03/22/14 – Robert Blumen – The Scott Horton Show

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Introducing Robert Blumen.
He's actually the first Austrian economist and therefore the first person to call the housing bubble in the last decade there.
Him and Mark Thornton and them over at Mises.org, the Ludwig von Mises Institute, where they study Austrian economics.
And Robert's got a great new article there that's actually a talk that he gave, the transcript of the speech that he wrote for a conference on Austrian economics that was held back in February.
It's called Say's Law and the Permanent Recession.
Very interesting stuff.
Welcome to the show, Robert.
How are you doing?
I'm great, Scott.
Well, good, good.
Very happy to talk with you again.
Who was J.B. Say?
What was his law and why would anybody obey it?
Say was a French economist from the 18th century.
When we talk about laws in economics, we're talking about regular patterns of the way things work in the real world that economists observed and gave them names.
Say observed that the way that people demand something in the market is by supplying something else, that every demand is accomplished by supply and every supply is a way of demanding something.
And that's what we remember him for.
All right.
And now, so what's really the significance of this?
I mean, it makes sense to me, logically speaking, that the reason people show up at work is so that they can take care of their wants and needs and that kind of thing.
Right.
But so what?
Isn't that obvious?
What's the big deal?
You'd be surprised, Scott.
There was a tremendous amount of debate over whether this was true or not.
About 50 years after Say published his book, there was a great debate between two British economists, Thomas Malthus and David Ricardo, which we know as the general glut debate.
The idea of a general glut is that somehow the market has produced too much of everything.
And for some reason, markets cannot clear.
So we're stuck with this surplus of every possible good.
Malthus thought this was a great danger that the market economy could go down that path.
But Ricardo used Say's law to show that this could not possibly characterize anything that could happen in the real world.
Ricardo pointed out that there cannot be a glut of everything in general because everything in general that's demanded and everything in general that's supplied are the same thing.
So macroeconomically, there is a balance between supply and demand.
And this, again, has proved to be very significant because of the rise of Keynesian economics, which is based on the same old argument that Ricardo destroyed back in the 1800s.
All right, now, well, I guess if it was Say versus Ricardo, then that would have been before Karl Marx.
But I've read some Karl Marx where he says, just look at these idiotic capitalists and their idiotic free market system where they produce so much of something that we right now have warehouses full of finished goods and lines full of unemployed and hungry people.
And because these capitalists, they can't see far enough ahead.
They overproduce everything they have for short term profit that they end up driving their own prices down through the floor and driving themselves right out of business.
So and they and they do it in these big cycles.
And I think that's why we need a communist state to prevent that kind of thing.
Scott, you've heard the term the dismal science to describe the field of economics.
The original meaning of that was, I think it was from Malthus, and he thought we would all get poorer and poorer over time.
And I think economics is a dismal science because the same bad ideas keep getting revived no matter how many times they've been debunked.
This type of theory, they're either called overproduction or underconsumption theories, which are two different angles on the same thing.
Both of them are saying that supply and demand at an aggregate level can get out of balance.
If you think that the purchasing power of labor as a whole cannot keep up with production, then you would call it underconsumption.
If you're seeing it more from the good side of too many goods getting produced, and not enough buying power, then that would be more of an overproduction angle on it.
Marx is one example, Malthus, Keynes, it's all the same idea, and it's all wrong because of Say's Law.
All right.
Well, so now, so does that make you a Chicago school supply side monetarist, like a Reaganite kind of a thing then?
If you say that what we don't need is to stimulate demand, that's not the problem, that there's a lack of demand.
The problem is a lack of production, right?
That makes you a supply sider, doesn't it, Robert?
I first started hearing the word supply sider back in the 80s around the time that Reagan ran for president.
I think what they were trying to do with that term, it was a really small group of people, and I don't know you could even call them a school because there are only ever a few.
There was Laffer, Wininski, and Gilder are the names I remember, and they were trying to call attention to this exact issue, that economics through Keynes have been taken over by the under-consumptionists.
Keynesian economics is based on the idea that demand can be a problem, that the economy can get stuck in a place where there's not enough demand, not purchasing power.
The government has to come in and create phony demand through stimulus or other Keynesian measures to bring supply and demand back into balance.
But according to Say's Law, demand comes about through producing things and supplying them to market.
So, the real problem is not how do we generate fake demand to get people spending again, it's how do we get people producing again?
The problem during a recession is there are people who are not producing, and I think the label supply side, they were intending to call attention to exactly that point, which I agree with them.
Right.
Well, but now, so what we do have though, I don't know, I guess you say this is not a general glut, this is something else when we have this so-called cluster of errors, the unsustainable boom theory, right?
The Austrian theory of the so-called business cycle, that says that you get a whole lot of people overproducing at least something, houses or derivatives of housing, mortgages, things like that, no?
Yes, everybody who observes economic life would acknowledge that there are such things as we call recessions or depressions.
Keynes in his book started out with a critique of Say's Law.
Keynes said the problem with Say's Law and the thinkers of that era is it only works when you're not in a recession.
If you have any idle capacity, unemployment, then Say's Law is no longer true.
And Keynes said, I've found a loophole or a hole in the reasoning of classical economists.
They fail to consider this case, but that's complete nonsense.
There's an excellent book by Australian economist Stephen Cates about Say's Law.
He goes through the writing of the economists of that era, and he shows that they were absolutely aware of such thing as recession and depression.
Now, as I've been saying, we cannot explain recessions or depressions by a general underconsumption or general overproduction.
The classical economists and the Austrian economists all offer a different type of theory for recessions, which is the wrong mix of goods and services got produced.
You had too much of some things and not enough of other things, and the things you had too much of, those particular things maybe cannot be sold at a price which will cover the cost of producing them.
You get some producers, the ones who produce the wrong things, well, they may take a lot and they may have to lay off their workers, and that is what we see happening during a recession.
It's particular problems of proportionality of some things and other things, and not a general problem of demand in general or supply in general.
All right.
Well, but now, so whenever there is a recession, like this one or the last one or the one before that, they always say, well, we got to stimulate.
We've got to stimulate to pick that demand back up, and we can't just let, they might even concede some of the time, I think, Robert, that, you know what, there are a lot of bad debts that do have to be liquidated, but, you know, let's give it a soft landing.
We've got to inflate, we'll make sure that the banks stay whole, because if they fall, you know, in other words, bail them out, because if they fall, then that'll just be, you know, disruptive to the whole economy, and after all, I think you even quote in here this kind of reversal of Say's Law, where the unemployed stop demanding.
If they don't have anything to bring to market, you know, supplies-wise, then they don't have the ability to demand either, and then what ends up happening is you have, you know, good businesses that otherwise, not even in artificial boom, but just in regular times would be a sound business, well, they end up being brought down by the fact that other businesses and other people around them are going out of business.
I learned about this in junior college for why we needed the New Deal so bad, was because we were in a deflationary spiral, where everybody in town is going bankrupt, and the more bankrupt everybody goes, the less ability anybody has to get back to work again, and so, at this point, thank God the Democrats came and stopped those prices from falling any lower.
Yeah, Scott, that is definitely the reflex, and they do use the Great Depression as the case to back that up.
The problem with those measures is they don't address the true cause.
It is true that you get people unemployed, businesses fail, but what stimulus is trying to do is it's trying to re-inflate the old production patterns, producing the wrong things in the wrong proportions, and what's wrong about those production patterns is they're inherently losing money, and losing money in a capitalist economy means that you consumed more economic value than what you produced at the end of the day, so you can't have an entire economic system based on money losing.
Then you'd have communism.
There was a great article on the Mises website this week about one of the communist countries, I think it was Yugoslavia, which the author shows that the entire economy required billions of dollars a year of increased foreign debt every year just to stay even.
The entire system was based on destroying economic value faster than it can be produced, and that's not a sustainable system because it depends on somebody else bailing you out.
To get back to a sustainable system where the economy can grow on its own two feet, you need a reorganization of production and of prices so that the entrepreneurs start producing things that people do want in the proportions they want them at costs which are lower than the prices they can charge for them, and the wages and the profits that are earned under those conditions, well, that becomes the true demand, which constitutes, I mean, true supply, which constitutes the demand for other goods, and that's a sustainable process.
The only way to get there is to allow the market to work, to allow prices to find their own level, and that can only happen if you go through the recession.
Well, we can see right now what seemed to me completely an amateur here, but just looking at CNBC from time to time, it seems like we have terrible distortions in the housing market already where it's just like 2005, or I don't know, you know, what year you'd make the analogy to there, but we're back into artificially high housing prices, complete with all the reality TV shows about how you can become a millionaire by flipping them all day, and at the same time, there are, I don't know how many millions of houses that are sitting empty, and we also have things that, you know, I'm sure this existed to a certain degree before, I don't know, but I've read about, you know, certain auctions where the banks are selling off, you know, I don't know, high numbers of properties that they foreclosed on to only the largest corporations are invited to the auction to invest, and you end up having these new banks and new holding companies that now own thousands or tens of thousands of rental houses that they buy very cheap after they're foreclosed on, the families are kicked out of them, they get the bargain and buy them up, and so this is all the kind of thing where I don't know exactly how it would be in the free market, but we can see this kind of thing is going on in a not free market right in front of our eyes.
Scott, a lot of the attention in business cycle thinking is based on labor markets.
People are concerned about the unemployed people and earning their wages, but a bigger chunk of the economy are capital markets, the prices of capital goods, capital assets, and a lot of those are equally or more inflated during the bubble.
We had a bubble in stock prices in the 90s and then in house prices in the 2000s, and part of the whole reorganization of production into a profitable self-sustaining system involves the repricing of capital goods and assets, but the policymakers, those same ones who believe they prevented another Great Depression, they're definitely afraid of letting capital markets clear, partly because they think that by popping up the price of capital goods, they're creating real wealth, partly because they want people to feel wealthy so they will consume more, and partly, David Stockman really goes into this in depth in his book.
We've come to a point in America where no one who is politically well-connected is ever in danger of losing even one dollar on anything anymore because there will be a bailout, and it's cronyism.
It's about keeping those people who are well-connected from ever losing money.
So, all right, what about this then, Robert?
I become the anarchist president of America, and I name you the anarchist secretary of the Treasury.
What are we going to tell the people of America, the society, that this is the medicine you've got to take?
This is how it's going to be, but this is why it's going to be worth it.
I'm not a huge fan of Reagan on many things.
You do a great job of covering a lot of bad stuff that happened during the Reagan administration on your show, but I think there is a lesson there.
When Reagan came in, the rate of inflation had gotten out of control.
Jimmy Carter had appointed Paul Volcker as the Fed chairman, and Reagan understood what Volcker was doing, and he tried to sell this to the public.
Look, we're going to go through some tough times, but it's necessary, and trust me, when we get past, then things are going to get better.
And that, I think, is the only way that you could sell this program to the public.
You have to have a conviction that when the price system does its job, that people will get back to producing, earning wages, and their life will be better, and that if that doesn't happen, then we'll be stuck.
The leader has to sell that message to the public.
And so then, that means food stamps and unemployment insurance, and this and that kind of thing.
You got to be able to recognize both sides of the argument, that people desperately need their unemployment when they're laid off, and they've got a family, and medical bills, and groceries, and price inflation at the grocery store, and fuel, and God knows what.
And yet, also, yeah, you are paying them to stay unemployed, in a sense, too, and that's a perverse incentive, and whatever, right?
So what about that?
What about the weak?
Because we're talking about people here, and by the way, I was reminded of this, too, maybe you can mention this if you want.
I was thinking about this, too, in your essay where you're talking about Hoover trying so hard to keep prices, wages, artificially high, and the same thing that they're trying to do.
Now we see all this debate over the minimum wage, and there's a part where it seems like economists forget that they're talking about people here, and of course it makes sense, logically speaking, that if you outlaw hiring somebody for less than a certain amount, that you're basically outlawing a certain segment of the population from working.
The other side of that is how unfair it is for a human being to work all day and still not have enough to be able to get by, at all, you know, or maybe half as much as they need to get by.
So we kind of got to take into account that these are our fellow countrymen and everything here, and we got to keep everybody from starving, right?
I do think there is a fairness point where people see the system is working now in a way to prevent the most connected people from ever losing money.
The people who don't have that kind of influence, their well-being doesn't seem to matter.
I would try to reform the system by letting the market work for the well-off, and if they own a lot of assets that got inflated, well, they have to take their medicine on the way down.
As far as how do I see the position of the least well-off, what is the best way to help those people?
Hoover was very concerned about the workers.
He decided the best way to help the workers was to keep nominal wages high.
He created mass unemployment by doing so, and prolonged the depression, retarded economic growth, and set back the fortunes of most people.
There were people who did have jobs, and it was a great time if you had income during the Great Depression, because everything was so cheap.
But that doesn't sound very fair to me either.
The final point I want to make is that the amount of wages that people make, let's forget about recessions.
Let's say we're in a country where everyone is employed who wants to be employed, and they're making $500 a year.
Why is that?
It's because they don't have enough capital.
Capital, meaning the tools that make labor more productive.
The only way for real wages to grow is people need to produce more.
When they produce more, they can supply more, and they can demand more.
We need to look at what kind of policies encourage investment, and the creation of more capital, and what kind of policies, like we have in the United States here, many of them discourage saving, discourage investment, and as a consequence, discourage capital formation, and get in the way of the growth of real wages, which is how everyone, it's the only way that everyone gets better off.
Right.
All right.
Now, so to finish up here, let's talk about, you know, if you can list for us some things like you do in your talk here, again, it's mises.org, Say's Law, and the Permanent Recession, where you talk about the major causes right now of regime uncertainty, other than just the QE and the bailouts that are keeping these prices from clearing and letting the economy get back to square one.
Even if they got to create another bubble after that, at least let us get a good solid grounding to start blowing that bubble from, right?
You mentioned regime uncertainty, which I haven't defined that yet, so I'll really quickly define that.
It's a term originated by economist Robert Higgs.
He meant a degree of uncertainty about property rights, about taxation and the return, or even being able to keep your wealth.
If that comes too much into question, then people who have assets and who have the ability to invest will simply not invest, because they don't see they'll be able to make any money or hold on to it.
Now, Higgs used this concept to explain one of the factors that prolonged the Great Depression, and I'm really borrowing from Higgs.
He thinks that we're in a period of regime uncertainty today.
And for what causes?
It's not just one thing.
It's the accumulation of regulatory and tax burden, price floors preventing capital markets from clearing, housing price floors preventing the housing market from clearing, Fannie and Freddie being nationalized, Obamacare, which, besides the taxation aspect, you remember Nancy Pelosi's statement that we have to pass the bill to find out what's in it?
Yeah.
Now we're finding out what's in it.
Every week I read another article about an obscure provision of Obamacare that is going to have huge implications on how medical care is financed and funded, and what's made me realize is if I read one of those a week, we don't know how many of them there are.
Obamacare is creating huge uncertainty in labor markets, makes it difficult for employers to understand what the incentives are, and in many cases they're choosing not to hire because they want the smoke to clear and the dust to settle on Obamacare.
Right, and I mean, even to this day they keep announcing executive orders changing individual parts of the law, so you don't even know day to day whether this or that page or paragraph is even going to last until next week.
Absolutely, Scott.
One more thing I'll throw in on that.
In fact, as far as I can tell, they've now taken back the rule that says that my old policy is canceled and I've got to get a new one.
Well, I already got a new one and I like the old one better, thanks for nothing, for now changing it back after it's too late.
I mean, the whole thing is ridiculous.
If that's my experience, imagine you're some giant multinational corporation got to deal with this crap.
If you went through that process of getting one policy and another policy and you want your old one back, well, now you're worse off and you probably spent a lot of time and maybe some money and got into a higher rate.
That is all wasteful and that type of waste is one thing that's making it much more difficult for employers to operate efficiently.
It really requires a degree of stability in order for people to foresee the future.
When you're talking about making a long-term investment and some large corporations have products that can take a hundred million or a billion dollars to bring to market and can require years and many more years beyond that to see a return on it, they need some confidence that they can make plans and then execute them, that the rules won't change, the ground won't shift under their feet after their $500 million into a big project.
If that's not there, then it's going to change their thinking about investing.
As I was saying a few minutes ago, it's the investment process which creates capital, which supports real wages.
There's nothing that says that even the amount of capital we have now will be there tomorrow.
Capital is something that wears out, gets used up, goes out of style.
If nothing were done, we would consume capital every year and real wages would fall year after year.
It requires a minimum level of investment just to stay even.
During the Depression, as Higgs points out, capital investment fell, capital stock eroded, and that was another contributor to wages falling.
We need to think about how are we going to get wages up, and if you mess with investment too much, then you're messing with wages.
I'll never forget Alan Greenspan testifying before the Congress.
I don't know if this was actually one of the times he was cross-examined by Ron Paul up there or not.
I kind of think not actually, but I do remember him testifying up there.
This would have been in the late 1990s, probably before the dot-com bust, but either way, it doesn't matter.
He would have said the same thing at any time.
That is that there's the slightest bit of upward pressure on wages.
This could cause inflation.
We must move to limit this.
When the very last people on the chain are finally getting a cost of living increase, 25 cents more per hour or whatever it is, then, oh, that's the cause of inflation in the economy, and that's what must be prevented at all costs, is the people just barely getting by to have a tiny bit easier time than that.
They get to take the rap for all of his counterfeiting.
Something that Austrian economists emphasize, Scott, is when new money comes into the system, it doesn't go everywhere equally all at once.
The way things are working now, it all goes into assets very much later after the guys with the assets have cashed out, and now they're buying Cartier wristwatches, and finally the employees at those stores get their take-home pay.
When you finally start to see the effect on wages, due to Greenspan's bogus theory of cost-push inflation, he saw that showing up, and he thought that was the cause of inflation if that was his true view, and that's where he decides to raise interest rates and cause the end of the boom.
Yeah, that's if he's being honestly wrong rather than just lying and refusing to take responsibility.
Oh, man.
All right.
Well, thank you so much for your time, Robert.
I've learned a lot, and I'll go ahead and apologize now for some of my dumber questions.
Thank you so much, Scott.
I appreciate it.
That's Robert Blumen, everybody.
He called this housing bubble over there at Mises.org before anybody, and they called it before anybody.
That's Mises.org.
This article is Say's Law and the Permanent Recession.
Hey, all.
Scott here.
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