 All right, why don't we go ahead and get started if you guys could take your seats? So what I'm talking about today is problems with Keynesian solutions to the current depression. And this is just to give you a flavor of where I'm going. This is a witch doctor. And it's not that I'm criticizing Keynesians with that, just we're showing how culturally sensitive we are here at the Mises Institute. And... Hmm. Is it at all serious, as you may remember, Mises in that one part in human action says it's not irrational to engage in a rain dance. It's using means to achieve ends. It's just a very poor choice of means. Okay, so the same thing here. We're not saying these Keynesians are irrational in that sense. Okay, so let me start out now. The problem with giving lectures here is that a lot of you are extremely advanced and you want to argue about what Rothbard said in footnote 14, that sort of thing, whereas some of you, it's like, oh yeah, my professor told me to come here and I thought, yeah, spending July down in Auburn sounds great. I hear the weather's fine down there at that time of year. So there is differences. So I'm gonna have to, a lot of you are gonna know some of these things, but I think later in the lecture, you'll get maybe nuances that you haven't heard before. And I will, as always, tell you I'm gonna leave time at the end for questions and then I probably won't. So here, this is, the partly why I want to walk through is I want to make sure a lot of bloggers and guys like Glenn Beck or whatever referred to this episode. And so I want to be crystal clear about what happened, particularly the way Krugman has dealt with this. So let me just walk you through and make sure you guys know exactly what's going on. So Christina Romer was the head of the Council of Economic Advisers. She was Obama's chief economist, as it were, the incoming new Obama administration. And she was the lead author, her name is on this thing, for the economic analysis that was undergirding what we now refer to as the Obama stimulus package. Right, the A-R-R-A was in terms of the actual title of the legislation. So where they spent, and the numbers differ like at the time, I think they called, they scored it at 787 billion and then later on they gave a revised estimate and it was I think 800 billion in change but what's 50 billion among friends. And so that's what I'm talking about. You guys remember the Obama stimulus. And to be clear, that's not the same thing as TARP. A lot of times some people get those things mixed up. The Troubled Asset Relief Program was under the Bush administration, the free market guru who wanted to have the federal government own a bunch of financial stocks. That was the Bush administration. This we're talking about is the big stimulus plan put in by the new upcoming Obama administration. So in order for them to justify this to the American people, they had this report and this, everything except the red comes from the actual Romer report. Okay, so the red stuff somebody else added on after the fact, but this was what they had in that report to explain to the American people why it makes sense for us to pass what at the time was touted as a $787 billion plan that consisted partly of tax cuts and partly of expenditures. So that's where the $787 billion came from. So they were making these numbers up like $450 billion of tax cuts, targeted tax cuts and then the rest in terms of increased spending. So you can see here, they're saying at the time this was in early 2009. So at that time, the official unemployment rate was 7% and change and it was rising. Because this is a few months after the crisis in September of 2008, everybody thought the world was collapsing. We got through that, thank goodness because Ben Bernanke came in and created a trillion dollars. But thank goodness we weren't on the gold standard but still the economy is struggling and they're warning us that there's not enough spending that's gonna be happening and so we need to prime the pump and so we wanna have more demand and so to get the American people, you know, $787 billion, that's a lot even for the government to be borrowing and spending or to be cutting taxes and thus having a bigger deficit that would otherwise be the case. So that's a lot of extra federal debt to be racking up over the course of two years. Why is that justified? And so this is what they were saying. They were saying, okay right now unemployment's around 7% and change but if we do nothing, it will keep going up and heaven forbid it might even just break 9% if we do nothing and can you imagine how awful that would be? And I was like, that would be terrible. Unemployment of 9%, I could be like in the early 80s, that's awful. They said, right, so why don't we go ahead and pass this thing because then unemployment won't break 8% you know, it'll go up. You know, we can't, we're not magicians, you know, we're scientists. We can't, we're not promising miracles here but we will mitigate it and things will turn around and then you know, but it won't break 8% but holy cow, the laissez-faire free market if we just do a liquidationist thing and do nothing, it'll go, you know, it might even break 9%, that's inconceivably awful. You know, we're not gonna do that. Okay, so then of course they pass it and then what happens obviously the actual unemployment rate broke 10%. All right, so now here again, let's not be so eager to pounce on this that we forget our Austrian principles. This by itself doesn't prove that the stimulus package was a bad idea. This demonstration here that I just went through doesn't prove that that extra spending made the economy worse, made the unemployment rate higher than it otherwise would be but it's not certainly not good, right? It doesn't help their case. And so what I've been saying to Keynesians is of course not just me, that other people and not even just Austrians but just general free market economists, Russ Roberts, if you know him, has been really good on this in his podcast that he does and having both Keynesians and anti-Keynesians on in his very soft spoken reasonable way just making this point over and over that what would reality have to look like? What would the data have to look like for you Keynesians to realize there's a potential problem here? In other words, suppose you guys were totally wrong and the stimulus actually was poison, isn't that what it would look like? And so it's fine for you guys to say, oh no, other things weren't equal but don't walk around saying duh, the evidence is on our side, how can you right-wingers be so blind to the empirical facts that on the face of it, prime of fascia, this looks like you were wrong. Let me just point out in terms of a, again, this isn't even so much an Austrian thing which is a general free market critique, why does this make sense? Because for whatever reason that you think unemployment is gonna go up. In other words, there must be some explanation. If you're an economist, whatever, you're a Keynesian, Austrian, a monetarist, what have you, supply cider, you have to have this theory of what causes recessions and why unemployment would ever be higher than a normal rate, like why would unemployment ever go up to 8% as opposed to markets just instantly clearing. So whatever your views are, the point is if you're a free market kind of an economist, you're gonna think whatever that particular nuanced explanation is, probably you're not gonna mitigate those factors by having the government come in and take an extra $300 billion from the private sector and devote it to politically motivated ends, right? Whatever those, in other words, in general, here's another way of putting it that I used to use a lot during when this was big. I used to say, look, if the economy were fine and all of a sudden this new administration came in and said we're gonna increase the deficit by $787 billion, people would be freaking out, right? That was a huge number at the time. Now it seems like nothing just because that happened and then we just filed that away as part of history and so now that number is not as big to us and because Bernanke's been doing stuff that has tees in it, namely trillions, so we get desensitized. But at the time, that was a massive number just to give you some context earlier. So this was, I think like around March of, let me get my dates mixed up, I think March of 2008, I believe, around there, George Bush proposed a tax cut to try to stimulate the economy. Maybe there was some spending I don't remember, but it was his Bush stimulus package and it I think was something like 300 billion or so and congressional Democrats were freaking out saying you can't be so irresponsible and run up the deficit that much, right? So just to give you an idea of the magnitude, so this thing was much bigger than what Bush had been proposing. So if things were normal, if the economy were fine and someone came along and said, why don't we do that? The standard free market response would be, well, no, that's not helping anybody. That's gonna make us poorer than we otherwise would be. It's gonna redirect resources away from private channels and into government selected ends. And so clearly, if you believe that in the efficacy of markets and that decentralized prices help direct things better than government planners, that's gonna make us poorer, that's bad. So why would that general presumption flip all of a sudden? If you say, okay, but suppose the economy is already on the ropes and we're really in trouble of an awful economy, maybe then would it be good to take resources from the private sector and have politicians direct them? So that general presumption wouldn't flip. And so you could see how whatever you think is causing the economy to be bad right now, doing this is gonna make it worse. And of course the Austrians would have a more particular story that Roger Garrison and others this week have talked to you about. So what's interesting then is how did the Keynesians deal with this? They just took it in stride and said, it's a good thing we acted when we did because the economy was a lot worse than we realized. That had we done nothing, this line in retrospect, we shouldn't have drawn it like that, it should have been way up here. Unemployment could have been 13% if we had done nothing. So in other words, they just know that federal spending, other things equal, raises demand and creates more jobs and the only possible issue would be the composition of the output and that eventually if you hit full employment, full output, if a real output equal potential output, then additional spending would just raise prices. That's in the standard Keynesian model. That's what eventually would happen. So if you try to use a reduct, you add absurd among them and say, well, gee, if spending an extra two trillions good, why don't we spend an extra 50 trillion? They would have a reply to that. They would say, well, because once you hit full employment further spending just causes prices to go up because you can't literally create more output out of a given stock of resources. So that's what they would say. But again, their whole theoretical framework, their whole modeling assumption presumes that if you do have a gap in potential output or a gap between potential and actual output and you have idle resources in their mind, you got a bunch of workers sitting around watching the prices right in their apartment. There is no opportunity cost to do some policy change that gets them off their butts into a factory and making stuff, right? That's not that something else has to go down in order for their output to go up because by definition we're dealing with idle resources. So that's their mindset. And so when you see these studies that came out after the fact, like in 2010 and 2011, that were, people would say stuff like bloggers and things would refer to these studies and say, oh, according to the Census Bureau or according to these allegedly reputable organizations, they did a study and they found that the Domestimulus package saved or created 2.37 million jobs, right? And they would give a range too to make it look real accurate with the probability distribution. Because again, we're scientists. And when you went and looked at it, it's not that they did some ex-post investigation, like say, okay, originally we had our theory, then we did it and now let's look at the results and then use a different methodology. No, they just use the same modeling approach and maybe tweak some of the numbers to update the fact that they knew now how much they actually spent, whereas in 2009, they were projecting how much would we spend by quarter. Okay, but in other words, the model headed built into it that other things equal if you spend more, you create jobs, right? So it's not that they were testing the Keynesian theory that there was nothing the numbers could have done to make them conclude, ooh, we actually destroyed jobs. That would have been an impossible result given the way those things were designed. Okay, let me talk a little bit about how Krugman himself deals with this episode that's a little bit embarrassing from the Keynesian perspective. So he's a very clever guy and he did a brilliant job. It is true. From the beginning, and he said this before he knew what the answer was gonna be, from the beginning it is true that he was warning when the Roma report came out on his blog within days of that thing going public. This is in January of 2009. It is true, you go look this up at his blog and he was saying that Democrats don't do this. I'm telling you, this could blow up in your face that unemployment of two years from now is still gonna be unacceptably high and I guarantee you these Republicans are gonna say, hey, we tried stimulus and it didn't work and it's gonna discredit Keynesianism. So I'm warning you, that's gonna happen. This is inadequate, you should spend more. So it's true he did say that. However, it's not true that Krugman, let me just back up for a second. It's not true that Krugman was saying this line that you were drawing here actually should be way up here and that's why actual unemployment with the stimulus is gonna be bigger. No, what Krugman was saying, if you go and read him carefully, he was saying, what are you guys talking about? Like here in late 2010, unemployment is still gonna be 7.5% with the recovery plan, that's too high. People are still gonna be mad that 18 months into this thing, unemployment's still 7.5% so what are you guys doing? Why aren't you more aggressive? Why don't you spend more and make this thing you know, kick over faster to get the number down to reasonable territory sooner because you don't want Newt Gingrich and Rush Limbaugh being able to harp on that. Okay, so do you understand the important distinction there? So yes, Krugman was warning them this is inadequate but it wasn't because he realized that the economy's worse than you guys think it is, it's because he was saying even on your own terms. Now even there, let me just full disclosure, he actually was saying he also thought this was optimistic but reading him, it's like you think he's saying okay, it might be like in here or something. It's not that he was saying it's gonna be way up there. All right, so that's the point and I don't wanna shock you but now after the fact, Krugman would lead you to believe that he knew it was gonna be up here, right? So he's being a little bit overly generous with his predictive powers and again, I hope I didn't shock anyone by saying that. Okay, so that's the point I just made here that when he says that he warned about that, he's actually using, and he was doing it rhetorically so his point was he was trying to say to the Keynesians, I'm not being a stick in the mud, I'm agreeing with the conventional multipliers on the forecast and everything. All I'm saying is look at these Romer's own figures. Why are we getting all excited about that? And the people at the time were telling him, yeah, Paul, we know what you're saying but politically, we can't ask for a deficit, a stimulus package is above a trillion dollars. That's gonna freak people out. We can't do that politically. And there's reports that like behind closed doors, Romer herself was actually pushing for a bigger stimulus and then somebody, I think Larry Summers maybe, was saying we can't do that politically. It's gotta be less than a trillion. So just because that sounds like too much money to be asking for. Okay, another thing too, so some people are just trying to say, okay, so Christina Romer's not a good forecaster, but Keynesianism still works. And it wasn't just Romer, it was like guys like Mark Zandy also in November of 2008 came out with a forecaster, whatever big study, assessing the state of the US economy, looking at the trends saying if we do nothing, this is what spending is gonna do. Therefore, we need a stimulus of such and such size. And again, the same pattern for some reason, magically, the economy as the Keynesians saw it before the stimulus passed was unhealthy, but not terrible. And then after the stimulus passed, wow, the economy just got a lot worse for some reason. All right, and again, if you thought the stimulus would hurt, that's consistent with that. And also notice too, the more rational you think people are, when would that pain set in, it would be right after the thing passed and it became law. So in other words, if you're told, oh, by the way, your taxes are gonna go up, or if somebody tells you we're gonna shoot you next month, it's not that you're fine until next month. I mean, you're gonna adapt right now. You're gonna, for that awful thing that's coming. So the same thing, it's not a coincidence. In other words, it's consistent with the critique of the stimulus to say the bad stuff really started happening upfront even before the things that would come later on. Even before the bulk of the spending kicked in, in other words, that it would be the knowledge of the policy change that would make private entrepreneurs cut back investment if they think, oh man, my taxes are gonna be hiring the future now because to pay for this stimulus, you would start dealing with that right away. You wouldn't wait for the tax bill to go up before you adjust it. Okay, in general, the Keynesians, because what's happened? Clearly, we have been following Keynesian policies in the US and in many other countries since 2008. And so what's their, and clearly things haven't been great since 2008. Nobody is gonna beam with pride about the successful recovery that these policies have instituted or that have been associated with. So what's the standard Keynesian response, of course, is to say, well, you didn't really try. You didn't really give it the old college effort. You didn't do what John Maynard Keynes would have said. You didn't do what Paul Krugman would have said. So it's been, oh, it's too little, too late. So what would you have to do to try to defeat that? And again, you could never prove that, right? In economics, there's no such thing as a controlled experiment. There's no way we could ever have an open and shut. Well, they said to do this, we did it. Such and such was the result. Therefore, they were wrong. Because again, things are always counterfactuals, right? And again, this is an Austrian point. So we can't get too mad at the Keynesians in any particular case for raising this objection. But without looking at the numbers first, and we just say, okay, but how would we referees an outsider? Are you sure? We know that you can never really prove it per se, but what would things look like to make you side with one side versus the other? And probably if you had like the historically unprecedented increase in monetary intervention, and that didn't work, that would be good prima facie evidence that such intervention wasn't a good idea. And that, oh, if we just had done a little bit more, right? So when you look at Federal Reserve policy, it seems odd to me to say, yeah, the problem is, Bernanke just didn't do enough. You see what I'm saying? He has more than tripled the monetary base since 2008. So if what you think is that really, we just need a little bit more monetary stimulus than too bad Bernanke is such a tightwad, that graph is a little bit awkward. Again, it's possible, maybe if he had just gone up to here, we'd have 2% unemployment right now. That's possible, I can't prove the opposite, but the point is this by itself is a little bit awkward if you're saying the problem since 2008 is that Ron Paul has been scaring Bernanke. And I'm not even, some of you might think I'm joking. No, they literally are saying that. People are blaming this on Ron Paul because he has intimidated Ben Bernanke. And I mean, he probably does intimidate him in the sense that like, gee, I don't want to go to that hearing tomorrow. You know, I get that, but I don't think that you can look at federal reserve policy and see that, yeah, you could see how Ron Paul's fingerprints are all over that. Okay, same thing with the federal surplus or deficit. So here I'm loading the deck by doing it in absolute terms. But again, it's fun to load the deck and the next slide will be a little bit fair to the Keynesians. Same story here. What are they saying? They're saying, yeah, they did engage in some deficit spending in response to this crisis when Ron Paul and the other Austrians would have said not to do that, but come on, given the magnitude of this gap between actual output and potential output, they should have done a much, they should have had a much bigger deficit. So you can't prove that, right? The only way we could literally prove it is to turn back time and have a $2 trillion deficit or $3 trillion deficit and then see what would have happened because we don't know what the counterfactual baseline is to compare it with. But again, given what we have to work with that all we know is what they did in the real world and what the actual result was, what would count as a strike against their theory? Well, what if you had the biggest deficit ever in US history and that didn't work and you just say we need it a little bit more, that would be kind of awkward and that's what did happen, right? So now let's do that as a percentage of GDP to make it a little fair. So this is federal debt held by the public or in the CBO, so you can see here, federal debt went up just from 2007, 2008 up here and it got up to levels that it hasn't been in over 60 years and that was when it was coming down from World War II, which was with the highest in US history, right? So again, it doesn't prove anything, but what would the graph have to look like for us to be able to say that come on, this is a slam dunk case, clearly monetary intervention and the federal government's borrowing and spending money is not the solution, we tried that and it didn't work. Wouldn't it look like that? Incidentally also, I'll just have to slide up here. What these things mean, in case you see these numbers bandied about a lot, the CBO's baseline projection is saying if the way things are currently written to law take effect and legislators don't change them, this is the projection. So what it's saying is the government predicts that it's gonna get real responsible pretty soon and then it will stay responsible and this alternative fiscal scenario is the CBO saying, suppose legislators act like legislators have historically acted, what would things look like and you see how it goes up and in case you're wondering the particulars, it's things like what's called the Medicare doc fix, so they always have programmed in that they're gonna greatly claw back how much they reimbursed doctors who have Medicare patients for various treatments and things, but then they never actually do it because nobody wants to be voting to cut reimbursements to doctors, especially if they're getting less than what they think they would need to in terms of their costs and medical malpractice and so on because then they might just drop a bunch of clients who can't pay cash or who don't have private insurance. So things like that also the so-called Bush tax cuts that that's scheduled to expire so there's like a built-in huge tax increase and so that's partly why this goes down because they're saying, oh, we're gonna get all this more revenue and this is saying, well, but what if they extend it like they keep doing because nobody wants to be voting for a huge tax hike in the midst of an awful recession? So that's where these discrepancies come in from. Okay, what about the success story of World War II? So here, again, the Keynesian trump card is to say, we have a clear cut example of where our policies worked so we're not stretching things. It's not ludicrous for us to say, why don't we just do now what we have seen historically worked in the past? I don't wanna repeat too much of what I said because a lot of you guys saw my talk on this yesterday where I covered some of these points. Let me just cover some different aspects of the same story, a little bit of repetition. One thing, let me, I do wanna, I mean, obviously I'm trying to make jokes and make fun of them a little bit, but let me make sure you do understand that what the Keynesian, why Keynesians like this so much. Because the problem in general when you ask what's the so-called multiplier on government spending and you're trying to assess empirically what is the effectiveness of the government coming along and spending more money to try to fix the economy? How can we test whether that works or not? Not using our models, our theoretical models, but to try to just be neutral and let the facts speak for themselves. The problem with doing that is you have, you confuse correlation and causation, right? I mean, there's sophisticated terms you would use in econometrics for this, but I'm trying to just give it to you in plain English. So it's, let me give you an analogy first to make sure you get the concept. What if somebody says, oh, I don't believe in hospitals? What are you talking about, believe in hospitals? Oh, there's a bunch of witch doctors in there and you just, I don't go to hospitals. I have a tumor, but I'm gonna handle it myself. Just give me that can opener, right? There's someone's talking like that and then you're just, what are you talking about? That's crazy and they say, no, I can prove it empirically. Look at what the death rate among the normal population and look at the death rate in hospitals and you'll see what I'm talking about. All right, or another thing is somebody could say, I don't believe in, well, I was gonna say, a standard one to use is police and crime, but with this libertarian crowd you guys might say, yeah, that's what's fine with that one, where high crime areas have a lot of police and then the issue is, do they have a lot of police to deal with the crime or do they have a lot of crime because of the police? But again, with Rothbardians, you'd say it's the same thing, but you get the thing with the hospitals, I hope, that it's not that necessarily going into the hospital makes you sick necessarily, it's people who go into the hospital because they're sick. So it's the same thing here. You can't just naively look throughout history and say, for example, what's the unemployment rate correlated with the government deficit? Because you might find that, oh, gee, government deficits go hand in hand with awful economies, but the Keynesian would say quite understandably, yeah, but the only reason they're spending so much is because the economy was awful and they were trying to fix it. And so that's not fair. If this is a tool that governments tend to use to fix bad economies, you would see that, wouldn't you? And so the reason they like World War II so much is they're saying here, the extra spending was not because the economy was awful, they were spending more for the war effort and so it's sort of this exogenous thing, it's a natural policy experiment. So that's why they like this. And they come up with other ones and the freakonomics guy, he does a lot of stuff in his book about this type of thing where you wanna isolate and you wanna find a case where the two variables that you're trying to figure out does one cause the other. The way you wanna cleanly test that or to more cleanly test that is to find cases where the one thing goes up for something that's clearly unrelated to the other trend and then you can see if the two move together or if they go in the opposite direction. Okay, so that's why they like this story so much or this episode so much. So what are they doing? And I mentioned some of this in the previous lecture that the problem is that one of the major problems with this treatment is they'll just naively, the Keynesians will naively look and say, uh-oh GDP went way up during the 40s so clearly government spending fixed the economy but that assumes it makes sense to just lump in private spending and government spending and treating them as equal, that a billion dollars the consumers spend on radios and cars is the same amount of output as a billion dollars that the government spends on tanks when clearly that's not the case. And again, you don't need to have a libertarian theory to make that judgment calls. And just in terms of standard economics, the reason it's somewhat acceptable as a first approximation to lump in all private spending in dollar terms is that you say on the margin, people could spend their dollars among competing uses and so a billion dollars spent on radios and a billion dollars spent on cars, it's not terrible to say that's $2 billion in total output if you wanna somehow come up with a common denominator but it really doesn't make sense to then say, oh and a billion dollars government spends on tanks that's $3 billion in total output. No, even just on mainstream economic terms that you can't do that because the incentives facing the government expenditures are different from the ones in the private sector. Namely, if the government finds a cheaper deal with tanks that are just as effective but are 10% cheaper, they have no incentive to switch to them because the money they save them, they're gonna lose it in their budget. They can't pocket it. It's not that they get more profits for their shareholders. All right, so there's no reason for government officials to be parsimonious with their money and so the fact that they're willing to spend a billion dollars on something isn't even to a first approximation evidence that that's a billion dollars worth of output. Okay, so that's one huge objection to their whole premise of what they're doing. Another major problem, and this stuff, of course, is Bob Higgs is the guy who really brought this stuff to the forefront. Another major objection is to what the Keynesians do with this episode is they ignore price controls and so what happened is the Federal Reserve was monetizing the debt during the war era and so that's partly how the US government was able to spend so much on the war effort. That's why nominal GDP was able to rise so quickly because private creditors wouldn't have lent the government so much money on such cheap terms. What happened is the Fed was monetizing a lot of the debt. Other things equal that would have pushed up the price level and so when you calculate real GDP, which is what the Keynesians use because they think they're being careful and rigorous, they say, oh, we're looking at real GDP. We're not idiots, but so the numerator's going up because the government's printing money and spending it but the denominator, it was illegal to go up, right? It was literally illegal for prices to rise in reaction to how much new money had been printed so it's not surprising then that that whole quotient went up, if you will, if they're allowed to print money to raise the numerator but it's illegal for the denominator to go up and offset that. Okay, now this is something I didn't mention yesterday. I had an article in the American conservative come out recently where this is a little bit, it's consistent with what Bob Higgs has been saying but I'm trying to put it in different terms. Suppose we forget these first two things. Let me just give that for the sake of argument and knock those out and just forget those arguments. Suppose we took Krugman and those guys at face value because they're saying we could do now what we did during the war years, World War II because that proved the efficacy of government spending to create certain government provided goods and services and raise total output. So what if we just looked at those statistics, took them at face value and said, oh yeah, real GDP really did go way up during the war years and yet you really did cure unemployment by just spending a bunch of money and so we'll look at that as a model, is that what we should do right now? And I wanna say no, even on their own terms, nobody, if he really understood what happened during the war years would do that because what actually happened is that private output fell 55% over three years and government debt during the war increased by a factor of five. So what that would mean now is if the government were to spend as much as it did during World War II it would so much crowd out the private sector that current living standards in terms of the private sector would go back to 1984 levels and the federal debt would be $50 trillion and this would just happen in a matter of a few years. And so Krugman and those guys, they say, oh, but no, we wouldn't be spending on socially useless things like tanks and bombers. We'd be having roads and schools and bridges. You say, okay, what household right now if you said to them, okay, your private standard of living, like you go out to restaurants, how much you spend for gasoline, things like that, what your rent is, things that the market provides for you, your level of consumption right now is gonna go down 55% over the next three years and the federal debt is gonna go up by a factor of five but the roads are gonna have no potholes. You want that? Or the bridge that you go under is gonna be a little bit sturdier. You're not gonna worry about it falling on you. Which, that was one of the things when that one bridge collapsed, all the canes are saying, why don't we spend more money? There's all these make work projects ready. Okay, so would anybody take that bargain? And I don't think, I mean, the only person who possibly would be someone who's long-term unemployed and thinks, well, at least I would have a job but even then that person's standard of living would go up, right? So if we're talking about the average household, the standard of living would go down 55%, right? So clearly what's happening is the people who had jobs, their standard of living must have gone way down and then the people who were unemployed but now got jobs, their standard of living didn't actually go up by as much as they otherwise would have thought in order for that aggregate figure to be like that. Okay, so that's, so again, even on their own terms, if we accepted that government spending creates output dollar for dollar, the same thing as the private sector does, or not even dollar for dollar, even if we take the multiplier into account and just literally look at the World War II era and take those numbers at face value, again, what they're saying is, look what we can do. If you just give us control and you follow our recommendation, now too, just like back then, we can give you an economy where we get full employment, full recovery. So what about the European case now? So they pivot and I think rhetorically, the Keynesians realized they were on not so solid footing with the US. The one sort of thing they kind of had in their favor was when it did seem like the economy was kind of turning, so initially the economy got awful when the stimulus package passed. Then things bottomed out and they started to recover and that kind of went hand in hand with when the extra federal spending really, like when the spigots were fully opened as far as the stimulus package was concerned. But then once that spending dried up, then the economy seemed to be heading back towards a double dip. So that was what they were trying to argue in terms of the US experience as this was happening. Was it, see, see, once spending came up, the economy, and then you could argue that either way, that it's even on an Austrian terms, in terms of quarter by quarter, it's not shocking that if the federal government's spending hundreds of billions of dollars, certain indicators might show activity and then when they cut it off, those indicators dry up. I mean, that's, I don't really have a problem where the other, if that's a true statement or not. But where they pivoted now is they think Europe's the place to go because as far as the standard rhetoric goes and they've done a great job in terms of selling their line and framing the debate as to what's been happening in Europe. Because clearly nobody likes what's going on in Europe in terms of the economic outcomes. And so the Keynesians realize if we can paint that as a poster child for what Ron Paul wants, then we win. So first of all, what they do is they're telling us that Europe is on a quasi gold standard. Did you guys know that? Yeah, Europe's on a gold, or quasi gold standard. What's quasi or pseudo among friends, right? And what they mean by that, of course, so the Euro, just for those of you who don't know, is not in any way tied to any commodity money in fact, it was never tied to a commodity money. It was a pure fiat currency introduced to replace what at the time were other fiat currencies. It is a purely technocratic invention of mainstream economists that has nothing whatsoever to do with the gold standard. And yet they're saying, this is basically showing you the problems of gold standard. So what do they mean? How can they possibly say that? What they mean is certain countries like Spain, for example, Krugman will say they, during the housing bubble, wages got bit up in Spain to unsustainable levels. And so what needs to happen in order to restore equilibrium now is Spanish wages need to fall relative to output prices, right? So the Spanish workers need to earn less compared to what their goods are being sold for. And so I said, there's two ways that can happen. One way is to have what's called internal devaluation, meaning in nominal terms, in Euro terms in Spain, that product prices remain what they are and wages actually get lower in absolute terms. So workers actually see I'm getting a little smaller paycheck now than I was last year. So that's one way to do it. Or another way is their nominal paychecks could stay the same, but the Spanish currency could depreciate against the rest of the world's currencies. And so it makes their products cheaper so then they can export more. And so that's another way that you could effectively reduce Spanish wages relative to the rest of the world and therefore get the rest of the world being willing to buy their products. All right, so he said, but that can't happen right now because darn it, the Spanish don't have their own currency. They can't devalue at the mercy of these Germans and the other people who are running the ECB. So that's what he's saying. And he says that's kind of like what happened to the world in the early 1930s when everybody was tied to gold. He was saying that various countries, the obvious textbook thing to do would be to devalue your currency. Ah, but they couldn't because they had foolishly locked in their currencies to gold at a fixed rate. And so you couldn't just willy-nilly inflate because then your gold stocks would run down. And then lo and behold, if you look empirically, it like industrial output statistics, the countries that went off gold in the 30s, first you saw them turn around and then it lines up, there is a fairly decent lining up in terms of the sequence that the countries that went off gold bottomed out and then recovered. And then it was like France, which really held out to the end has the longest sluggish, most sluggish recovery in the 30s, right? So that's what Krugman means when he says Europe right now is suffering from a pseudo gold standard. Okay, and then the other thing of course is he says, he's been upping the ante with his rhetoric, saying at first it was just, oh, they're trying austerity in Europe and it's not gonna work. And now he's built it up to, he calls it Europe has tried unprecedented austerity. And so just to show you this unprecedented austerity, in particular he was pointing to the elections in France saying they tried austerity in France and the French people are smart, they're Alkanesians at heart and they know to get rid of these guys. And in the UK also he was saying they tried austerity in the UK and it didn't work. So you can see these figures, this is from Varanik, Roderick in here, how do you say her name? Varanik Derougeur. You know what I'm talking about? Varanik from Cato. What's that? Yes, there you go. Okay. So this is from her analysis and she got people were just biting her head off with this one, you know, like, somebody, what did Krugman say? I don't wanna misquote him because I'm such a fair guy, but he said something astounding like, at this point, any data that comes from her, you know, is suspect or something like that or you can't trust it. It's like, can you imagine in a debate over European austerity, this woman had the audacity to graph the actual budgets? I mean, will these right-wingers, do they have no shame, you know? And what Krugman was mad about was that she should have just been showing government consumption and investment expenditures because some of these include transfer payments and that there's no Keynesian rationale for why those, which is totally not true that Krugman himself would include transfer payments earlier when he was explaining why the big government saved the US in 2009. You know, he was, so anyway. But that's neither here or there. So what's the point with this that you can see? Now, I was actually surprised. I mean, Spain actually did cut it a little bit. Greece actually cut, Ireland actually cut, which isn't shown here, but the point is a lot of these things, at best, maybe they partially rolled back what they had increased from 2008 onwards. So if you're an Austrian and all along, you've been saying, no, no, these stimulus spending packages are bad, they're making things worse. It's not really a refutation of your point that if they take that poison and then cut the dosage in half and the patient still is sick, you know, the person said, well, we tried your approach and it didn't work. You know, if you're, no, what you're doing is wrong and just scaling back the wrongness of what you're doing is still a bad idea, right? So that's one thing to point out. The other is that what has been called austerity in Europe, a lot of it is tax increases. In no Austrian that I know of ever said before the fact that you know when they were going, to implement this stuff that, oh yeah, raising taxes is a good way to get out of this crisis and that will make the European economies recover next quarter and you'll see GDP go up if they hike taxes. No Austrian that I don't have said that. And I even, and I was sure, like I emailed Robert Wenzel, economicpolicyjournal.com because I was sure he had written about this. And I said, just off the top of your head, can you quickly grab me some stuff of you saying at the outset that these planes that are gonna raise taxes and all these bailouts and everything, aren't a good idea, because that's the other thing too. This so-called austerity in Europe, they have been having repeated bank bailouts and they just keep upping the ante. So call it what you will. If Crouman wants to say, well, that's not what I'm for, okay, fine. But that's certainly not to be held up as the paragon of what a Ron Paulian or a Rothbardian would have said, this is what Europe should do. They have been spending well over a trillion dollars at this point bailing out banks who bought government debt. That's, I mean, it'd be hard to come up with things that an Austrian would have opposed more strongly than what they've been doing. So here's just an example to show you on that speaking in general, is that this really, we can go document showing people who are influenced by the Austrian school didn't think this was going to work. This is not that austerity we can believe in. So this is Wenzel from April 2010 saying, former chief IMF economist Simon Johnson makes the astounding call for a trillion dollar bailout of the pigs. Bottom line, the Eurozone crisis is too big to be solved by bailouts without huge pain inflicted via taxation and or inflation on citizens of this planet who had nothing to do with creating the crisis. And incidentally, this Simon Johnson, the former chief IMF economist who was calling for the trillion dollar bailout is not a closet Rothbardian as far as I know. All right, so this is, we shouldn't say, ah, see, we see that somebody here who was in the Austrian tradition was calling for the bailout. No, that's not someone that's on our team. Okay, all right, that's the end of this thing. Now let me, now when I had prepared this, I was thinking, okay, I'm going through some standard stuff here, but I don't really have this really knocked down case of something to show you guys. And then Ezra Klein, bless his heart, just came out with something, I think this was two days ago, to just to show you just really the absurdity of Keynesian prescriptions for how to solve this mess. So the name of this art, it says in the Washington Post, it came out on July 24th, 2010. And the title of it is Uncle Ben's Crazy Housing Sale. And let me just read a few excerpts. So this is Ezra Klein talking. He says, there's no mystery as to why Congress is not doing more to help the economy. And he's saying, because of disagreements between Democrats and Republicans over fiscal situation. Okay, da, da, da, da. But there's a real mystery as to why the Federal Reserve is not doing more to help the economy. Ben Bernanke, after all, keeps saying the central bank can do more. And if the economy gets worse, it will do more. But the economy keeps getting worse and the Fed keeps not doing more. And then Klein has a chart showing what the Federal Reserve's predictions were for 2012 GDP growth and going back to, I think, January 2010. So in other words, it keeps talking about the Fed's view of what will 2012 growth be back in early 2010, what do they think? And then just keep advancing it. And the number keeps getting lower. So in other words, as 2012 gets closer and closer, the Fed keeps marking down what they think growth's gonna be. So it's kind of a funny chart just to show that how bad the Fed has been at forecasting or at least what their official views are. So you get what Klein is saying, that Bernanke says we could do more, we have more ammunition. And it's not, isn't it kind of funny that the way Bernanke talks, it's always about how we have more ways to shoot the economy if we had to. Right, he always talks about that hasn't run out of ammunition yet. You know, we can bomb the economy even more if we need to. All right, so, this is back to Klein. So some argue there's nothing more the Fed can do, but Bernanke is not one of these people. Quote, I wouldn't accept the proposition that the Fed has no more ammunition, Bernanke said in June. Da, da, da, da, da, okay. So back to Ezra Klein. So why isn't the Fed using those tools? Explanations vary, he gives various psychological reasons, constraints that people are facing. Klein says, I don't pretend to know what is truly in the heart of our top central banker, but in conversations with Fed watchers and economists, I am convinced that there is something more the Fed can do and that now is the right time for them to do it. I call it Uncle Ben's crazy housing sale. Tomorrow morning, Bernanke could walk in front of a camera and announce that the Federal Reserve intends to begin buying huge numbers of mortgage-backed securities with the simple intention of bringing the interest rate on a 30-year mortgage down to about 2.5% and holding it there for one year and one year only. The message would be clear. If you have any intention of ever buying a house, the next 12 months is the time to do it. This is Uncle Ben's crazy housing sale and you'd be crazy to miss it. So he's picked the right adjective, that's for sure. Okay, so it actually gets worse, but let me stop there. Let's assume he just ended his article at that point. So think about what he's doing. There's a term for this. Maybe you guys can help me. I know Tom Woods was outsourcing, I'm drawing a blank. So clearly what would happen is by his own admission, anyone who in the next 10 years has any intention of buying a house would do it next year. So if you think about the inter-temporary allocations, what would that do? All this demand for housing that otherwise would have been spread out over a decade is gonna get concentrated into one year and then it's gonna fall off a cliff. So what happens when the demand curve goes way up and then it whips back, price goes up, right? And then it goes down. So the price of housing would go like this. Is there a, what's the word for that? It's like when you're chewing gum and you go, and what is that? It's you blow a ball, a bubble, right? That's what it is. So what he's proposing quite literally is we could create a massive housing bubble and that would fix things. And also, I'm gonna sound like a jerk but it's okay, the cat's out of the bag. That horse has left the barn. This is not an ad hominem, it's like Roderick's here. I think he can confirm for me. It's gonna sound like I'm attacking Ezra Klein personally but I'm actually not. I do wanna point out though that he's 28 years old. He has a BA in political science from UCLA and he is telling us what the 30 year mortgage rate should be down to the first decimal point. How could he possibly know that? Why shouldn't it be 2.6%? What about 2.35%? Then it would be Uncle Ben's even crazier housing sale, right? So, and I'm being quite serious. Like how does he, how could he possibly, what about, you guys know Dave Ramsey, he's been telling people to get out of debt and he has these compromises where he says, okay, if you wanna buy a house, I want you to have a big down payment. And I want you to take no more than a 15 year mortgage. Ezra has left these people out. He's been focusing on the 30 year mortgage. What the heck is your problem Ezra? He doesn't wanna help unemployed workers. Really, he should also make sure that Ben buys 15 year mortgage back securities to push down that interest rate too. You see what I'm saying? He's leaving these things out. Another thing's off the top of my head. There's lots of corporate pensions right now. That's a big issue. The corporate pensions are underfunded. If you take 30 year interest rates and push them way down, that will increase the underfunding, right? Because now those future liabilities are gonna have a higher present value. And the assets that you had are gonna earn less as you're pushing down long term rates. Now Ezra doesn't mention all that. I am sure that he has an Excel spreadsheet where he has all these different things I just mentioned and has the pros and cons and has a social welfare function to balance the benefits to unemployed workers right now getting a job against corporate pensions being underfunded 16 years out. And he must have had the pros and cons and he has it and I'm sure it's linked somewhere probably that we can go look at that information because he wouldn't just spout off, Bernanke you should go do this without thinking about it carefully, right? He wouldn't just do that, I wouldn't think. People would be more responsible. Okay, what did I mean when I said it gets worse? Typically Keynesians talk about what they call counter cyclical policy, right? So you would think, okay, well if the housing market's awful and they're saying come in and buy mortgage backed securities and boost the housing, okay fine. But listen, okay, let me just read it. This is a particularly good time for Uncle Ben to launch his sale because the housing market appears to be turning. More houses are being built, the price of existing homes is beginning to rise and inventory levels are falling. A recent Wall Street Journal poll of economic forecasters found that 44% thought that housing had bottomed out while only 3% thought the housing market had further to fall. The Fed in other words would be working with the economic trends rather than against them. Do you get what he's saying there? So what he's saying is we wouldn't want to make housing go up if we thought it was gonna keep going down but since now it's finally bottomed out after three or four agonizing years and it's starting to go up. Now's the time to jump in and take all the future demand and concentrate it in one year. What could go wrong with that? I can't imagine, I mean, because the economy's basically just about total spending, right? So this is what I mean in terms of giving a caricature of Keynesian opinion. I mean, he is literally calling to create a housing bubble, he just isn't using that phrase. So when Austria, it's not at all strong man when Austrians say things like Keynesians don't have an idea of the inter-temporal structure of production and all they care about is boosting spending right now and creating, that is not a caricature, that is in practice what their policy proposals do and it's not enough to say, oh, come on, this is just some pundit, this isn't the actual PhD economist. Ezra Klein in an interview with Paul Krugman within the last three or four months were talking and he asked Krugman, should the Fed, he didn't say create a housing bubble right now but he said words to that effect and Krugman was like, yeah, if they could do it, it'd be fine. So I mean, that is the proposal and of course you guys probably many of you know that back in 2002 Krugman famously said, as a thunder booms as I say this, that green span needs to replace the Nasdaq bubble with a housing bubble and then also just the last point, I'll turn to your questions here. Krugman has been living down that statement for years and he has gone through a succession of explanations for it and it went from things like saying that wasn't me talking, I was quoting the guy from PIMCO, which is true, but he was clearly endorsing what the guy was saying, to then saying I wasn't giving a policy recommendation that was just a positive statement of economic analysis. So again, if Krugman was just saying this is the way to get recovery, he wasn't saying recovery would be good, who in the world would think that Paul Krugman was for economic recovery, right? Assuming economic depression is bad, then this follows, but we're scientists. Okay, so there's that and then the latest one is somebody asked him, I think it was that Spanish thing when he debated the Spanish guy, somebody in the crowd asked him, what about that Krugman back in 2002 when you said it would be good that he should replace the Nasdaq bubble with a housing bubble and Krugman said, if you go and read me in context, I was clearly joking. So he just realized, you would think if he was joking, he would have mentioned that in the past three or four years, like it's the first time it occurred to him to let us know, by the way, that was a joke. So okay, why don't I stop there and we got a few minutes for questions. Okay, so the question for people watching the video, what involved Estonia and there's ways that if you're a fan of true austerity and scaling back government, you could look at the Estonian story and you could certainly tell a tale that makes it look like it's good, that it looks like when they tried the stuff that everybody else was trying, things were awful and then when they instituted reforms, things turned around. I don't know enough about their, let me say this, I don't think guys like Krugman and other ones necessarily write up a blog post and are just like, I just lied through my teeth, this is awesome, but I can't get caught. I don't think that's what they're, I think a lot of them believe what they're saying because there are so many moving parts and it is easy, especially if you're a clever guy like Krugman to craft the narrative, you can draw on all kinds of statistics, to give you one quick example about Estonia, what Krugman did is, so he was trying to show people why are people touting Estonia and he was looking at the drop from the peak down to the trough and saying, look at the drop and that's awful compared to other countries that were clearly more Keynesian than Estonia was, so why are we looking at that as a success story? And so then some other group came back and said, well, yeah, but that's, you're looking at the peak to the trough, that's not really fair, look at the trough and the growth since then and on that criteria and Estonia's great. So Krugman comes back and called, said that that was, I can't remember the exact words, something like a particularly stupid objection and said, I mean, can you imagine economists who would look at from the trough and the growth since then? I mean, that would be like, that would be like looking at 1933 when Roosevelt took over and looking at the growth in the few years since then and saying, go a new deal. And that's exactly what Christina Romer said to explain why the Obama-Stimulus package would be great and Krugman endorsed her analysis at the time. And so I said as a joke, Krugman probably wanted to call her incredibly stupid and the New York Times ombudsman said, no, you can't say that about a lady. But the point is Krugman can just, on any particular issue, he can take a stand and say as an economist, these are my modeling choices and this is the way I'm gonna deal with one thing or the other. And it's, there's nothing inherently objectionable but it's that next Wednesday, when he needs all those dials to go the other way to fit his policy proposal then, he has no problem doing that. Okay, maybe one more, yep. So the question is, have I read DeSoto's article on the defense of the Euro and I've heard of it but no, I actually haven't read it yet. So that's an easy way to answer that question. All right, thanks everybody. Thank you.