 I'm very pleased to be speaking at the 30th Mises Institute's 30th anniversary and I want to take this opportunity to salute Lou Rockwell for his magnificent achievement in founding the Mises Institute and for putting Austrian economics back on the right track and restoring Murray Rothbard to his rightful position as the found, intellectual found of the modern Austrian movement. During very dark days for Austrian economics, Lou gave young Rothbardians like myself renewed hope and a home for our research activities and for this I'll be eternally grateful to him. So thank you Lou. Okay, from the sublime to the ridiculous, I'm going to talk about the Keynesian architects of the warfare state and the argument that they use to justify military spending and it truly is ridiculous. The very logic of Keynesian economics implies that war increases employment, income and wealth in the economy, especially the economy operating below full employment. John Maynard Keynes, the father of macroeconomics, said as much himself, basically he said that wasteful spending of all kinds generates additional income because of something that he called the multiplier and that we still teach our students, unfortunately, in economics courses. This is supposed to be a magic formula, literally a magic formula. According to this, if the government, for example, spends $100 million to order a new missile, let's say an F-22 jet fighter, well then that $100 million creates income for the new workers that are hired to produce that missile. But these workers save some of that money. That's actually bad for Keynes. Let's say they save 10 percent, so they spend $90 million on iPads. But now that creates another $90 million of income because Apple has to hire, as their inventory of iPads runs down, has to hire new workers to assemble more iPads and pay them $90 million. That's an additional $90 million of income created out of thin air, but it doesn't stop there, of course, because the workers who got the $90 million working for Apple now go out and splurge on automobile and automobiles and, let's say, restaurant meals. They only spend, of course, 90 percent. They save 10 percent. So that's another $81 million of income. And this goes on and on at each stage getting less. The multiplier in this case would be 10. In other words, each dollar of government spending on that missile generated an additional $10 of income and, of course, increased employment. So keeping this ridiculous multiplier formula in mind, this is the backbone of the Keynes in case for military spending as creative and not destructive. So Keynes argued that the best cure for unemployment was very large government projects, even if they involve wasteful spending. Keynes in a radio address, as early as 1931, before he became a full-blown Keynesian himself, wrote, argued that you should tear down half of London and then rebuild it, because they were in the middle of a slump then, and that this would make the country richer. So he says nationally, too, I should like to see schemes of greatness and magnificence designed and carried through. For example, why not pull down the whole of South London from Westminster to Greenwich and make a good job of it, housing on that convenient area near to their work as a much greater population than at present, in far better buildings with all the conveniences of modern life, yet at the same time providing hundreds of acres of squares, avenues, parks and public spaces? Would that employ men? Well, of course it would. Of course it would. Okay, destroying your own house and then paying someone to rebuild it, of course that employs men. In 1933, I mean Keynes was a guy who fled a lot of himself, to say the least. So he wrote a letter to the FDR and he said, I lay overwhelming emphasis on the increase of national purchasing power resulting from government expenditure, which is financed by loans from the central bank and not by taxing present incomes. Loan expenditures that is borrowing and spending is the only sure means of securing quickly a rising output at rising prices. This is why a war has always caused intense industrial activity. Now, he himself was not a militarist, I'll say that in his favor. He went on to urge FDR to begin to engage in huge construction projects so that he would have spending on useful projects rather than just war. But he believed that war did create employment and income. Finally, in the general theory, which is the Bible of modern macroeconomics still, Keynes argued that purely wasteful spending in general would generate this additional employment income and wealth. And he explicitly mentioned spending on war, pyramid building, earthquakes, and digging holes in the ground, which is what his term was for mining gold. He thought mining gold was purely wasteful, but that's okay because it did create employment. So he says, the above reasoning shows how wasteful loan expenditure may nevertheless enrich the community on balance. Standard building, earthquakes, even wars may serve to increase wealth. He also proposed only half facetiously to bury paper money and dig it up again, have the Treasury do this. He said, if the Treasury were to fill all bottles with banknotes, bury them at suitable depths in disused coal mines, which are then filled up to the surface with town rubbish, and leave it to private enterprise to dig the notes up again, then there need be no more unemployment, I mean, he's serious. And with the help of the repercussions, the real income of the community and its capital wealth also would probably become a good deal greater than it usually is. He went on to attribute the fabulous wealth of ancient Egypt to the fact that they had two forms of wasteful spending, not only did they dig holes in the ground looking for precious metals, but they also built pyramids. So he says, ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely pyramid building as well as a search for precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. In other words, he just kept it around, he didn't really do anything with it. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead are twice as good as one. Okay, he's nuts. So World War II, I just want to quickly mention that Abba Lerner was an extreme follower of Keynes, and he formalized these doctrines of wasteful spending and incorporated them into mainstream macroeconomics. He proudly referred to Keynesian economics as topsy-turvy economics, because it stood on its head all the truths of classical and Austrian economics. According to Lerner, an economy with unemployment, with unemployment, has an upside-down economy, which needed topsy-turvy economics to analyze it and prescribe remedies to turn upside on the right side again. He said crazy things, he said, he had four principles. One is where there's unemployment and efficiency is uneconomic. So he says, in fact, he went on and he said, in every socially significant sense, the increase in efficiency brings not greater happiness, but greater misery. In fact, Lerner explicitly praised monopolistic restrictions, wasteful union rules, I'm actually quoting from him, tariffs that interfere with the International Division of Labor and everything else that reduces productive efficiency because they lead to an increase in employment. He also said saving was wasteful and also said in the upside-down economy, prodigality that it's just spending freely and irresponsibly is beneficial and wastefulness enriches. That's one of his principles. Finally, he is fourth principle, he said in the upside-down economy, money and work are scarce rather than goods. So he went on to say, according to this topsy-turvy economics, the wealthier a society is in terms of quantity and quality of invested capital that it has available, the more it will suffer from poverty. So what he's saying, in other words, is that having more factories, houses and electric utilities make you poorer. Now what, no, what's his reasoning? He goes on and says the productivity of investment is a nuisance, for it means that when the factories and houses have been built, there is no longer a great need for still more of them, so that investment is checked. On the other hand, if investments do not turn out to be useful, if they are destroyed before they are completed, or if they are badly designed so that they are not of any use when they are completed, they can be started all over again. And meanwhile, increase employment, income, and the output of consumption goods. Okay, all right, so that's the background. I won't go more on Lerner. Though I once saw Murray Rothbard give a talk of praising deflation. And Lerner was in the audience and he got up and he said, Murray, he says, I completely agree with you. But only if wages were completely flexible. So that was kind of startling for me to hear that you thought, what's going to be right if the world worked in a way that it really does work. Wages are flexible. Okay, so anyway, Paul Samuelson, though he wasn't as extreme as Lerner, he was sort of the father of modern macroeconomics in the US, put this doctrine into his textbook and created in a way military Keynesianism. That's what we call it. He said there is nothing special about government spending on jet bombers and intercontinental missiles that leads to a larger multiplier support of the economy than what other kinds of government spending. In other words, building missiles is just as productive as building more machines, more factories, and so on. Okay, so I want to jump to the present day. Lerner and Samuelson's simplistic Keynesianism sort of fell out of favor as a result of the great inflation that it caused in the 1970s and was displaced by more sophisticated varieties of macroeconomics, including monetarism, new classicism, and eventually new Keynesianism. Okay, which is what we really have today. But after the failure of these more refined and there's still Keynesian approaches to either predict or explain the housing bubble, the financial crisis, and this stagnant recovery, vulgar Keynesianism, as Doug has pointed out, has come roaring back with QE infinity, just spend, spend on anything. And with it has come military Keynesianism on both the left and the right. Let me take the right. For example, in 2008, Martin Feldstein, the eminent Harvard economist and establishment Republican economist and advisor to presidents, wrote an op-ed in the Wall Street Journal advocating a large temporary increase in spending by the Departments of Defense. And of Homeland Security as well as by the FBI and other national intelligence agencies. As part of Obama's original $800 billion stimulus package. So he was advising Obama to spend more on the military. And he said, 10% increase in defense outlays for procurement and for research would contribute about $20 billion a year to the overall stimulus budget. He also wanted a 5% rise in operations and maintenance, and that would create about 300,000 additional jobs. He wanted to raise the military's annual recruitment goal by 15% because that would provide jobs. But although he says that you should avoid wasteful spending, he doesn't think this is wasteful spending, okay, of course he's wrong. He does say, he does embrace learners' topsy-turvy economics. He says although some activities like shipbuilding cannot be completed in the two year stimulus period, the major part of the expenditures can be brought forward in time by acquiring components and materials quickly and holding them in inventory until they are needed in the shipbuilding process. In other words, build up things that you really don't need at that point in time. So then he goes on and says, such a departure from just in time inventory management would be wasteful under normal conditions but makes economic sense where there's temporary excess capacity. So again, that's topsy-turvy economics. That is a different kind of economics that applies when there's some unemployment in the economy. Misesian disciple turned supply-side of Reaganite, turned Obama-loving Keynesian commentator, Bruce Bartlett, recently posted a New York Times blog in which he portrayed the effectiveness of military Keynesianism in curing recessions and depressions as an established fact accepted by almost everyone. So he said, World War II ended the Great Depression. And ushered in post-war prosperity, convincing economists and politicians that military spending was economically beneficial. Bartlett argued that this almost universal acceptance of military Keynesianism could be used by Obama or Romney to pump more stimulus spending into the U.S. economy. He makes an ingenious argument, though it's disingenuous also. He advises the next president to follow the example of Dwight Eisenhower and repackage spending on national infrastructure projects as vital to national security. Eisenhower's giant interstate highway boondoggle enacted in 1956 was referred to as the National Interstate and Defense Highways Act. Also in 1958, the launching of Sputnik by the Soviet Union prompted Congress to pass the National Defense Education Act. So what Bartlett says then, he's basically telling the next president to redefine everything that the government spends on as national defense. And this will allow, everyone will say, oh yes, we agree with this. So he says, it is true in today's world that national defense does not consist of bombs and rockets only. Adequate public infrastructure, a well-trained labor force that can produce soldiers capable of operating high-tech weaponry and a strong economy or as important as the traditional tools of war. In other words, anything the government spends on, let's call it military spending. And since we're fighting a war on terror, everyone will simply accept it. And then finally, and lastly, and deservedly lastly, we come to the strange case of Paul Krugman. In an article entitled Bombs, Bridges, and Jobs, Krugman criticizes military big spenders and he calls them weaponized Keynesians. And I like that. But he criticized them for the wrong reasons and then at the end of the article winds up endorsing them. He says basically the problem with right wing weaponized Keynesians is that they argue that cutting military spending will destroy jobs. And that implies that of course spending, military spending creates jobs, but they won't go any further than that, right? They believe that any other kind of government spending is wasteful and so on. So he berates them for that. And he says that they're hypocrites because they generally view spending on F-22 fighters as economically beneficial while they portray Obama's spending on promoting new energy sources as economically destructive. Okay. He does, however, wholeheartedly endorse the argument for military Keynesianism and is thrilled with its recent revival. He writes, military spending does create jobs when the economy is depressed. Indeed, much of the evidence that Keynesian economics works comes from the track, comes from tracking the effects of past military build-ups. Some liberals dislike this conclusion, but economics isn't a morality play. Spending on things you don't like is still spending and more spending, simply more spending creates jobs. So I welcome the sudden upsurge in weaponized Keynesianism, which is revealing the reality behind our political debates. He came up with his own plan. Okay. He wanted the government to invent the threat of a Martian invasion. Seriously. And then expend an enormous amount of monies, created money, basically, on military spending on wasteful anti Martian weapons that would never be used. But of course, the US government has already invented a phony threat, and that's called the war on terror. But let me just show you a little clip of Krugman here. Hopefully, Chad schooled me correctly in how to do this. So I'll leave you with Krugman for the last one minute and 37 seconds point forward. I hate to do that to you. Infrastructure spending, if we're well spent, that's great. I'm all for that. I'd borrow for that, assuming we're not paying Boston big dig kind of prices for the infrastructure. But even if you were, wouldn't John Maynard Keynes say that if you could employ people to dig a ditch and then fill it up again, that's fine. They've been productively employed. They pay taxes. So maybe Boston's big dig was just fine after all. Think about World War II, right? That was actually negative social product spending, and yet it brought us out. I mean, partly because you want to put these things together. If we say, look, we could use some inflation. Ken and I are both saying that, which is, of course, anathema to a lot of people in Washington, but is in fact what the basic logic says. It's very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So if you think about using all of these things together, you could accomplish a great deal. If we discovered that space aliens were playing to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, whoops, we made a mistake. There aren't actually any space aliens. So we need arson. We'd be better. That's what you're saying. No, that's right. There was a Twilight Zone episode like this, which scientists think is a alien threat in order to achieve world peace. Well, this time we don't need it. We need it in order to get some fiscal stimulus. That was a Twilight Zone episode. Thank you.