pulling that number out of a hat. | |
| But Social Security is easy to fix. | |
| Medicare, Medicaid are not. | |
| Oh, Medicare is very popular. | |
| Well, sure. Free stuff generally is, right? | |
| Yeah, it's called rent-seeking behavior. | |
| Most people love a deal where they get something for nothing. | |
| I think statistically they're pulling three bucks of benefits out for every dollar they've paid in contributions. | |
| That's a pretty easy thing to sell. | |
| Right. And that's gone up dramatically every year. | |
| And if you tried to make Medicare actuarially sound, then why would you need Medicare? | |
| But many people argued that when it got enacted back in the... | |
| In the 1960s, if you tour the Harry Truman Library and Museum in Independence, Missouri, you can actually view the desk that bankrupted America, and it's the desk on which Lyndon Johnson signed Medicare into law back in 1964. | |
| And he sent the deaths to President Truman, who had championed Medicare but couldn't get it through Congress. | |
| LBJ did, and that's the reason we're looking at a net present value deficit of $60, $70, $80 trillion with a T. The folks up at Boston University keep that number up to date, Joel Kotlikoff and his colleagues. | |
| It's more than the net worth of everyone in the United States, which is about $55.8 trillion at the end of last year, according to The Federal Reserve Board's flow of funds. | |
| So, I mean, my basic response to that is to quote Herb Stein, trends tend to continue until they become unsustainable, at which time they stop and turn around. | |
| And I suppose the other part of that would be, again, the empirical observation that when things get horrible enough, Congress usually does the right thing. | |
| They hardly ever do it in advance, but the notion that we are facing unprecedented challenges, I think, is ludicrous. | |
| We had pretty amazing challenges in 1789, how we're going to make the United States work. | |
| Thank the good Lord, we had George Washington there, the greatest strategic planner in history, and by far our greatest president, who invented the United States. | |
| Then we got invaded by the British. | |
| They burned our capital. | |
| Dolly Madison fled the White House with a picture of George Madison. | |
| George Washington always wondered what James Madison thought about that, but in any case, you know, pretty traumatic time. | |
| Then we had Andrew Jackson with his brilliant idea of doing away with the central bank and paying off all the national debt. | |
| Well, that was a disaster. | |
| Then, of course, we had our second greatest president, Abraham Lincoln, who had to prove That a house divided against itself cannot stand and take every other disaster we've had from 1789 until today. | |
| And I would say basically today's troubles pale in comparison. | |
| A, they're all financial, which means they're all solvable. | |
| We just have to get Congress to understand that. | |
| All right. We can perhaps have another show where we debate the history of the United States. | |
| I think that there's some stuff that I would disagree with, but I always try and stay on target at these shows, which is always tough for me because there's so much interesting stuff that's being said. | |
| If you can raise the retirement age, if you can get more immigrants and all these sorts of things, if these things can be achieved, yes, then those problems can be addressed to some degree. | |
| What about the current debt itself, you know, rolling in at 14 plus trillion dollars a year and only set to increase? | |
| So what are your thoughts about... | |
| Because, of course, the fear that everybody has is the US is going to monetize the debt, which you could argue is somewhat underway through QE1 and QE2 and whatever is going to come after this and the bailouts and this and that. | |
| And the monetization of the debt resulting in inflation and all of that kind of Weimar mess. | |
| So what are your thoughts about that? | |
| Well, yes. I don't think the U.S. is going to wind up like Germany or like Hungary. | |
| Argentina, yeah. Argentina. | |
| The people who've studied hyperinflations, at least, again, they've proven that there's a real easy way to cure them, stop printing money. | |
| Zimbabwe being a very recent example. | |
| Of that, the first country I know of to actually print a trillion dollar bill, which I believe was worth about six cents by the time they stopped running the printing presses. | |
| Running neck and neck with toilet paper in terms of utility. | |
| Well, yes. | |
| The hyperinflation in the United States or any other developed country is basically impossible. | |
| And the reason is because the bond market vigilantes wouldn't allow it and the dollar would collapse or the currency of any other country that were to try it. | |
| Most central banks in the world today, not ours unfortunately, But most of them have one and only one goal, which is price stability, or even an actual target like zero to two or one to three percent inflation. | |
| I mean, look at... | |
| Mervyn King at the Bank of England, every time inflation goes above 2%, every month, I should say, he has to write a letter to the Chancellor of the Exchequer explaining what went wrong, because the Bank of England is supposed to keep it That's got to be a very embarrassing letter to have to write. | |
| But with all of our global competitors having essentially a price stability goal, and only that, there's just no way we could get away with inflating our way out of the debt. | |
| That is what we did in the 1970s. | |
| But we couldn't do it again. | |
| Because the bondholders would start dumping bonds, which would lower the value of the currency, thus causing a change in Fed policy if they tried that. | |
| Again, I'm sorry if I've described it too naively, but is that the general idea? | |
| I don't see a thing naive about it. | |
| I mean, that's the mechanism. | |
| And so the other currencies faced that potential because there were fewer bondholders invested in the value of that currency. | |
| I mean, who cared, in a sense, outside of Zimbabwe about Zimbabwe's inflation? | |
| But because so many people have so much invested in the U.S. currency, they're very keen on protecting its value. | |
| Is that a fair way of stating it? | |
| That's totally a fair way of stating it. | |
| And I said the same is true, you know, you could say exactly the same thing about Canada or Japan or Germany or France or the UK or any other developed country. | |
| Inflating your way out simply is impossible. | |
| Okay, so sorry to interrupt, but if there's no inflation, then there has to be debt pay down, I guess a continual debt carrying, which if the demographic bulge is a problem, seems unsustainable, or defaults. | |
| And of course, all of those, you know, here you hear massive disaster scenarios about any of those options. | |
| Well, I mean, there is only one logical solution. | |
| Spend less or at least dramatically slow the rate of growth of government spending. | |
| We can't tax our way out. | |
| Some people claim that's possible, but it's not. | |
| We have... We're good to go. | |
| Regardless of personal political leanings, that it looks like the 2012 presidential election in the United States is going to be fought on the issue of, you know, should we cut $4 trillion out of future obligations over the next decade, or $6 trillion, or perhaps more, instead of, you know, what can I promise That I can't afford to give away. | |
| That's a revolutionary change in the dialogue and it's hard to see how anything bad can come from that. | |
| Of course, the example that people could take some comfort in is that Canada in the 90s faced a huge crisis in debt payments, cut government by 10-15%. | |
| Now, admittedly, of course, public choice theory dictates that it's always going to start growing again and that's what's been happening now. | |
| But there was a 10 to 15 percent cut in government's expenditures. | |
| And, of course, the houses didn't burst into flames. | |
| It didn't start raining frozen frogs on innocent children. | |
| I mean, you know, you just people say like there's some savage cut when they're talking about going back to the spending from six years ago. | |
| I mean, this is not a savage cut. | |
| Savage cut would be going back to the spending of 1820, not, you know, 2004. | |
| I mean, we've doubled federal government spending in the U.S. in just six years, which is insane. | |
| It would be great if we could get back to 1998 spending levels. | |
| 1898. I vote for 1898. | |
| People who are eating 5,000 calories a day who say, well, I have to go down to 4,500 calories a day cannot make a case that they're starving to death. | |
| They just can't do it, although that is always how it's sold. | |
| Well, yes. You look back in the 1920s. | |
| And you note that federal government spending was 3% of GDP and defense spending was 1% of GDP. And I don't know anybody who could get you back to that kind of level today. | |
| Murray Rothbard would be one person who comes to mind. | |
| But anyway, Murray Rothbard, he was a state of the society kind of guy. | |
| By 3% would be pretty tough. | |
| Yeah, I think that in the 1920s, America did not face many threats of imminent invasion or terrorist activity, even with only a 1% defense spending budget. | |
| So it's something to remember for everybody out there. | |
| Yes, but not even, or only a little over a decade later, we found out that we should have been spending a little more On defense, because then we ran the defense budget up to 40% of GDP, which did the trick, but was certainly, I would assume, painful at the time. | |
| I have to look in a history book to figure it out, but the... | |
| We've been in giant pickles in the past. | |
| The Great Depression was totally caused by bad government policies. | |
| The Smoot-Hawley tariff, raising taxes and allowing the money supply to shrink by a third. | |
| Nobody understood at the time that when banks go broke and you don't have deposit insurance, The money supply shrinks. | |
| Well, I think not only the citizens of the United States, but the entire world is unbelievably lucky to have Ben Bernanke where he is today. | |
| He's by far the leading living scholar of the causes and consequences of the Great Depression, and we're not going to revisit that experience. | |
| All right. There's one final argument that I'd like you to take a swing at. | |
| Tyler Cowen has recently written, I can't remember the title, it's quite long-winded, and I'm certainly not one to talk about being long-winded, but he basically says that a lot of the low-hanging fruit of economic efficiencies has been sort of picked in the post-war period, and one of the reasons... | |
| That, you know, something which is unprecedented in U.S. economic history, at least in a longer period of time, is the sort of stagnation and even slight decline in middle class incomes and to some degree lower class incomes, particularly if you take out sort of income redistribution. | |
| That there has been a softening of economic growth for the middle classes and upper classes as always are doing beautifully but there has been a sort of wage stagnation. | |
| Part of his argument is that it just it gets harder and harder to be more productive once you've got the low-hanging fruit out of the way. | |
| Do you think that this may be an argument for a sort of uniqueness and this ties into what I mentioned earlier about sort of hyper regulation or increased regulations of US business and all of that sort of stuff. | |
| That there may be an argument that one of the ways you know you're in a unique situation is that something is happening now that hasn't happened before, such as this softening of real wages for a lot of Americans. | |
| Well, probably most of that will get revised away. | |
| A. B. There's 20% of the people at both ends of the Income distribution fall out of that category every year. | |
| So we're still the most economically mobile society in the history of the world, and most of that is related to the degree of education. | |
| So the more education you have, the higher the probability you'll be in the upper part of the income distribution. | |
| The fastest way to solve that would be to have a national commission on regulatory reform that worked just like the base closing commissions that we've had four or five times, have it be created by Congress, review every regulation that we have on the books, put in a set of recommendations, Eliminate this, this, and this so that we match costs and benefits. | |
| It's estimated the deadweight loss of the regulatory burden in the U.S., which means the excess of costs over benefits, is about $1.2 trillion, so almost 10% of GDP. If you could free that up, you could solve all of our problems very quickly, and I don't hear anyone talking about that. | |
| Instead, we're piling on more regulations, like this new Consumer Financial Protection Board and all the other parts of Dodd-Frank and heaven help us if the healthcare stuff all comes to fruition. | |
| We never repeal the old regulations. | |
| We just keep adding new ones and Almost 10% of GDP would be very nice to put into productive activity and paying down that drastic national debt. | |
| Not to mention, of course, doing something to simplify this absolutely insane tax code that just piles. | |
| You're killing trees by the hundreds of thousands just to print that stuff. | |
| That would be another thing. Trillions of dollars wasted on that. | |
| Go for the fair tax. | |
| They repeal the Repeal the 16th Amendment and pay 23% of all consumption and have a subsidy that goes to households with incomes below $50,000 a year. | |
| Watch the economy boom. | |
| Watch the deficit shrink. | |
| And watch us look for some whole new set of problems to worry about down the road. | |
| Now we have too much time on our hands. | |
| What are we going to do with it all? I guess we're so rich. | |
| Well, listen, I really, really appreciate your time. | |
| It's been a very, very fascinating conversation, and I appreciate your insights. | |
| I'm very happy to bring some positivity to the discussion on economics that's been going on, at least through this show. | |
| And I certainly look forward to feedback from people who... | |
| Who, when they experience the elephant of doom slowly sitting up from their chest, feel the need to crush something other down with it and let me know how you or I or everyone in this show is wrong. | |
| And I'll forward some of that onto you if that might be of interest to you. | |
| And I really do appreciate your time. | |
| Oh, yeah. No, I'd love to see that. | |
| 3.3% growth has held for 80-plus years now. | |
| I don't see why it won't continue. | |
| All right. Time will tell for sure, and I really do appreciate your time. | |
| Thanks again. Thank you, Stefan. |