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The New Ideological Divide


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June 28, 2010

The New Ideological Divide

By Peter Schiff

Despite the apparent deficit-cutting solidarity that emerged from this weekend’s G-20 meeting in Toronto, it is clear that the great powers of the industrialized world have not been this philosophically estranged since the end of the Cold War. Ironically, in this new contest, the former belligerents have switched sides – the capitalists are now the socialists, and vice versa.

We now are witnessing a struggle between two camps that I playfully call the “Stimulators” and the “Austereians.” Both warn that a worldwide depression will ensue if governments now make the wrong choices: the Stimulators say the danger lies in spending too little and the Austereians from spending too much. Each side also has their own economic champion: the Stimulators follow the banner of Nobel Prize-winning economist Paul Krugman, while the Austereians are forming up behind the recently reformed former Fed Chairman Alan Greenspan. (It is cold comfort to witness “The Maestro” belatedly returning to the hard-money positions that characterized his earlier years.)

In a recent Wall Street Journal editorial, Greenspan argued that the best economic stimulus would be for the world’s leading debtors (the United States, UK, Japan, Italy, et al) to rein in their budget deficits, a strategy dubbed “austerity” by the press. Greenspan explains that because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid- and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. Greenspan’s Austereian view has been echoed loudly in the highest policy circles of Berlin, Ottawa, Moscow, Beijing, and Canberra.

Meanwhile, in several articles for his New York Times column, including one today, Krugman has argued that those who push for austerity in the face of recession are either doing so for political expediency or out of a “crazy” fealty to archaic economic views. Krugman has apparently judged inadequate the trillions of dollars worth of deficit spending unleashed by the United States and European governments in the last 24 months. He believes our only remedy is to spend more – no matter how much debt results. Absent this, he claims, millions of workers “will never work again.” Unfortunately, Washington has clearly aligned itself with Krugman and the Stimulators.

Reading straight from the Keynesian playbook, Krugman argues that cutting government spending now will simply send the economy back into recession. He asserts that by flooding the economy with money, i.e. “stimulus,” governments can encourage consumers to spend. Once the spending creates better conditions, so the argument goes, the economy will be better positioned to withstand the spending cuts, tax hikes, and higher interest rates necessary to address the staggering deficits left behind.

Krugman proposes an enticing argument that is nevertheless built on rubbish. Economies do not grow because consumers spend; consumers spend because economies grow [for a detailed explanation of how this works, read my latest book: How an Economy Grows]. Investment capital comes from savings, and when governments borrow, savings are diverted from private investment. While it is possible for governments to invest as well, it is much more likely that the money will be spent on entitlements or “invested” in projects that may be politically advantageous but economically useless.

Any money spent by governments is not available to the private sector to invest. The Stimulators don’t make this connection because they believe money grows on trees and that a printing press is a legitimate creator of wealth. However, printing money merely encourages people to spend their savings now rather than wait for it to lose value through inflation. This is okay to Stimulators, because stimulating “demand” by any means necessary is the only goal they can see.

What really grows an economy is not more demand, but more supply [also explained in my book]. The Austereian argument is that reductions in government spending will allow the private sector to generate the additional supply of goods and services. Europe seems to understand this; unfortunately, the US does not. Judging by the recent weakness of the dollar – not only against gold, but other fiat currencies, including the pound and the euro – the markets are coming to the same conclusion.

As sovereign-debt worries initially spread throughout Europe, the dollar benefitted. However, now that Europe has demonstrated a willingness to reduce its debts, while we have committed to make ours even larger, the sovereign-debt worries are moving west.

If Greenspan and the Austereians are correct, the stimulus will fail and leave us in a much deeper hole. As long as governments create bigger deficits, we will never have a sustainable recovery. Instead, we will be chasing our tail, and wearing ourselves out in the process. When we finally realize the folly of this approach, the austerity measures that we will then be forced to adopt will make those currently proposed by the Europeans seem relatively painless.

My guess is that before year-end, our stimulus-induced recovery will falter, prompting Obama and Congress to administer even more stimulus. After all, the Stimulators have no other answer. However, given the adverse reaction this will produce in the currency and debt markets, this next jolt will likely vindicate the Austereians, as the world witnesses its greatest power careen into inflationary depression.

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i guess id consider myself a stimulator, but the government only knows how to spend, they do not know how to pay back, which is what you are suppose to do when the economy is growing in the stimulator thought. i agree we got to spend to get out of recessions, but i think this one should be left to invisible hands, because the austrians are correct. spending too much could really harm us. we have too much debt.

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i guess id consider myself a stimulator, but the government only knows how to spend, they do not know how to pay back, which is what you are suppose to do when the economy is growing in the stimulator thought. i agree we got to spend to get out of recessions, but i think this one should be left to invisible hands, because the austrians are correct. spending too much could really harm us. we have too much debt.

It is going to be interesting to see how all this plays out. No doubt a defining moment in history.

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Oh look, another terrible article from Peter Schiff.

Yep. There's nothing new about this ideological divide; it literally dates back hundreds of years. And Greenspan hasn't renounced anything--lowering deficits to restore confidence in the bond markets to lower interest rates, which puts more money in the hands of homeowners and debtors than a tax cut, was a central part of his advice to the Clinton administration.

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This is an article written specifically for a tea-party member looking for fodder or more likely trying to sound intelligent in front of a co-worker. It's an over simplification of the issue. Not surprisingly short sighted from the Schiffster. And before someone kills me, I don't necessarily think he is 100% wrong.

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This is an article written specifically for a tea-party member looking for fodder or more likely trying to sound intelligent in front of a co-worker. It's an over simplification of the issue. Not surprisingly short sighted from the Schiffster. And before someone kills me, I don't necessarily think he is 100% wrong.

Well, its not supposed to be any kind of in depth analysis. That would take pages and pages of information and then nobody would read it anyway. Besides, this is more fun.

I notice you are starting to hear more and more rumblings of a depression. I certainly hope that doesn't happen. Obama might pass out and knock over his teleprompters. :)

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This is an article written specifically for a tea-party member looking for fodder or more likely trying to sound intelligent in front of a co-worker. It's an over simplification of the issue. Not surprisingly short sighted from the Schiffster. And before someone kills me, I don't necessarily think he is 100% wrong.

Yeah, there's nothing about this article that sounds like an attempt to present the strategy of both sides in the same light. It's very obvious that the author favors an immediate reduction in spending; and that's certainly a valid thought. But I do believe that the Keynesian(sp) model can work, and is likely the best strategy to employ. I could be wrong; but then again, so could the man who wrote this article.

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Well, its not supposed to be any kind of in depth analysis. That would take pages and pages of information and then nobody would read it anyway. Besides, this is more fun.

I notice you are starting to hear more and more rumblings of a depression. I certainly hope that doesn't happen. Obama might pass out and knock over his teleprompters. :)

You better hope not. Who do you think pays for broken teleprompters??? Tax payers, that's who.

Seriously, you make a good point. There are only about 6 people in the entire world who would want to read a in depth article on the two strategies.

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Some of you need to read the tripe Krugman put in the NYT op-ed page today before you trash this article. Schiff can be hit or miss, but some of you don't understand that we've already spent and/or committed more stimulus money than was spent on an inflation adjusted basis for the entire Great Depression. And that doesn't include the Trillions dumped into the market via the Federal Reserve.

Government doesn't create permanent employment, except for it's own employees and the military. But those are not net contributing positions, but drains on public resources (necessary or not). And pet projects, such as roads, etc. are temporary at best, and are simply transfers of private resources, thus shutting out something else.

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Some of you need to read the tripe Krugman put in the NYT op-ed page today before you trash this article. Schiff can be hit or miss, but some of you don't understand that we've already spent and/or committed more stimulus money than was spent on an inflation adjusted basis for the entire Great Depression. And that doesn't include the Trillions dumped into the market via the Federal Reserve.

Government doesn't create permanent employment, except for it's own employees and the military. But those are not net contributing positions, but drains on public resources (necessary or not). And pet projects, such as roads, etc. are temporary at best, and are simply transfers of private resources, thus shutting out something else.

Well if the government gives money to the states and the states in turn request bids for building new highways and the highways are built which allows several private companies to keep their employs working that will at least provide temporary relief to companies that are on the verge of laying off a large percentage of their employees. Isn't that beneficial to the economy?

I know that was a terrbily structured 1st sentance, but you understand what I'm asking, correct?

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Well if the government gives money to the states and the states in turn request bids for building new highways and the highways are built which allows several private companies to keep their employs working that will at least provide temporary relief to companies that are on the verge of laying off a large percentage of their employees. Isn't that beneficial to the economy?

I know that was a terrbily structured 1st sentance, but you understand what I'm asking, correct?

Yes, I acknowledged the temporary nature of employment via these types of projects, but they don't solve unemployment. In fact these types of projects end up costing taxpayers more than welfare or unemployment benefits because the costs are higher. Think about that and let it sink in. In fact, all taxes received from these types of projects are discounts from dollars spent from taxpayer money or taxpayer debt facilities.

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Yes, I acknowledged the temporary nature of employment via these types of projects, but they don't solve unemployment. In fact these types of projects end up costing taxpayers more than welfare or unemployment benefits because the costs are higher. Think about that and let it sink in. In fact, all taxes received from these types of projects are discounts from dollars spent from taxpayer money or taxpayer debt facilities.

I understand what you're saying and the theories/facts supporting your views. But I don't think there is any real quantatative means to measuring the potential costs associated with letting those employees stand idle and lose their jobs. Then, when those jobs are lost, the unemployment benefits paid accumulate exponentially as more and more people begin to file claims.

Just an FYI here. I don't have the wherewithal to go in-depth with the analysis and the different costs vs. benefits of the different strategies that could play out in this situation. I'm not saying that I will not read your posts and try to respond, just that I know I don't have the requisite drive to find various studies to support any belief I might have and to make an attempt to refute any arguements you might put forth. Suffice to say that we, as a country, possibly as a global economy, may be standing on the edge of financial collapse and ruin. There are any number of studies and theories by people far more intelligent than myself to support either side of the debate and, in the end, it all comes down to supporting the side you believe will have the best outcome for all of us.

I don't know the answers; but I do enjoy discussing it with you or anyone else who is willing to do so in the spirit of honest debate, and with a willingness to listen to other viewpoints. I'm all about asking questions and exchanging ideas.

Dayum, I sound like a politician. :ph34r:

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I'd gladly make terrible post upon terrible post before being typecast into the guy who does nothing but post articles that feed my ideological egotism. I mean, at least snake had thoughts of his own.

Woah, you sure you're talking about Snake when you make that statement. I thought he was King CutnPaste.

Speaking of that, I wonder if he's ever come back in here with another name and posted. If so, he sure seems to have taken a smart approach to doing it.

Carry on

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I understand what you're saying and the theories/facts supporting your views. But I don't think there is any real quantatative means to measuring the potential costs associated with letting those employees stand idle and lose their jobs. Then, when those jobs are lost, the unemployment benefits paid accumulate exponentially as more and more people begin to file claims.

Just an FYI here. I don't have the wherewithal to go in-depth with the analysis and the different costs vs. benefits of the different strategies that could play out in this situation. I'm not saying that I will not read your posts and try to respond, just that I know I don't have the requisite drive to find various studies to support any belief I might have and to make an attempt to refute any arguements you might put forth. Suffice to say that we, as a country, possibly as a global economy, may be standing on the edge of financial collapse and ruin. There are any number of studies and theories by people far more intelligent than myself to support either side of the debate and, in the end, it all comes down to supporting the side you believe will have the best outcome for all of us.

I don't know the answers; but I do enjoy discussing it with you or anyone else who is willing to do so in the spirit of honest debate, and with a willingness to listen to other viewpoints. I'm all about asking questions and exchanging ideas.

Dayum, I sound like a politician. :ph34r:

Actually, you sound better than a politician. You acknowledge you have a viewpoint, but also that you don't know everything in defense of it, which means you are open to other ideas if determined to make more sense. I don't see much of that in politics today, unfortunately.

The quantitative measure isn't whether it is better to have those employees working or not, even though, as I was pointing out above, it would be cheaper to simply give these people unemployment benefits as that is less expensive to the taxpayer than funding a huge works project. In essence, it's creating artificial demand in the marketplace that crowds out real demand that can increase the circulation of private capital and thus increase market value. The quantitative issue is where the funding for these jobs derive. The cost/benefit analysis for those employees working is also offset by an opposing loss analysis as to what private projects/investment/business went unfunded by this captive capital. I also think there's an ingrained paradigm that government is the best facilitator of these projects versus private mechanisms.

I'll bring to light one issue, and that is that you can't sue the Federal Government. For example, what redress do those people who were on the bridge in Minnesota that collapsed? The lack of liability and no real risk in what it oversees makes government an inefficient manager of capital and capital risk. Just imagine if the government owned BP??

I find the biggest weakness in Keynesian approaches is that it starts with the idea that government operates in a way that makes it an effective allocator of resources. In theory, an institution with such broad reach and based upon some form of universal access would work. The only problem is that it's proven to be more susceptible to the whims of human nature than any corporation is, and not subject to the same level of accountability private enterprises are.

At least that's my semi-informed opinion.

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I noticed in Krugman's article he says we are at the beginning of a depression. I was listening to a history professor from Harvard a few weeks back who also thinks we are in the third depression but believes the best way to solve the problem is to cut spending.

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