Sept. 29, 2018 - Freedomain Radio - Stefan Molyneux
01:11:09
4209 The Truth About President Trump's Economy. Prepare Yourself.
Dr. Robert P. Murphy is an Austrian Economist, Senior Fellow at the Mises Institute, the Research Assistant Professor at Texas Tech University’s Free Market Institute and is the author of several books including; “The Politically Incorrect Guide to Capitalism,” “The Politically Incorrect Guide to the Great Depression and the New Deal,” “Choice: Cooperation, Enterprise, and Human Action,” and the recently released “Contra Krugman: Smashing the Errors of America's Most Famous Keynesian.” Dr. Murphy also co-hosts the weekly Contra Krugman podcast with Tom Woods – where the duo regularly refute and eviscerate Paul Krugman’s New York Times writings. Website: http://www.consultingbyrpm.comTwitter: http://www.twitter.com/BobMurphyEconContra Krugman Podcast: http://www.contrakrugman.comContra Krugman Book: https://contrakrugmanbook.comContra Krugman: Smashing the Errors of America's Most Famous Keynesianhttp://www.fdrurl.com/murphy-contra-krugmanThe Politically Incorrect Guide to Capitalismhttp://www.fdrurl.com/murphy-capitalismThe Politically Incorrect Guide to the Great Depression and the New Dealhttp://www.fdrurl.com/murphy-depressionChoice: Cooperation, Enterprise, and Human Actionhttp://www.fdrurl.com/murphy-choiceLessons for the Young Economisthttp://www.fdrurl.com/murphy-lessonsYour support is essential to Freedomain Radio, which is 100% funded by viewers like you. Please support the show by making a one time donation or signing up for a monthly recurring donation at: http://www.freedomainradio.com/donate
You forget the thought or the feeling that the simulation may in fact be the modern Western economy as a whole.
I wanted to talk about that with a great economist, Dr.
Robert P. Murphy. He is an Austrian economist, which is a school of thought rather than a geographical location.
He's a senior fellow at the Mises Institute, the research assistant professor at Texas Tech University's Free Market Institute, and is the author of several books, all of which are great, including The Politically Incorrect Guide to Capitalism, The Politically Incorrect Guide to the Great Depression and the New Deal,
Choice, Cooperation, Enterprise, and Human Action, and the recently released Contra Krugman Smashing the Errors of America's Most Famous We're good to go.
Well, thanks, Bob, for taking the time today.
How are you doing? Doing great, Stefan.
Thanks for having me on. So, boy, there's a lot to talk about in terms of the mirage of economic recovery that's going on.
And it's complicated by the fact that Trump is doing a lot of stuff right and is kind of enigmatic, as you want a good negotiator to be.
You know, if he was up front with his ideology, people could use that as leverage against him in negotiations.
So where do you think things are from an Austrian perspective?
And where do you think they may be heading?
Well, sure. The big thing I've been saying ever since 2008, basically, after the financial crisis and the Fed started slashing interest rates and buying up also mortgage-backed securities and treasuries, is I was saying that's exactly what Alan Greenspan had done after the dot-com crash.
In the Austrian view, the business cycle is not a free market phenomenon.
It's because the banking system and nowadays, central banks push the thing.
They push interest rates artificially low.
That causes a false, unsustainable boom.
Then when they start getting nervous and they raise rates, that's what causes the bust.
I was just pointing out that what the Fed has been doing since the crisis hit is just setting us up for an even bigger crash.
Now that the Fed has started raising rates, I think that crash is coming sooner rather than later.
Regardless of what Trump did in office, I think that was already baked into the cake.
As far as his policies, I don't like his rhetoric for sure on trade, and then we can talk about some of the particulars.
The corporate tax cut, though, I think was a very pro-growth move.
I think even a lot of free market economists, it surprises me how little credence they give to that or how they don't think that's a big deal.
Both politically, it was amazing that they got that through just because of the optics of it, but also in terms of the significant That was a very big move.
Supply-side type economists have been saying for years, the US has one of the highest corporate income tax rates in the world, and now they've really made some significant moves on that.
The problem now is, unfortunately, it's hard to disentangle.
Under Obama, everything was just bad.
Then when there was the lackluster, one of the most sluggish recoveries in US history, if not the slowest, you could just say, yeah, see, I told you so, whereas here, it's a little bit hard.
I'm against protectionism, but I can understand people saying, oh, the economy's doing fine.
You idiots were warning us. I can say, well, I think it's because of the corporate tax cut.
Then likewise, the people, I thought the corporate tax cut was going to be huge.
Now, people can say, well, or if it crashes, they can say, oh, Murphy, you said the corporate tax cut.
I go, yeah, but that's because of the Fed.
Unfortunately, everyone's going to be right.
Paul Krugman's going to be right no matter what happens.
Oh, no, no. That makes my ears burn, even by accident.
Okay, so let's go over the Austrian theory of the business cycle.
It's been quite a while since I've done a show on that.
And there is this general perception, as you know, Bob, that, well, you know, these booms and busts are just part of the rollercoaster ride of the free market.
And I've sort of pointed out, yeah, people get sick, people get better.
But if the whole town gets sick, At once, you kind of want to look at the water supply, maybe the food supply.
There's something that's in common.
And I've never understood how people can imagine that an entire complex economy with hundreds of millions of people could suddenly go up and down at the same time, unless you start looking at what's in common, like money supply, interest rates, and so on.
So the Austrians, I think, have the answer regarding the business cycle.
So I wonder if you could step people through how it works.
Sure, and I like your analogy there, because that's exactly right.
This isn't like a free market economist versus Keynesian interventionist divide.
Even lots of people who are fans of Milton Friedman or whatever, I've heard them say things along the lines of, well, yeah, you've got to have innovation, and if you want to have free enterprise, business cycles are the price we pay.
No, that's not correct.
As you say, it is weird.
Obviously, any particular business, any entrepreneur might make a bad forecast.
They might open up their business, and then the consumer demand's not there, and they go out of business.
They go bankrupt. That's normal, but you're right.
The thing that we have to explain as economists is, Why are these clusters of mistakes?
Why does it seem like there's alternating periods where business in general seems to be booming, lots of businesses all seem to be doing well, and then all of a sudden it flips so that in general business is bad?
Yeah, there could be a few outliers, but you're right, it doesn't seem like it's a randomly distributed thing.
It seems like it comes in these huge cyclical patterns.
The Austrians, this was originally formulated by Ludwig von Mises.
In his work, the theory of what we translate as the theory of money and credit, and then, of course, Friedrich Hayek helped elaborate.
That's one of the major reasons Hayek won the Nobel Prize.
Mises says it's because of the banking system that For various reasons, what we can get into in a minute if you want, that the banking system is able to push interest rates artificially low by flooding the market with credit that's not really backed up by genuine saving.
Wait, wait. Hold on for a second.
Because when you say the banking system, most people gravitate towards the private banking system, to which point they would say, well, they can't create their own money.
They don't control interest rates directly.
Okay. So, and this gets subtle.
So, Mises' original theory came out in 1912.
That was before the US had a central bank, or at least before the Fed, they had had the national banks.
This brings up the issue of what's called fractional reserve banking.
There is a sense in which even private sector banks, if they're allowed to, you give $1,000 in your checking account deposit, and then if they're allowed to lend out some of that to other people, there's a sense in which Your original $1,000 deposit, and you think you've got $1,000 in there, but yet if other people are walking around with the money that the bank lent out, part of which was your reserves, now the community as a whole thinks they have more in checking account balances than your $1,000 savings actually is backing up.
Especially if they're lending out multiples of your savings, right?
Right, yeah. People may dimly remember from their horrible college classes on this stuff.
There's the multiplier in the banking system.
Some Austrians, we quibble about this.
This is actually a huge area of disagreement, but this is the Standard Misesian story was saying, if you think that what the banking system does when things are well functioning is channeled legitimate savings into loans to productive enterprise, the interest rate is the price signaling the scarcity.
If the banking system, in a sense, is allowed to lend more than has been genuinely saved by creating money, Well, sorry.
Hang on. I've gone back and forth on this as well because to me, if you put your money in a bank and your contract with the bank is, don't ever lend out more than you have in the bank.
Okay. Then they'll lend out a little bit based upon people's uncertain needs for liquidity in the moment.
But if you go to a bank that says, we lend out 20 times the amount of money that's in your bank account, well, you're going to get potentially a huge gain.
You may also get potentially a huge loss.
So to me, you know, fractional reserve banking is just a matter of risk tolerance.
Is it mad money? Can you handle the loss?
Do you want to have the high returns?
Or do you want something more conservative?
And in a free market, I think banks would offer a variety of those options.
Again, this gets really nuanced.
In a totally free market, you're right, I think a lot of this would just be a red herring because I think normal market mechanisms, as you say, would constrain banks, and so they wouldn't be able to engage in fractional reserve banking to the degree they are allowed to under a heavily regulated system.
That's fine. Clearly, in modern times with central banks, think about it.
Even the official rationale for why did the Federal Reserve get created, it was to be a lender of last resort.
When there's a crisis, we don't want people dependent on JP Morgan's good graces.
We want a public institution.
Clearly, whatever the issue might be about how would banking work in a totally free market, clearly under the heavily regulated system with a cartel enforcement and then a central bank there willing to bail people out when they get caught with their pants down, that clearly exacerbates this notion of fractional reserve banking beyond the margin that that clearly exacerbates this notion of fractional reserve banking beyond the margin that would happen in a And most people, I think – I know that I would.
Maybe you would as well, Bob.
But most people would want a banking executive board to lose their houses if the bank went bankrupt first.
Like they would be living under a bridge in a box.
They'd be living in a rusty old car.
Because at the moment, of course, with this corporate shield, and people think the corporation is somehow part of the free market, other than another status invention that allows people to hoover money out of a business enterprise without exposing their personal assets to risk of loss if the enterprise goes tits up.
And so I would want that sort of protection as well.
And that used to be the case in the 19th century.
If a bank went bust, the first thing they do is take the houses off.
Of the bank board members, and that's kind of been removed to some degree by this corporate shield.
Yeah, I agree with that entirely.
In general, the move towards debt and away from equity financing is partly a phenomenon or symptom of what we're talking about here, these artificially low interest rates.
Another thing, this is just recent.
I don't know if this is on your radar, but there was this financial institution called The Narrow Bank, so they go by TNB. Their business model, because right now, the Federal Reserve, if commercial banks keep their money parked at the Fed, the Fed gives them interest on reserves.
That is a privilege that only qualified financial institutions like banks can do.
You can't just go leave your money and deposit the Fed and get this guaranteed interest payment.
This thing called the narrow bank, their business plan was to say, okay, we'll be a regular bank, and we'll just take our customers' deposits with us and park them at the Fed, and we'll just pass along the interest.
So sort of, you know, have everyone be able to enjoy it.
And imagine, you're not going to believe this.
I hope you're not sitting down.
You should be. Because the Fed did not approve that charter.
The Fed said no. And the thing is, and it can't be- Wait, profits might be flowing to regular folk?
I'm sorry. We really can't have that.
It's only for the elites.
And the thing is, it can't be that there's some kind of riskiness involved, because this would be literally the safest thing imaginable.
This would be 100% reserve banking where you put your money with it.
In other words, they weren't going to do anything else.
This was going to be an entity that solely took customer deposits, parked them at the Fed, and just flowed through the interest.
That's the only thing on their books.
So your money would be absolutely safe, unless the Fed just decided to dissolve itself, and yet the Fed wouldn't approve that.
So you would think, gee, in this environment of wanting financial stability and wanting to have capital requirements and we don't want another too big to fail, having this option of everyone enjoying these, nope.
So Oh, can you imagine?
I mean, to look in the mirror and say, I'm a business genius because I can borrow money from the Fed at 2.25%.
I can park it in another account, get 3%.
Woohoo! I'm a business genius!
It's like, that's not even simple math.
Yeah. Again, obviously, you and I know that the real reason is because right now, the subsidies they're giving, in case people don't realize this, the Fed right now is giving many tens of billions of dollars just in interest payments per year to the commercial banking system.
That's new. That's something that was instituted in October of 2008, right after the crisis.
They had their rationale and their jargon for why they were doing it, but the point is, They're literally giving tens of billions of dollars a year right now to the commercial banks, just an explicit payment saying, hey, don't lend your money out to customers.
Keep it parked with us. So I mean, the whole thing, and as interest rates rise, that gets more and more expensive to do.
So clearly, yeah, they don't want more people in on that nice little cozy relationship.
Well, and this was the big tragedy of 07-08 was that the Federal Reserve and the government as a whole had a huge mandate for banks to lend to low-income people regardless of the future.
And then when that – because this is the question.
People say, oh, well, these credit default swaps and these bundled mortgage securities.
Boy, a lot of people on Wall Street made really bad decisions at the same time.
It's like that's a clue.
That's a clue that something beyond their particular purview exists.
And yeah, there was this mandate to try and get as many low-income people into houses as humanly possible.
And then when interest rates ticked up, variable rate mortgages kicked in, people couldn't afford it, and the whole thing went supernova.
But that's not a free market situation.
Do you think that banks just woke up one day and said, well, we've had hundreds and hundreds of years of figuring out who's good at paying back money that we lend to them, but we're just going to throw all of that out of the window.
And it's like, that didn't happen.
There was a mandate that was going on.
Right, and there's a documentary coming out that Tom Woods was involved with by this guy Jimmy Morrison.
I think it's called The Bubble. He might be breaking up into two parts now, and I've seen a preview of this recently.
He interviewed me and Peter Schiff and guys like that.
But he's got great quotes in the beginning from people like George W. Bush and Barney Frank and others.
I think Obama might be involved, too, but I'm not sure about that.
They're congratulating themselves, saying, we're going to promote the dream of home ownership.
They're so happy at how they're, through the Community Reinvestment Act and the artificially low interest rates and Fannie and Freddie and all those things, the whole goal was to Get banks to give mortgages to people who otherwise wouldn't qualify.
So you can't have it both ways.
It can't be that the government's pat itself on the back and then five years later saying, gee, how come all these people got mortgages who in retrospect were not good at credit risk?
It's like, well, that was the whole rationale of your program.
You've got to admire the truth in advertising, right?
You have to admire the truth in advertising, calling it the dream of home ownership.
Because one thing that we understand about dreams every single morning is you wake up and they ain't real.
Right. So that's the thing.
It wasn't merely that it was an unintended consequence.
That was the whole rationale.
And so for them, people will say, oh, it's a free market.
I mean, that's kind of crazy.
And so in general, back to your earlier question.
So the Austrian story is that these artificially low interest rates caused by credit expansion, there's a mismatch, that the interest rate does not truly reflect the available supply of savings available for borrowing.
The credit expansion, there's money created that really isn't justified by saving.
That's going to cause a problem.
The interest rate is a price.
It has a function to serve.
Just like if the government somehow made crude oil prices $5 a barrel, that wouldn't be doing any favors.
That would be misallocating it, because that's not the right price.
If interest rates are artificially low, something screwy happens, and in the Austrian story, It causes an unsustainable boom, and then when rates spike later on, everybody realizes, oh, I made too grandiose of investments, and a lot of entrepreneurs at the same time are trying to scale back, and so that's what we perceive as a recession.
Well, and that's the one thing that, as far as I understand it, Bob, only the Austrian school gets right, which is why does it happen in the B2B or the business sector first and then the recession hits the more personal or business-to-consumer market first?
Why is it that businesses, in terms of capital investment and expansion, Yeah, I agree.
And just in case your listeners don't know, even though the Austrians do, especially Mises and Rothbard They're very skeptical of empirical studies.
They're more in terms of a priori theorizing.
Still, don't misunderstand.
In terms of just empirical, what would the signature or the pattern in the data look like?
Like, it lines up with the Austrian sort.
Like, some of my favorite essays going against Paul Krugman were when he was saying after the 2008 crisis, well, gee, if this was a story about a housing boom and bust and reallocation, we would see this.
And so I would go and look at the data and say, yeah, that is what we see.
You know, your story about it's just people are afraid to spend, you would think retail would fall off a cliff, and then it would percolate back.
But no, as you say, Stephan, it's the other way around.
Capital good investments, those industries take a huge hit, and retail and service sector just takes a smaller hit.
The story lines up very well with the Austrian approach, whereas if it's just, hey, people are afraid to spend, and so the economy shrinks, that doesn't line up with the particular sectoral adjustments that we see.
Well, yes. So, I mean, just, of course, everybody knows this, but interest rates being the price of money and are subject to the same supply and demand, at least in a free market, as any other good or service.
So, if you have a whole bunch of money that people are saving, then the banks have a lot to lend out.
And to incentivize, they have to lower the price.
of interest, right? Because they have an excess of supply of capital set to lower the price of interest.
So when interest rates are low, that means there's a lot of deferred spending going on.
So businesses want to use that time to ramp up for additional production because they know that people are going to start spending sooner or later.
But if interest rates are artificially low, if they're kept artificially low and it doesn't represent an accumulation of savings or deferred spending, then the businesses start building for an expansion That never comes.
And that's why it hits the business sector first and then flows back into the personal sector.
That's exactly right. Especially for your listeners who understand how you would reckon the present value of a flow of cash flow stream, you know that the higher the discount rate you use, the higher the interest rate, that means future dollars aren't worth as much today.
Yes, the interest rate, if you're an entrepreneur, you're like, okay, we're thinking about building an apartment complex.
It's going to have a 30-, 40-year horizon in terms of us planning, We're going to spend $10 million this year building the thing, and then over the next 40 years, what kind of rental return do we think we can get?
The interest rate is a huge component in your decision whether to go forward with that or not, whereas if you're just going to put up a hot dog stand for the next 30 weeks, the interest rate is not really a big deal.
Yes, in a simple Keynesian macro model, the interest rate at best is just something like a brake or a gas pedal on total spending.
Whereas in a more sophisticated framework where you have long-term projects versus short-term, a low interest rate doesn't just stimulate investment.
It particularly stimulates long-term projects.
In the Austrian story, that's why an artificially low interest rate, it sets in motion long-term projects.
That's why you can get entrepreneurs, they might start something, and then when the economy flips, now all of a sudden, they've got a half-finished project.
They have to decide, do we continue?
Do we just lay people off?
In a more simplistic Keynesian story where it's just up, there's aggregate demand, and that's it, you can't even get those nuances.
It doesn't even make sense to say stuff went into long-term projects.
We're trying to explain the housing bubble.
Housing and real estate in general, those are very long-term projects, and that's why an artificially low interest rate would stimulate them in particular.
Right. And it's often struck me, Bob, if you can imagine some basketball game occurring, and there's some guy on the sidelines who's got a gravity dial, and they crank the gravity up to triple, and then they move it down to one-sixth of Earth's gravity like moon.
Can you imagine trying to play that game, trying to do your shots, trying to pass?
Not knowing what the gravity was going to be over the next five minutes or the next 30 seconds or the next three seconds.
You get dialing it up and down, got people falling over the place.
It would be kind of a weird comedy, but that's kind of what it's like being an entrepreneur with a central bank and a politically driven set of interest rates and a politically driven set of money creation policies.
You really don't know what's coming down the road and you're trying to play this game, but man, half the time the basketball goes up your nose, half the time you pass it, the gravity dials down, it sails way over, the other half the time it lands on your toes.
It's really tough to plan with people monkeying with foundational economic signals like this.
ED HARRISON Yeah, and beyond that, too, the standard objection to the Austrian story is, oh, I thought you guys think investors are rational, or what?
You economists know the Fed's doing this, but all the other people in real estate were idiots?
Part of the explanation is it's not a monolithic thing.
There are some people who are relatively new who just, they had never lived through a major boom-bust cycle before.
Also, it's the thing, if the Fed's handing out money at ridiculously low rates, and your competitors are taking it, Yeah, you can play the long game and sit back and let them make super high profits while you just tread water.
But the only way that's going to pay off is once the bust happens, they should be allowed to fail.
But if they get rescued, well, then you're just the sucker, because you didn't earn money during the heady boom years, and then they didn't go bust later.
So you have nothing to show to the people investing in your hedge fund or whatever.
So there's a lot of reasons that the stimulus on the front end and then all the bailouts are the exact wrong thing to do.
It's a profit and loss system.
If the people who lost a bunch of money aren't allowed to fail, then all the incentives are screwed up.
And that's something I think that's quite confusing for people around the 07-08 crash, when immediately $600 billion were pumped into various institutions, and it's been trillions of dollars, I think, since, if I've got my math right.
And the question is, okay, why can't they fail?
What is the problem? I understand with the FDIC that they've got to guarantee people's bank accounts, so you might as well prop up the bank rather than pay off everyone's bank accounts because it's just easier.
But a lot of these institutions that were failing were investment places that didn't have FDIC guarantees.
I mean, it's hard to guess what happened with Paulson and Bush and then Paulson and Obama, where it's like, hey, nice economy you got here.
Be a real shame if something happened to it.
What do you think the story was about what was going to happen without the bailout?
I mean, we all know that it would have been a crater, but then there would have been new growth that would have been sustainable.
What do you think was told to people that got the wallet books open to that degree?
Sure. So, yes, in September and early October going into the tarp.
Congress originally voted against HARP, because their constituents were, I don't remember what the numbers were, but the phone calls were heavily against it.
People were like, no, you're not bailing me out.
I'm underwater on my mortgage.
Where's my check? Where's my bailout?
Forget that. And they voted no, and then I don't know what was said behind closed doors, but then all of a sudden they held another vote, and it squeaked through.
The story is he literally got down on one knee and was begging Pelosi, saying, you know, we need this.
So yeah, they were telling people that your ATM is not going to work next week if we don't approve of this thing.
And they were like with the AIG bailout.
So the Fed came in, I think it was an $85 billion AIG, of course, is the big insurance company.
People were led to believe my life insurance policy is not going to be funded.
That was completely a lie, that AIG, it was like its parent company that was doing these credit default swaps that was in trouble.
The money backing up individual life insurance policies, that was in segregated accounts regulated at the state level.
Obviously, not that I'm a huge fan of state regulation, but the point is, that money was segregated.
The AIG, if they had just been allowed to fail, everybody's life insurance policy would have been fine.
And the same thing, too, in general, I mean, when a regular company corporation goes bankrupt, It's not the end of the world.
You figure out, okay, what are the net assets?
Then there's bankruptcy court, and they pay off the creditors in terms of where they stand in the queue, and if there's anything left over, and the shareholders take the hit, and the workers get laid off, but they get reabsorbed elsewhere by companies that have a better business model that are meeting the needs of consumers.
Yeah, it would have been bad, but the point is, We didn't avoid that crisis.
All they did was kick the can down the road.
So we're still going to have that day of reckoning.
It's just going to be much bigger now.
So there's that element as well.
But yeah, the idea that the whole financial system was going to just implode if they didn't come in and bail people out, that's crazy.
If they were saying, oh, well, the mortgage market, and hey, we have to bail out Wall Street to save Main Street.
That was one of the slogans. But no, like I said, so one thing is, they could have just given checks to people who were underwater.
That would have saved them more, but they didn't do that.
Instead, they were spending hundreds of billions on mortgage-backed securities.
So that was a farce.
But also, remember, in October of 2008, the Fed literally started paying commercial banks to not make loans to people.
They didn't use that language to describe it, but that's what it was called paying interest on reserves.
One way of thinking about what is the event, they were literally paying commercial banks saying, we don't want you to lend this money out, keep it parked with us.
Clearly, this was not about keeping the lending juices flowing so the average people could still get loaned.
That's not at all what was happening.
This was clearly their investment banker buddies screwed up, and they were about to lose billions, and the Fed came up with a way to bail them all out.
Well, and this is the really frustrating thing as well.
These guys were really playing some risky poker.
I mean, some of these institutions were lending out like 30 to 1.
I mean, you're lending out 30 to 1, you get a 3% market shift, you are completely wiped out.
And so they were really doing a lot of heavy risk.
And hey, you know, sometimes that risk pays off.
And sometimes it doesn't.
And that's sort of the whole point. And the way it plays out is one of these horrible examples of the seen versus the unseen.
You know, Bastiat's old idea.
Because, of course, the people who get to keep their jobs because of the government bailouts are like, woohoo!
Love these government bailouts.
They're great. The people who get to keep their life savings at the top.
But, of course, all the people who otherwise would have had jobs, all of the businesses that weren't created, all of the new things that didn't come into being, those fabled jetpacks that I'm still waiting for, nobody knows that that didn't.
Nobody has a direct visceral experience of what was not brought into being.
And that mismatch of incentives is one of the reasons why state control of the economy tends to be so corrupting for everyone.
Right. After the fact, I went and talked.
I hope I'm not coming off as if I'm saying, oh, it was all the government and private sector were angels.
No, you're right. There were people in the private sector that were completely reckless, were very short-sighted.
I'm sure there was a lot of outright fraud that was happening, like those things called liar loans, where part of what's going on is, yeah, commercial banks were originating mortgages, knowing full well the recipient It didn't have a job or was lying about his income because they were able to sell it off to Wall Street.
Still, you got to ask, somewhere along the chain, someone was doing something stupid.
Why was that process? The ratings agencies were involved.
Ultimately, and I talked to people afterward, like people at major investment banks where the physics PhDs down the hall were given a AAA rating to these derivative credit default swaps or things like that.
And part of it, he says, those things were so complex, we didn't even know what they were.
They were using computer models to evaluate them.
But one guy said something along the lines to me of, we kind of knew that, look, all the big banks were into this stuff.
And we knew if there was a meltdown, the Fed was going to come in and not let that happen.
And there was precedent for that.
The Fed had done stuff.
The Fed had come. They called it the Greenspan put.
When there was a big financial thing, and so the plunge protection team, there's all these fancy names you want to call it.
And they were right in that respect.
So it's not that it was like this completely Machiavellian calculation.
There was a lot of arrogance and hubris involved, and they thought, oh, no, this was going to go on.
Who cares? But ultimately, if somebody did raise the question, we're kind of levered here, they would say, well, no, but the kind of scenario you're worried about, it's not just that we would go down.
Everybody would go down, and the Fed's not going to let that happen.
And they were right. So you can't even say they were wrong.
I mean, it was immoral.
But They weren't wrong in what their estimate was.
Whatever the issue is, you can't blame that on the free market.
That's crazy. Now, the other thing too is that when you do start to prop up These companies with government money, government power, government protection, you do end up with this, you know, dead company walking zombie company scenario, which seems to be the case in Japan, where they kind of had a freeze time spell, you know, everyone who's of this particular size in 1990 can now get the same size forever.
And then you end up with this very strange economy, like this twilight zone, where there just isn't that creative destruction that is the source of new wealth.
Yeah, you're right. And what's funny, too, just on that point is a lot of the Keynesians, when people like me were arguing against the huge rounds of QE and the trillion-dollar-plus deficits under the Obama years, they were saying, hey, this is not a good idea.
And people were saying, well, no, but Japan's been doing that for 20 years, and they've just been stuck in a rut.
So it hasn't caused hyperinflation over there.
So on the one hand, you're right.
It didn't cause hyperinflation.
But also, it's like, right, so we could also have a lost decade Just like Japan, you know what I mean?
So it was weird to me that Keynesians were saying, no, Japan has been trying our policies for 20 years and so far it hasn't worked, but it proves it's not the end of the world either.
And so it was just a weird, you know, you think they would point to a success story.
Well, and Japan as a whole is actually physically dying off.
And I'm not saying it's all to do with economics, but it's also not unrelated to economics when you have a, what is it, they're selling more elderly diapers now than babies' diapers.
And they're projected like within 80 years, there's going to be like nobody left in Japan except one guy who's really old and squinting at his anime.
And so the idea that you can just do a freeze time spell on an entire economy without it having massive cultural, social, familial ramifications to me is a complete disaster.
And of course, what are they, 220, 240% of GDP is their national debt.
I mean, come on, that can't be a Satan situation.
Right, yeah, I don't know the exact number, but it is way up there.
When you just look at some of the numbers of them, it is amazing.
Again, as you say, if they were a vibrant, booming economy, and they had great prospects for the future, that would be one thing, but it's not.
Everyone realizes it's been a shell for 20 plus years now, and it's just caught in this rut.
Yes, it hasn't imploded per se, but it's certainly not a success story.
It's just weird to me that people are saying, hey, well, they're doing it over there.
Why don't we do the same policies over here?
Why would you want to emulate that?
Now, for the next part of the conversation, I'm going to have to charge you enormously to respond because we're going to talk about tariffs.
So there is an argument from libertarian circles, which I fully understand, and I've been a friend of mine who's an economist who's telling me this like 20 years ago, and the argument goes something like this.
Let's say Japan comes up with a cure for AIDS and America comes up with a cure for cancer.
But Japan won't let America's cure for cancer be sold in Japan.
Does that mean that America should not accept the cure for AIDS from Japan?
It's like, well, of course you should, right?
Because at least then you'll be healing some people.
So this idea that even if other people have restrictive tariff walls, you should keep your tariffs low to simulate trade and get the benefit and blah, blah, blah.
I get all of that. But at the same time, if you don't bring anything to the negotiating table, I have no idea how you're going to get other countries to lower their tariffs.
Because other countries, I mean, Canadian Milk Board and wheat subsidies and all that's crazy stuff that goes on dairy-wise in Canada.
So how are you going to get Canada to lower its trades unless you're going to bring a big stick of, oh, well, there's going to be tariff retaliation unless...
You lower your tariffs.
So I get the argument from the economic standpoint, but from the pure, raw, Machiavellian negotiating standpoint, if you ain't sitting down with a stick and a carrot, I'm not sure how the tariffs are ever going to get lowered.
Okay, yeah, I don't have a problem with that perspective.
I guess my problem with the way Trump has been conducting it is when he then explains his thinking, like, oh, a trade war is easy to win, that kind of stuff.
If it's all a show to make the other people think, oh, this guy's crazy, and he's going to stick to his gun, fair enough.
If that's really the way he's thinking through, then no.
I guess what I'm saying is, it doesn't sound to me like Trump is saying, I fully agree that if we put a tariff in place, that's going to make our people poorer, but I got to risk.
It's like we're going into a bank and saying, I'm strapped with explosives, and I'm going to kill us all unless you give me the money.
You know, that's not necessarily an irrational thing to do as long as the bank teller, you know, backs down and gives you the money.
And even if it's just like a bunch of smarty tubes painted green or something, then you've got nothing.
Right. So I'm saying, but some of Trump's rhetoric, it doesn't sound to me like he's realizing he's threatening to impoverish Americans further in the hopes that at the end goal.
But on the other hand, he does have quick lines about, hey, if we want to go to zero tariffs, I'm ready.
And then they're afraid to call his bluff.
What I for sure will say, it's amazing to me all of a sudden how Nancy Pelosi is a huge fan of David Ricardo.
Like all of a sudden, all these Democrats.
Now that is not a sentence I was expecting to hear today, Bob.
I'll be straight up with you. On my list of things Bob Murphy is going to say, that was not on them, but please illuminate me.
Right, because in other words, once Trump was arguing against free trade as this panacea, all of a sudden these Democrats are, every economist knows, blah, blah, blah, blah.
Whereas if it was a Republican or even when it was Obama, the most progressive left-wing Democrats were certainly against trade deals because all the effect on the environment or it's going to hurt manufacturing.
So they were saying very Trumpian things back then.
But now since it's Donald Trump, now all of a sudden they're just hiding behind textbook economics.
So my thing is I want Trump to come out attacking the gold standard so that Dianne Feinstein all of a sudden is in favor of the gold standard.
She becomes a rather ancient gold bug, wizened and blue-eyed.
Hard-money Diane, yeah.
That's right. So, with regards to where the American economy is right now, I mean, it's been a frank in economy for quite some time, with the vital parts of the free market keeping alive the remnants of the status system.
I mean, it's always struck me, you know, like the antler-strucked argument that there was this Sorry, it's a spoiler, but it's been, what, 60 years?
I think we can handle it, right?
That there's this device that keeps the status system alive, which then they don't produce, the electromagnetic machine or whatever.
It's in the 20th century motor company.
It's always kind of struck me that computers are kind of like that.
Computers were the things that allow this system to continue on for another couple decades, but...
Even the end run of computers seems to have been achieved in that I think just about every ounce of progress has been extracted from computerization for the foreseeable future.
And so the next big thing doesn't seem to be coming along, so the bill may finally be coming due for all of this mad spending of really the last couple of generations.
Now, Trump, I think, is coming in, and with the tax cuts and so on, I think what he's trying to do is shift people from relying on government money to paying taxes.
Because if you're receiving government money, you don't really care about taxes because you ain't paying any.
In fact, you might want taxes to be higher because then there's more of a pool for you to get paid from.
But once you shift from receiving government benefits to paying taxes, you have an investment into lower taxes.
You don't mind welfare being cut because it's costing you rather than benefiting you.
And that shift of trying to get people off government dependence and into the workforce may be part of what's going on because it seems almost impossible to cut government spending directly.
You can only hope to shift the demographics.
Yeah, I agree with that.
And there was, you know, we have like empirical...
Evidence that during the recovery from the recession, when they stopped extending unemployment benefits, all of a sudden those people found jobs.
It wasn't 100%, but it's not a cliche or it's not too simplistic to say unemployment benefits, you're literally paying people to not find work.
Now, it's not to pass judgment on those people.
Of course, the economy is awful.
There's a lot of government restrictions in place, so it's not a pure level playing field.
It's not a pure meritocracy.
Nonetheless, if you want more of something, you subsidize it.
The federal government is sending people checks on the condition that you don't have work.
You shouldn't be shocked when they take longer looking for, oh, this job is beneath me.
I'm going to keep looking. What is it they see that there's this huge spike?
You know, like if you've got a year and a half of unemployment benefits, you know, a year and a half minus three days.
Oh, man, I got to get a job.
You work 12 hours a day to get a job.
It's like, well, the previous time, well, why would you have the same incentive?
You wouldn't. Right.
And so, like I said, that's not merely a talking point.
I mean, we can document that, that when they stopped extending it, then all of a sudden, you know, you saw a lot of people finding work.
So there's that element.
And I think you're right.
Trump also... He has done really well, from my perspective, on energy issues.
In other words, making very strong claims during the campaign and then coming in.
People I knew in libertarian circles who were experts on energy policy were getting pretty high-level appointments in the Trump administration, people that I would have assumed would be way too radical to get government work.
They would have had a paper trail, they're too libertarian, and they were getting hired.
I was very pleasantly surprised.
You know, pull out Paris, just the so-called clean power plant, all these things where people were going just ballistic, and he didn't care.
You know, he was like, so they can call them names.
And so I guess that's the benefit of when people have called you every name in the book.
They're out of ammo, yeah.
It's just blanks. It's okay.
We can keep going forward. So on that issue, I think it's great.
I mean, also, too, you mentioned the computer stuff.
I think partly the reason the economy...
It didn't respond as negatively to the stuff that happened on the Obama years, for example.
Just look at US crude and natural gas output, so-called fracking boom.
Some of that, I think, is because of low interest rates that stimulate it.
But it is amazing. It used to be everyone was like, oh, we got to have electric cars because we're running out of oil.
And now the US is the leading producer in the world again.
And this was just something that happened in the left-wing people warning about Well,
America did achieve energy independence I think just over the last couple of months according to some statistics.
That's a huge deal, and it's not just a huge deal for the economy, it's a huge deal for foreign policy.
Because if you achieve more energy independence, particularly oil independence, then hey, you're not so dependent on the Middle East and the horrible Islamic theocracies that keep waging war and causing terrorist attacks and so on.
I think that's actually a pretty good deal.
I don't mind if some environmentalists get too upset if we stop pumping money into the blood-soaked hands of theocrats overseas.
Yeah, exactly.
It's just all around the ostensible...
Obviously, you and I have very strong views on US Army action and so forth, but yeah, even the ostensible justification for less goes away.
Again, Canada and Mexico also have just huge stockpiles of coal and oil.
If the US government allowed offshore Oil exploration.
It's not this idea that, oh my gosh, the earth's running out of oil and everything.
That is so completely wrong from a technological standpoint.
It's all regulatory barriers that are in place.
Certainly, that's true. Even as you say, these demographic trends, if the government would just hold their spending, these things would be fine if they could just start privatizing, letting people opt out of Social Security and so on.
That all ultimately could grow out of it.
The problem is, though, that right now, the trajectory we're on, it will take massive changes.
But again, Trump kind of showing.
I wouldn't have thought that massive corporate income tax cut would have been politically possible, but I was wrong.
The stuff, like I say, Trump doing with The Paris Accords and these things, I would have thought a Republican would be too afraid.
He would just want to actually tweak things.
It's showing a lot of things are possible that would not have been possible politically in the last cycle.
Certainly, these problems are solvable, but yeah, it will take a pretty radical shift in current policy.
It's a funny thing, too, because I'm sure you remember, as I do, back in the days when Mitt Romney said, corporations are people, and everybody just went completely insane.
Like, there are two kinds of human, there are two kinds of sentient creatures in the world today.
There's carbon-based bipeds like you and I, and then there's the evil alien overlords called corporations who are inhuman and like, No, they are people.
They're just pieces of paper which do nothing and they represent people.
If you cut corporate taxes, corporations have more money to invest.
They have more money to hire people.
It is actually in some ways a better tax cut because it produces more sustainable things rather than just people going out and buying flat screen TVs, which is fine.
But, you know, they're consumer goods that lose value rather than capital investments that gain value.
So they're not going to do much to make you wealthier.
They make you happier, maybe, but they won't make you much wealthier.
Wealthier, and the fact that these corporate tax cuts got through is really quite astounding because, of course, for the leftists, the new Satan are the corporations, and the idea that you would get tax cuts for them, the complete separation of them from the people that they actually hire and invest in and so on, it was an amazing moment.
Yeah, and also, for the benefit of your listeners who might not know, in terms of, like, standard pretty buttoned-down economic analysis of tax policy, You get the most bang for your buck by cutting corporate taxes.
What you're trying to do is, okay, we have $1 trillion to spend on reducing taxes.
What should we do if we want to promote GDP growth and employment growth?
Actually, from a supply side, starting cutting corporate taxes, because what that's ultimately doing is cutting taxes on saving, because a corporation, its income is the net profit of the firm.
A return on the investment that the shareholders put into the corporation.
That's why other things equal cutting a corporate income tax is like cutting a tax on saving as opposed to just a generic personal income tax.
Morality, If they had told me, we're going to spend this much money in the sense of giving money back to taxpayers, how should we design it?
I probably would have wanted more going to middle and lower class households just because they're struggling the most.
But in terms of what you're trying to do is jumpstart standard economic growth, yeah, cutting the corporate income tax, even according to standard.
This isn't like some right wing talking point.
Standard peer reviewed journal research says Corporate income taxes are particularly destructive because it's like taxing savings and that's the worst thing you want to do for long-term growth.
Right. And boy, I mean as far as you pointing out, I'm glad you're bringing that up, the lower incomes in America like the bottom say quintile.
Man, they are struggling.
And a half. I mean, you've seen the studies, I'm sure, as well as I have.
Like, vast proportions of American households have, like, less than $500 in the bank at any given time, you know?
Like, one flat tire and you're living under a bridge.
And this is something that...
I think is underrepresented in terms of discussions.
Or if it is represented, it's like, well, that's just capitalism.
They exploit the poor.
And it's like, yeah, because governments never exploit the poor.
They never offer people something for free in return for votes.
Never happens in government.
But the amount of hurt and economic stress and pain and anxiety Among the bottom 20 to 25 percent of Americans, you could really scale that up to about 40 percent for a lot of people.
It is really a lot of pain out there.
And I think the inability of, say, the Hillary campaign to recognize that and the fact that Trump did get it, I think was hugely instrumental in 2016.
And I think it's also going to be pretty instrumental in 2020 or maybe even the midterms.
There is a lot of pain out there and a lot of people who feel, you know, the bottom 20 rungs on the ladder just don't exist anymore.
Yeah, that's right. Also, too, I think even sometimes some libertarians are naive about this, where they'll say things like, oh, Obama, he's an idiot.
He doesn't know how to fix the economy to help his voters.
Or like, yeah, Franklin Roosevelt, the depression just kept going on because he was a moron and thought the new- No, Democrats want you to be a paycheck away from devastation because then you're dependent on the government.
They want healthcare to be really expensive so that your only option is to either work for a big corporation or to be getting subsidized health insurance from the government.
Because they don't want people who are independent that have two years of savings The kind of person that's independent and could tell his employer to go take a hike and walk away and go do something else, That person's very independent.
They can speak their mind, whereas somebody who knows, yeah, I got to keep my head down, even in terms of the culture wars and stuff.
Somebody right now who's working for a Fortune 500 company and might have a strong opinion on the Kavanaugh hearings, he's not going to say anything around the water cooler because he knows if I lose this job, then my health insurance is gone and maybe my kid's getting treatment for something.
So yeah, the whole system right now, everybody is just very dependent.
On the crumbs that the powerful people throw at them.
As you say, even though that's the caricature of capitalism, that's actually not the result of true laissez faire market economies.
That's this highly interventionist Oh, this drives me nuts.
It's all the people who want to wave the magic wands of other people's money rather than actually go in and solve a problem themselves.
If you want the poor to get healthcare, go study, be a doctor, and then find a way to provide it at a cut rate.
If you want people to be better educated, put together educational videos and put them out on YouTube.
I really, really dislike this.
Well, I want the world to be a better place, so I'm going to whine at the government until corrupt people take other people's money at gunpoint and pretend to solve the problem while actually making people enslaved on the bloody barrels of state power.
I just really prefer it when people are like, I wanted the world to be more philosophical, so I'm going to whine for the government for massive subsidies for philosophy departments?
No, just go out and make philosophical videos and write philosophical books and try to engage people in philosophy?
This... Passivity and literally passing the bloodstained buck to the government has really frustrated me because if you really want to solve a problem, don't you want to wake up, roll up your sleeves and get to work solving it yourself?
Yeah, exactly. And this really struck me with the debate over the Affordable Care Act and then later when the Republicans were tweaking it.
And so, I mean, how many people just like on Twitter or whatever were just stating matter-of-factly like, oh, well, or like when Rand Paul got attacked, a lot of people were saying, well, I don't have sympathy for him because he was trying to take away my health care.
Stuff like that was just insane.
I think it was when John McCain changed his vote anyway, but when he was getting treatment, and it wasn't clear how he was going to vote yet on the Affordable Care Act, the changes to it, and people were saying things like, oh, it's fine for him to get health care, but he doesn't want to give it to other people.
I was like, well, John McCain drives a car.
Does that mean the government needs to give everyone a car or else he's a hypocrite?
The logic was so crazy.
As you say, just take it for granted that, well, no, if I want something, then I'm just going to put a tweet out and that will show I'm a good person.
As if my tweeting has something to do with, well, somebody has to go to medical school and then go and actually work, and where are you going to come up with the resources to pay for that?
You setting out a tweet doesn't magically make someone come out of medical school knowing how to help people.
And this is really foundational to, I think, what we're talking about.
For most people, the economic illiteracy is so high and so rampant that they simply don't ever think that the high cost of something is due to government restriction of supply.
Because government restriction of supply could occur through so many different ways, through requiring licenses to open a hospital, through requiring licenses to practice medicine.
Thank you.
and raise the price of malpractice insurance.
I mean, you know, restrictions on drug production and the FDA and so on.
Why is health care so expensive?
Well, because the government has restricted its supply.
And you just compared this to the computer industry.
It's an old way of doing it, but I think still quite effective.
The government doesn't do much to regulate the computer industry, and it gets cheaper and faster all the time.
The government, you know, half of every dollar spent on health care is spent by the federal government.
They have unbelievable layers of control and bureaucracy, even before Obamacare, to the point where some doctors spending as much time doing paperwork as they are Seeing patients. And of course, with that kind of restriction in supply, you're going to end up with prices going up because it's not like a very elastic demand.
You get sick, you need to go see a doctor for the most part.
There's a little bit of elastic demand at the outset, but it's pretty fixed in the middle.
But people don't sit there and think, oh, well, if we just reduce these barriers, remove these barriers, the price of health care will drop.
And that's because there's a huge constituent of people who want to expand government power.
But there's also a huge constituent of people who are benefiting from the restrictions into the marketplace and therefore want those restrictions to either maintain themselves or increase.
Like if you're some doctor and you went through like this eight-year program and then you did your, you know, 40 hours a day, some ridiculous number that they work, and then you finally get your license and you've got all this debt and suddenly the government says, oh, we're cutting all these restrictions so that people can compete with you.
It's like you would raise high bloody holy hell and I wouldn't blame you, but economically it's very destructive.
Sure. And of course, the average person, they would believe in and endorse those restrictions because they'd say, oh, I don't want some quack doing brain surgery on me.
But the idea is, look, hospitals could still vet their surgeons, right?
Or my thing is, for example, the FDA. The FDA could still give its opinion.
So if a drugstore wanted to sell some pharmaceutical product that has not been FDA approved, there could be even a bright red sticker on it saying, FDA is not vouching for this, proceed with caution.
But if that thing costs $5 and the FDA approved stuff costs $1,000, a lot more people might try that.
So there's all those elements.
The other huge thing, too, is it's the third party payment.
So yes, it's like Medicare, but also The way that things have evolved, and there's a whole history, of course, of this, but it's like the patient is no longer the customer.
They're just a nuisance that gets in the way.
To give one example of how the market is not working at all, there was some woman who did this.
She worked for a radio station, and she was pregnant.
She called all the local hospitals just to get a price quote to say, hey, if I do my delivery with you, and it's normal, no cesarean, just regular thing, what's it going to cost?
Only one out of eight places she called would even give her a number.
And they were even saying, now, hey, you can't quote us.
We're not saying this is it. Imagine if the car market worked that way.
Imagine if you went to go buy a car, and after you bought it, they told you how much it cost.
And you didn't have to pay for it. And you didn't have to pay for it, right.
Can you imagine how screwed up that market would be?
But that's what health care is, and yet people blame that on the free market.
It's amazing. Another one of the big debates, since we might as well step on every conceivable landmine that we can together, another big debate going on in libertarian circles and free market circles is regarding immigration.
And again, I've had debates on this myself.
I'm not sure exactly where you do stand with regards to immigration, its effects on the labor market, possible costs for government programs and so on.
You know, there's the idea, well, crossing a border is a violation of the non-aggression principle, and then there's, of course, the argument from Hoppe and others that, you know, the taxpayers own the country and should decide who gets to come in.
Where do you stand on immigration and its impact on the economics of a host country?
Okay, so my thing is...
Let me just first say where I jump in, in terms of the rhetorical debate.
Brian Kaplan, for example, who I know you know, your listeners may know, the economist from George Mason, who's one of the leading advocates of what's called open borders.
Every time he has a post that I just mentioned, I said, Brian, you actually don't believe in open borders.
What you actually believe in is privatize the borders.
You agree the best case scenario would be just a private property society where everyone owns land.
The individual owner gets to decide whatever the policies are.
It seems kind of weird to me.
Why do you keep advocating?
In other words, it's not like Brian Kaplan is a senator and can actually influence the policy.
He's just an intellectual trying to move public opinion.
It would be as if an abolitionist during the 1840s Was talking about, let's treat the slaves better or something.
He was like three square a day, and that was his policy when, no, you believe in something completely different.
That element, as far as the studies, I confess I haven't studied it a lot.
My guess is I think At least for smaller bursts.
Any empirical example where we can study and see, I think it's not that big of a deal in terms of it.
Yes, people come in that tends to push down wages for certain classes of workers, but now there's more people there, and so they spend more, and so it's not a huge thing overall.
The problem with that is that really doesn't tell you what would happen if you had massive migration.
In other words, just because 5,000 people came in and this one isolated thing that we can study empirically and run regressions on, if you totally opened it up, that's such a qualitatively different thing.
I don't know how much light that sheds on that particular thing.
The U.S. has had mass migration.
Since the 60s, what is it, 50 million people have come in largely from the third world to the United States.
That is massive.
I don't know that we can say, well, if it's just a couple of thousand, I mean, there's a And this doesn't even count the 20 to 30 million illegal immigrants that are the illegal aliens that are in America.
So I think that there's enough of a coalition that we can look at larger impact studies.
Oh, okay. Well, just to be clear, I'm talking about when they try to do like real isolate, like trying to hold other things, you know, so like the boat lift exam, you know, a bunch of people coming into Miami, and then you can compare that, like compare it to San Francisco or what, you know, so those real control, like control things to try to isolate because you had the The problem with the US is there's so much stuff changing over 40 years, it's hard to isolate and say, how much does that do to immigration?
Is that due to something else? I guess I will say I have not carefully studied the empirical literature on that because, again, for me, I make the more modest point and say this whole system is crazy.
Ultimately, for me, the idea would be private property, and I know we don't have that right now.
I'm sympathetic to both sides of people that say, well, gee, I don't want politicians determining who can cross a border.
But on the other hand, I realize the people who are being very practical and say, well, this is the system we have now.
And if you let more people in from certain places, what if they vote a certain way?
I get that, too. To me, the analogy I use is like, if you ask me, should there be prayer allowed in government schools, there's no good answer to that.
That's what I'm saying.
Yeah, because it's sad to think that Americans who desperately want A wall.
And Europeans and Canadians desperately want reductions in immigration.
And a lot of that has to do with the fact that immigrants from the third world overwhelmingly vote for the left.
Immigrants from Mexico overly...
That means collectivist cultures.
It's a whole backdrop. It's a whole, you know, a lot of the free market books are only available in English.
It's little things like that.
And it's so sad to me, Bob, that the American public...
So desperately want a wall that they'll vote in a guy with no experience, you know, who seems to have banged everything with half a pulse in a 20-foot radius for the past 30 years, rather than just saying, well, we want a wall, so let's all get together.
We're going to buy up some land.
We're going to build a wall. You know, they've got to go and beg on knees like supplicants to hope that some guy is going to convince his party to release the funds to get it done.
And that is so disempowering.
It's kind of horrible. So let's talk a little bit about the possible mirage of the economic recovery.
Is it a dead cat bounce?
Is it the last twitch before the expiration?
Is it like when they can't revive the patient, but they put the electrodes on the side of the chest?
Hey, there's a lot of movement.
It's like, yeah, but it's about to stop.
And that is, of course, the big concern among people who are interested in the free market and kind of understand it, that the numbers can be kind of jigged and the unfunded liabilities, the debts, the regulatory burden is so intense and so high that recovery has become functionally impossible, at least the kind of recovery the regulatory burden is so intense and so high that recovery has become functionally impossible, at least ED HARRISON: Right.
And so here, just a lot of the things that I've been following politics since I was a teenager, and it was always this long-- like, for example, the unfunded liabilities.
Oh, at some point, Social Security is going to flip to be cash flow negative, and then they're going to burn through the trust fund.
And that was always something that was like 30 years away.
And it was like, we really need to reform this.
And now we're already there.
So Social Security has been losing money in terms of incoming payroll taxes.
Contributions have been less than the outgoing benefit payments for several years at this point.
Even if you segregate in terms of the accounting and count the Social Security trust fund, pretty soon, they're going to be selling off those funds to the rest of the government.
That stuff is already upon us.
What used to be this looming thing that we're going to have to deal with that at some point is already right here.
There's a recent New York Times article just projecting CBO saying within a decade, the interest on the federal debt will be over $900 billion.
The annual, how much they spend every year just to service the debt is going to be over $900 billion.
These kind of things, it's not Crazy conspiracy fear-mongering to say the Treasury may have to default.
That might be the best thing to do over the next 10 years.
It's just crazy if interest rates keep rising.
I think what happened is during the Obama years, as the Fed pushed interest rates down to zero, it masked the pain.
There were four years in a row when the Obama administration had trillion-dollar-plus deficits.
But yet, that didn't do what it normally would because the Fed at the same time was monetizing the debt and things were low.
So the analogy I use is if you run up your credit card debt, but you keep getting 0% APR offers in the mail, It doesn't – the irresponsibility of what you've done doesn't hit you right away.
It's only when those offers stop and then all of a sudden the rates reset and you realize, do I want to pay this offer or just walk away and kill my credit?
Well, I just want to point out some people really get mad at Obama for that and certainly he was king spendy.
But a lot of this stuff was just snowballing beyond his control, all of the mandatory spending that the president has very little.
It's all just accumulating all of these obligations and so on.
So he certainly had something to do with it, but I don't like when people blame individuals for the momentum of a system as a whole.
Yeah, I'm fine with it. Certainly, the George W. Bush administration, Medicare Part D, completely indefensible.
You couldn't even blame, oh, the Democrats control Congress.
No. Me growing up, the story was always, well, those rascally Democrats are forcing us to spend more.
Ronald Reagan's a great guy.
He hates spending. In my lifetime, under the George W. Bush administration, that last excuse went away.
You're right. I don't want to make it sound like I'm blaming Obama.
My point is, normally, four years of trillion-dollar-plus deficits would have freaked everybody out, and the markets would have screamed bloody murder, but yet we were in a period there where the Fed was doing QE and everything, and all the rules seem to be different.
I think that's why that didn't send off the alarm bells it normally would have.
To answer your question, yeah.
The stock market increase, that happened while the Fed was buying bonds, and Nothing, in terms of normal economics, was going right at that period.
The Obama administration was threatening a carbon tax, Affordable Care Act, whatever you think of it, certainly was not a pro-growth.
People might have liked it for equity reasons, but certainly not.
Having the government take over health insurance is not a good idea.
All these things they were putting in place were not things you would have thought would stimulate profitability.
And so yet, when you see that, you know something's got to be screwy.
I think the recovery, tepid as it has been, was fueled by the Fed.
Trump did do some good things.
I think some of the growth under Trump, especially if people had been baking in a Hillary Clinton presidency and then the switch, I think a lot of that was legitimate.
In other words, the response of the stock market in the first year of the Trump administration, I think, was defensible and was really rational, if you want to use that terminology.
Look at measures of home price indices, for example, in the U.S., to me, that seems unsustainable.
I know people are just a fear monger, but yeah, people were saying that about the people who were warning of the housing bubble in 2006.
So sometimes the fear mongers are correct.
Right.
Well, let's close off on a topic that I think is very, very important, which is this question of the student debt bubble, which is what, 1.5 trillion, some insane number at the moment.
That, to me, is one of the easiest ones to solve and would be one of the most effective ones to solve.
Just allow students to discharge their debt through bankruptcy, you know, like everyone else does.
I mean, we're not asking for everyone to have massive subsidies like, say, the bankers in 07, 08, but just allow students to discharge unprofitable debt in bankruptcy proceedings.
The fact that they're not allowed to, it's one of these, I won't go on off a huge rant here, but it's one of these pet peeves I have.
It's more than a peeve, which is they have a bunch of leftist professors lecturing students about exploitation by capitalists when the professors are being paid for by loans enforced by the government that the students can't wriggle out of that take sometimes five times longer to pay off than a car loan.
It's absolutely abysmal how much the leftists are exploiting the most vulnerable in society, you know, 17, 18-year-old kids who don't know their ass from a hole in the ground in terms of future value and viability and maybe can't even project how long it's going to take them to pay off their debts or how much money they might make from those loans.
It's horribly exploitive, horribly destructive.
And forcing, in a sense, taxpayers to fund the spread of communist propaganda is really one of the great sleight of hands in the evil deck of human history.
Where do you think solutions, if you think there are needed to be solutions, where do you think solutions can come from in this situation?
Yeah, I agree with everything you just said there.
And I think even a lot of your listeners might be surprised to see how much of the student loan portfolio was taken on the federal government's books.
It's amazing how much they absorbed.
The taxpayers are directly responsible on the receiving end of that.
You're right, it is amazing that normally you would think progressive leftists would be outraged.
Are you kidding me? Poor students aren't allowed to just declare bankruptcy?
They have to have this thing sail around their necks forever.
Yet, that's the deal that was made, and I guess they support it because they like I think the solution is pretty simple.
Allow them to default on that, and it's going to ruin your credit, but that's if you want to make that choice.
Knowing that now people are allowed to default on any other loan, that will make lenders a little bit more responsible, and maybe they won't.
That will stop fueling this ridiculous rise in tuition.
I think ultimately, and I know you talked about this a lot.
I heard you on Tom Woods talking about it.
Ultimately, I think businesses are going to realize we don't need as a screen to say someone has to be a college grad.
That is no longer providing the signal that we want.
There's much better ways to see who do we want to have working for.
I think we need to get away from this idea that everyone has to go to college to get a four-year degree or else you're not a good human being.
That's a crazy system.
So employers can find some other system.
It's hugely economically efficient because then you don't have to pay not only for the direct cost of the education but for the cost of deferred income that the person has endured for close to half a decade.
So you can end up with much cheaper employees who aren't depressed, who don't feel enslaved, who can actually talk back to you because they don't feel overburdened by debt and can't afford to get fired, which is good.
You want that kind of 360 feedback.
As a manager and you can reduce the price of your products because you're paying your workers less.
I mean, it's such a powerful thing that I can't imagine it's going to take long for employers to figure out that there's many better ways to figure out how to get smart employees.
You know, if you want programmers, just show me the iOS app that you've built.
You know, if you want people to work in media, show me your podcast channel.
I mean, there's so many different ways to do it that are much more practical.
I just can't wait. And I think a combination of those two would also be great to get actual default statistics for various programs.
Degrees, right? So if people who take sociology or art history are defaulting on their loans at a rate of 40 or 50 or 60%, well, that would be pretty important if they're declaring bankruptcy.
It's a lot harder to find that data now because it's much more scattered.
But if you were actually to see bankruptcies occurring and popping up in particular disciplines, that'd be very powerful for people to see for the students going in saying, wow, so a 50% chance I might have to declare bankruptcy if I take this degree.
I think I would shift my gears just a little.
Yeah, that's a great point.
Of course, yeah, the lenders would take that into account also.
Somebody promising is going to go to medical school, yeah, okay, we'll underwrite that.
But yeah, somebody doing something else, feminist studies probably wouldn't.
Yeah, you're exactly right.
And also, too, just for people who never have thought this through, imagine if all of a sudden society said everyone needs to get a PhD or else you're not a responsible citizen.
You can see how crazy, and not only the waste of extra time, everybody now loses four or five more years before they can work, Beyond that, all the programs would get watered down.
In other words, it's not merely the waste of the people who really don't need to do that.
It's also the people who should be getting PhDs now, they wouldn't be as productive.
The same thing at the undergrad level, just not as extreme.
When I was teaching in Hillsdale, I noticed this more.
I had a pretty full load.
I thought about half these students shouldn't be here.
I don't mean because they're not intelligent.
I just meant They were there because they were going to run their dad's business and they had to get a degree.
They could have taken a few accounting classes or whatever.
They didn't need to be getting the four-year thing where half the time they were going to frat parties anyway.
This was a fairly elite school.
I know it's much worse at other schools as well.
Again, it's not me making fun of certain people.
My point is I had to change the way I taught the class.
If it had been people who were there because they were really just scholars and they wanted to learn about the Western canon, I could have taught the class one way, but since I knew half the class were business majors who were just checking a box and they had to take my class because it was part of their major, I couldn't leave them behind.
It was the worst of both worlds.
Everybody was miserable in that class, in some of those introductory classes.
It's really horrible and it comes out of a fundamental misrepresentation of cause and effect.
School doesn't make you smarter any more than basketball makes you taller.
If you and I audition for hair ads, it's not like we suddenly get luxurious pelts of hair.
It's just people with great hair end up in those hair ads and people who are very smart should go to school.
But the idea that if you go to school, you become really smart is unsupported by any of the data that I've ever seen.
And it is, of course, mining the prestige that comes from prior generations of smart people.
Like it used to be that 10% or so of people went to college.
Now it's 40% to 50%.
And it's not like we've leapt ahead cognitively so quickly.
It just means that the value of the college degree gets diluted.
And that's a real shame because then not only do a lot of people end up with useless degrees, but the really smart people, it's really hard to differentiate them from the general people who got in just to stuff the numbers.
ED HARRISON- Right, exactly. It's like it breaks down into an arms race, that if everybody needs a college degree, then we all just go to college.
It would be crazy if employers thought, if you don't have a PhD, there must be something wrong with you, and so everybody had to go get a PhD.
That wouldn't give you an advantage.
That just means everybody now has to waste four or five more years going to school and struggling, and the headaches, and, geez, this is hard.
It's bad for everybody, like you say, that the signal gets diluted.
To the extent that it really is just an arms race.
If that's the natural voluntary outcome, so be it, but it's not.
There's plenty of things with the government actively spending hundreds of billions subsidizing these things, and like you say, the things about not being able to default on the loans.
This is not a normal outcome.
This was forced. And so the fact that it's quite harmful is just all the more reason to stop this crazy idea.
Well, and I mean, the idea or the argument that everybody has to go to college, I can't see it as anything other than a massive confession that government schools suck.
And after you've been on the government schools for 12 years, you're economically completely useless and therefore you need to go to college.
So rather than raise the game in the government schools, they're just passing the buck to the colleges.
Who can't fix what government schools have broken?
I really want to thank you for your time.
I wanted to remind people to check out Dr.
Murphy's great books.
Also, his Contra Krugman podcast is fascinating with Tom Woods.
His conversations with Dave Smith are great.
You can't dip into this man's work without coming out illuminated, refreshed, and I dare say smelling like roses.
So I really, really want to thank you for your time.
I hope we can do this again soon.
Thanks, Stephan. You just want to tell me, yep, I got the new book at ContraKrugmanBook.com is where you can see the latest smackdowns of Krugman.
