11/12/13 – Mark Thornton – The Scott Horton Show

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Alright y'all, welcome back.
I'm Scott Horton, this is my show, The Scott Horton Show.
Next up is Mark Thornton, Senior Fellow at the Ludwig von Mises Institute of Austrian Economics.
At Mises dot org, M-I-S-E-S dot org.
Welcome back, how are you doing Mark?
Hey Scott, it's great to be back on the show, I'm doing great.
Well good times, it's good to have you here.
So listen, a few things lately have got me thinking about, I don't know exactly how to phrase it.
Sort of the coming and the going of different eras of time.
Like back before I was born there was such a thing as the Eisenhower era or something.
Right now, nobody seems to think about the coming and going of these eras, these times.
These ways of looking at things, the changes, the massive changes in the way people live their lives.
And the kind of futures that they imagine or the choices that they would make.
People just don't tie it into the economy.
Or if they do, it's still all just this big impersonal force.
And that's why I like the Austrian school so much.
It's not because I'm an economist and I really understand all the footnotes and all the chapter headings and whatever.
But I can see that you guys are right, that it's all the government's fault.
It's not the winds of time blowing and the page of history turning.
There's an open market committee.
And they're the ones who make sure that the Republicans have enough money to invade the Middle East.
And they're the ones who make sure that the Democrats have enough money to buy up all the votes that they need.
And they're the ones who cause the booms that cause the busts that lead to the kind of hopelessness that I read about day in and day out.
People turning on their families, kids in foster care, businesses falling apart.
And so I was thinking, you know, I bet if I brought Mark Thornton on the show, he could explain how it is this works.
That the winds of time get blamed for decisions that humans make about the future of the society that all the rest of us have to live in.
And with that, I'm going to go ahead and shut up for 20 minutes.
Well, Scott, that is an unbelievably great question.
I mean, I think I can't imagine a better, more important, and more timely question than what you've just posed there.
Because I think everything you said encapsulates the world as it currently exists.
And basically what we are living in is the age of crony capitalism.
Crony capitalism is where you have the appearance of capitalism.
You have the appearance of free markets.
When in fact, everything is being rigged behind the scenes by the largest corporate interests in our country.
I'm talking about the big banks, big pharma, big ag.
All of those large corporations, Wall Street included, of course.
And other industries where large corporations spend an enormous amount of money lobbying, bribing, paying off our politicians.
So that basically our politicians in Washington, D.C., our congressmen, and our senators.
It goes all the way up to the president's office, of course.
They're really looking out for the interests of those large corporations and other interest groups.
They're not looking out for the interests of you, or me, or your audience, or the general population, or the Constitution.
They want to act independent of all that in order to guarantee their success.
And that's exactly what they've done.
I think we're coming to a pinnacle in time, as you said, that their ability to control the system is at its ultimate extent.
Where the banks, the large New York City banks have been bailed out.
Some other financial institutions have been bailed out.
They're not carrying all the bad mortgages.
It's Fannie Mae and Freddie Mac who we have to subsidize as taxpayers.
Those are the people who are really in charge.
And so they get the bailouts.
They get the stock market at all-time highs.
They get record earnings at the banks, and at the Wall Street firms, and at the hedge funds.
And the Manhattan real estate market is on fire.
The contemporary art market in Manhattan is on fire.
The real estate market in Washington, D.C. is at all-time record highs.
And so what we're seeing is that this crony capitalist system has, in fact, been in control.
And this economic crisis, I think, reveals, if we look at it carefully, if we study it carefully, that's exactly what we see.
The Fed bailing out the banks and bringing interest rate, the cost of capital, down to zero, basically, for all of these large corporations.
So that whether you're Microsoft or Pepsi, you can float 10-year bonds at 1.5%.
To sort of guarantee you've got more money, cash on the side.
Which, of course, corporations have the largest amount of cash on their balance sheet than they've ever had before.
Record numbers, as well as the banks themselves, they have record amounts of cash on the sideline.
And the average Joe on Main Street has virtually no access to debt.
It's very, very difficult to qualify for any kind of loan.
Or if you're an ordinary person or a small business person, it's very, very difficult to get access to funds.
So that you can start a business, you can expand your operations, you can carry a larger inventory or a bigger workforce to allow the economy to grow and to heal.
However, I think that we're starting to see the very first signs that this party may be coming to an end.
The Fed, there's increased anxiety about the Fed's balance sheet and what it's done with quantitative easing.
And that if interest rates are going to continue to rise in marketplaces that are beyond the control of the Fed, that the Fed could find itself with losses on its balance sheet.
And would be technically bankrupt and would not be able to give money back to the Treasury.
It might actually be the case that the Treasury has to start funding the Federal Reserve because of losses that they're going to sustain from these policies of quantitative easing.
And so at the point where the Fed stops contributing about $100 billion to the Treasury and starts making requisitions of money from the Treasury and interest rates are rising.
So the interest burden on the Federal budget is rising.
You can see all sorts of implications that this awful, awful policy environment that's been generated under Greenspan and Bernanke and soon to be Janet Yellen, who is just as dovish on monetary policy as the other three, willing to, of course, bail out the big institutions even though it's easing away at the capital base of the country and making it difficult for labor to be employed.
And so this is where the angst comes from is because the vast majority of Americans are feeling economic pain from this economic crisis.
They're feeling economic pain from Obamacare, which is enriching the insurance company.
I just talked to my brother who has a health insurance policy on his own, and it's a catastrophic policy that only pays for really big-ticket items.
And he has to pay the full cost of doctor's visits and things of that nature.
And he said that under Obamacare, his premiums are going to triple as a result, and he's going to receive a lot of services, so-called services, that he could not possibly use and would certainly not want to use, but he's being forced to do this under Obamacare.
And, of course, a lot of places – I just had a discussion with some other economists, and it's quite rampant that a lot of institutions that were trying to avoid paying benefits to all of their employees, especially the temporary ones, would typically hire people for about 75 percent of a full-time job, say, 32 hours.
And now they're being forced to reduce that number of hours in order to continue to avoid paying benefits under Obamacare.
And so people are losing hours, and they're losing benefits, and they're screwing up Medicaid and Medicare.
And the only thing I've heard that's been cut in the government budget, this enormous government, federal budget, paying twice the wages of normal jobs, is that they cut food stamps.
Well, now, of course, food stamps is not a great thing, and food stamps is actually a scam, but some people really depend upon that.
The poorest people in our economy may be deservingly getting food stamps, and so that's where they decide to start cutting.
Now, as I said, food stamps is a scam as well.
I mean, they just arrested somebody the other day around here where she had a bag containing $100,000 worth of food stamps and eight different IDs so that she was qualifying for food stamps eight times over and then taking those extra food stamps and either cashing them in for food or trading them for other goods with people who don't have enough food stamps.
And so, you know, Obamacare, you worry, you feel sorry for the fact that 50 million Americans are on food stamps, but, you know, how much of a scam is this program, and why aren't they examining this, and why are they giving away eight sets of food stamps to individuals?
I mean, if this person who wasn't brilliant or bright or intelligent at all could do it, it seems like then a lot of people could do it.
And so that's the world we live in, where the government's not paying attention to anything we say, anything that's important to us.
It's just making things worse and worse and worse, and our only hope is that we're standing in time at a point in time when this whole crony capitalist system collapses of its own weight.
Well, now, so when it comes to the boom and the bust, it seems like, well, obviously we had a big fake boom, although I sure wasn't feeling very boomy in the Bush years.
I guess the stock market and the housing market and all of that was a big boom, just like the dot-coms before that.
But it seems like, you know, then we had our big bust in 08 and, you know, through 09 and into now, but so isn't this supposed to be boom time again right now?
I guess you're saying it is for some people, but in a much more narrow sense than it was in the Bush years, right?
There's many fewer people benefiting.
It still feels like a recession, a jobless recovery, they call it, for everybody else.
It set the art market in New York.
Yes, I mean, I think that's exactly right, and it's a very difficult process to explain.
That's why tonight we're starting a new course on the Mises Academy called Crony Capitalism, and it's going to be given by Dr. Robert Badamarco, and it's based on David Stockman's book.
And, you know, if you've seen David Stockman's book, it's huge.
It's bigger than human action.
So Professor Badamarco is going to break it all down for us.
So I think that's going to be a very interesting course to take, but this is not a recovery at all.
Now, sometimes if you increase the money supply and banks go along and increase the amount of loans that they give, yes, there is a temporary boom in the economy, but that's really not happening this time around.
They're not making the new loans, and as a consequence, there's really nothing happening.
They're blowing bubbles in certain areas of the economy, like the art market, certain real estate markets, the land prices in the Midwest, farmland prices in the Midwest.
They've tried to reinflate the housing bubble, but, of course, new housing starts are still way, way, way low.
And so this is definitely a jobless recovery.
The number of people who are unemployed is still very, very high.
And, you know, you probably have seen and your audience has probably seen some reports that suggest, well, you know, the unemployment rate was at 10% at the worst part of this crisis, and now it's down below 7.5%.
But what's wrong with that number is that it fails to consider the fact that people have been unemployed for so long that they've run out of benefits and they are no longer counted in the workforce.
So, basically, the people who have been kicked off of the workforce, those people who are interested in working, are able to work, don't have a job, and are not considered as part of the labor force is at an all-time record high.
And so, basically, it's just a trick, basically, that's an incorrect picture of the job market.
And, of course, wage rate growth has been pitiful in the U.S. economy, and consumer prices have risen.
So, the real purchasing power of the average income has actually been slipping, so that the standard of living today in America, as measured by inflation-adjusted income, actually is basically the same if you go back 20 years.
So, I mean, that's why there's so much angst out there is that the average person in the distribution of income in this country, because of the negative impacts on the economy and rising food and fuel prices, there's a 20-year disconnect where we've dropped back to the standard of living of 20 years ago, while at the same time we see all these really super-wealthy people indulging in extravagant consumption.
And the contemporary art market is, I think, really the best sign of exactly how deranged all of that is, where the things that come up for auction in that contemporary art market sell for tens of millions of dollars.
And in every artist category, we're seeing record prices for their work, and we're seeing the overall sale of particular auctions setting all-time records.
I just saw an article yesterday where a condominium in Manhattan went for $90 million, and it wasn't really super-special or super-large or anything like that.
It was a fairly average, high-quality, not that large of a condominium, and yet they were able to pre-sell them before construction for $90 million each.
And so you see the excesses of what the Fed can do, just as we saw the excesses of what the Fed did in the 1920s, where you combined rapid inflation with prohibition, and you just got really a degenerate society as characterized in the Great Gatsby, for example.
And that's what we're seeing today.
We're seeing the ultra-rich right alongside the average American who is suffering under the system.
The Federal Reserve's policies are benefiting the big bankers, the hedge fund managers, Goldman Sachs.
They're all doing extremely well with record profits and record bonuses.
Alright, now hold on for a second, Mark, because I've got to accuse you of being a Democrat here for a second.
Because it sure sounds like what you're saying is that there's a lot of demand-side economics going on, but it's for rich people only.
But that if they would go ahead and start loaning out all of that QE money they've been printing, then the average guy could get a fair shake for a minute.
And I know you saw that Twitter debate I was having with a Democrat yesterday where he was saying, I'm going to go ahead and put words in his mouth because I know he sort of kind of means this, is that, hey, there's a role for stimulus, especially for the lowest end of the economic ladder.
Let's food stamp the hell out of them.
Let's put a whole bunch of money in their pockets and make a bunch of loans to them for their tiny little businesses where they can employ each other and get this economy up and going again.
And, of course, that's what the Austrians are always accusing Paul Krugman of thinking and saying that it doesn't work out.
And yet it sounds like you're saying what the Fed is doing wrong is that they're not doing that right now.
No, well, it's a good call, but basically what I'm saying is that the Fed is setting policy to the benefit of the wealthy.
I'm not saying that we should give away handouts to the poor.
Handouts to the poor have never worked.
I mean, you know, the old adage, you give a man a fish and he can eat for a day.
You give a man a fishing net and he can eat for the rest of his life.
Well, people need jobs.
People need tools to earn wages.
And basically what the Fed has been doing is eroding the true capital base of the economy.
First, in the housing bubble, where we saw manufacturer shrinking from the demands of the housing sector.
And then since then, they've basically just been trying to pump up the system.
And it's basically pumped up Wall Street.
And it hurt the rest of society, hurt the rest of the economy, because its policies are not geared towards creating savings, investment, and capital.
When you keep interest rates at very low rates, it helps the borrowers, the investors, the stock, people who buy stock on margins and leverage and things of that nature.
But guess what?
It hurts savers.
It hurts people on retirement.
It hurts people on fixed income.
It doesn't give anybody the incentive to save for the future.
And it's that necessary savings that's necessary to produce real capital, not just paper financial capital, but real capital in the form of software, machinery, warehouses, trucks, and so on and so forth.
Those physical things that entrepreneurs use to hire labor, you pay labor.
The labor uses the capital in order to produce goods and services that is used to pay off of those loans and to pay back those savers.
So, again, it's the Fed that's adversely affecting the economy to the benefit of the wealthy.
And this is very much a generalization, obviously, but those very low interest rates are hurting so many other people in society.
I talk to people all the time, and they're desperate to know what they need to do to their money.
They're old, they're retired, they needed income from their savings, and yet the safe bets in the economy like keeping your money in a bank and buying bonds and things of that nature don't really provide a return.
And so they're being forced at the end of the party to put their money in the stock market.
So the Fed helps certain groups, but also its low interest rate policy is actually hurting the truly productive part of the economy that is all about savings, investment in capital, and then hiring people to produce goods and services.
Well, and now maybe it's too close to the end of the interview to ask you, but in a way it sounds like what you're arguing.
I know if I pretend to be a leftist for a minute while I listen to you, I think that, hey, the problem here is capitalism.
And once somebody's rich, of course they're going to buy up some congressmen and use state power to turn America into a fascist dictatorship so that they can stay rich.
That's what a conservative is, someone who already has something.
So why would they ever let us have a free market?
Of course they're the enemies of the free market, but they're the rich and the powerful because they got there first.
So what are we ever supposed to do about this?
Well, you know, the wealthy always do have a privileged position in society.
It's just that we need to limit their privileges with respect to government.
And that's not an easy thing to accomplish.
And what it's going to take is, first of all, the fact that everybody has to wake up, get alternative media such as your show and the Mises.org website, and find out the true story.
Take this course starting tonight on crony capitalism and find out.
Once people find out, then you get the ideological shift that's necessary to overcome crony capitalism.
So Austrian economists have always been big believers in being optimistic about the long run, no matter how pessimistic the short run looks.
And from the long run, I can tell you that things are looking wonderful and that more and more people are waking up and getting to alternative medias and learning about the realities of crony capitalism.
And once we get a sufficient mass of people who understand that problem and want to do something about it, then something will get done.
You remember Ross Perot in the early 90s ran for president on the issue of the national debt and the deficits.
That was it.
And when he ran, he didn't have much chance to succeed in winning, but he set a new tone in Washington, D.C. that said Americans can stand up and fight for what's right.
And after that, what we saw is that Washington temporarily did get its house in order and over the next eight years actually balanced the budget and turned it into a surplus.
So Ross Perot and his little understanding of how things work actually did make a significant change without even getting elected.
So that's what we've got to go for, Scott.
We've got to inform people.
We've got to make people upset about the unfairness of how these economic policies work and change America in the future.
All right, everybody.
That's Mark Thornton, senior fellow at the Ludwig von Mises Institute.
Thanks very much, Mark.
Appreciate it.
Thank you, Scott.
That's Mises.org, you know, M-I-S-E-S.org.
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