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Thursday, February 05, 2009
The Austrian Solution
Austrian economists have been criticized frequently for proposing that we do nothing in response to the economic crisis in a political climate where the majority are demanding that the government do something (anything!)
Well, Robert Murphy over at Mises.org takes up the challenge of answering, "do you Austrians have a better idea?"
Murphy first points out that you don't actually need have a better idea to realize that the idea being criticized is bad (an idea that's dangerously rare these days)
If an allergic man has been stung by a bee, I don't know what to do except rush him to the hospital and maybe scour the cupboards looking for Benadryl. But I'm pretty sure drawing blood from his leg, in order to inject it into his arm and thus "stimulate his immune system," is a bad idea on numerous accounts — not least of which, is that I'm pretty sure an allergic reaction means your immune system needs to calm down. But the point is, if a bunch of guys hold the man down — he has to be forced to endure the procedure for his own good, don't you know — I feel perfectly qualified in yelling, "Stop!"
If you grasped that analogy, you can understand my feelings about anything Paul Krugman writes.
He then lays out an Austrian-friendly (though he admits not pure Austrian) plan for dramatically cutting government as the ultimate economic stimulus.
Among his recommendations: dismantle the IRS and level the building, eliminate the DEA and the Department of Education, and more.
Cut the Pentagon budget in half. In FY 2008 it was (officially) some $460 billion,
so that cut alone would free up $230 billion per year. This isn't an article about foreign policy, so we won't be specific about how the military could achieve such cuts. But if you're worried that the country would suddenly be overrun by Iranian tanks, the following chart should reassure you:
Top 10 Countries by Military Expenditure, 2007
These ideas are far from politically feasible in the US or Canada, but it's an entertaining read and it's nice to see pie in the sky thinking in the right direction.
h/t: Isaac Morehouse.
Posted by Janet Neilson on February 5, 2009 | Permalink
Comments
The graph is shocking, until you glance at the other countries on the list. Seven of the countries on the list get away with spending less because the US spends more. The US has been practically keeping Europe alive for over 50 years. Saudi Arabia would not exist without US military spending.
Think of it this way, a big piece of that spending allows the US access to reliable energy sources. Would people complain this much if it was access to food or water they were fighting for?
Posted by: dp | 2009-02-05 11:26:33 AM
dp,
"Think of it this way, a big piece of that spending allows the US access to reliable energy sources."
The author of the famous phrase "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest," dealt with your exact mercantilist objection back in 1776.
It is not US military might and spending that guarantees access to, for example, mid-east oil for Americans, but rather the self-interest (one might say greed) of those in possession of the oil who will sell it on the world market where Americans can buy it.
Posted by: Kalim Kassam | 2009-02-05 11:56:39 AM
Kalim is right. Most middle eastern countries would blow up without selling oil. They don't have a choice.
Posted by: Charles | 2009-02-05 12:07:00 PM
Cut the Pentagon budget in half. In FY 2008 it was (officially) some $460 billion,Download PDF so that cut alone would free up $230 billion per year. This isn't an article about foreign policy, so we won't be specific about how the military could achieve such cuts. But if you're worried that the country would suddenly be overrun by Iranian tanks, the following chart should reassure you:
Posted by Janet Neilson on February 5, 2009
Hmm. So the US cuts the Pentagon budget in half from $460 billion to $230 billion. When you total up all the personnel costs (pay, housing, travel, food, healthcare,etc.) it comes to around $150 billion. That leaves around $80 billion for operations and maintenance, new equipment and R&D. Unless you intend to also reduce the size of the US military by half, for 1,500,000 to 750,000 your "Austrian Solution" is nothing but hot air. And what are you going to do with another 750,000 looking for jobs?
Posted by: The Stig | 2009-02-05 1:13:20 PM
Stig, Re the point what would we do with 750,000 looking for jobs, I am reminded of the broken window fallacy. http://freedomkeys.com/window.htm
The 750,000 people would not be an issue at all if it makes sense to reduce military spending. The taxes required to pay the wages of 750,000 people would remain in the pockets of the people, where is will be spent. As this money is spent, jobs and wealth will be created. What these jobs will look like, who knows. But they will be created.
Posted by: TM | 2009-02-05 3:09:21 PM
Cut the one department in the U.S. government that actually works? You had me on getting rid of the Education Dept and ditching the Commerce Portfolio. I think replacing the IRS with either a flat tax or national sales tax is a great idea. I think that there are probably at least 4 or 5 more cabinet level departments that should be closed. However, I disagree on the military budget. One, the United States military budget is so large because it has both worldwide commitments and spends a lot of money on technology(the goal being to decrease American casualties). A lot of that money has gone to things like missile defense(started under Reagan but now proving very effective as a limited nuclear deterrent), telecommunications(that led to the creation of the internet), predator drones, spy satellites, and incredibly realistic combat simulators(goal to reduce casualties and prepare U.S. forces for combat). In addition, the U.S. has to be on its toes in multiple theatres. In Eastern Asia, the U.S. has to worry about increasing Chinese military power. The Chinese have especially been investing in their navy(particularly submarines). Will Canada or one of the european country significantly increase their forces in the Pacific to counter this? In Afghanistan, we have a situation that calls for more troops so that captured ground can be held. Most NATO nations won't commit their forces to combat there. After 108 deaths, the Canadians plan to leave Afghanistan in 2011 and won't be coming back. In fact, many Canadians seem to feel that Afghanistan is an American problem. A few Canadians on the web even talked about how this would be good because American soldiers were more expendable than Canadian soldiers and their deaths were deserved. This means that the only ones left willing to put up combat forces will be the U.S., U.K., Netherlands, Australia, Norway, and Denmark. The U.S. is the only one left that can put significant forces in the field to make a difference. I doubt these other countries will reinstate the draft or massively increase their military sizes. Also, the U.S. needs forces deployed to monitor Venezuela(allied with Iran), Cuba, and other western hemisphere hotspots. Second, the U.S. military strategy of overwhelming firepower and mobility(See Gulf War or 2003 Iraq invasion) requires significant numbers of aircraft and armored vehicles that are able to be effectively applied at various locations while overwhelming air superiority is achieved. Finally, look at American history. The United States has a history of cutting its military too far in peacetime and being caught unprepared for war. In World War 1, the United States entered the war but had to borrow helmets, artillery, some clothing, and tanks from the Allies. The U.S. military was also understrength and untrained in deploying large forces in the field for significant periods of time. The result is that the French and British took the American forces as they applied piecemeal in France and wouldn't let them fight as a unified command. Instead, these countries send U.S. forces into some of the worst areas of the front to do their dirtwork(while the other 2 countries took the credit). In the Korean War, the U.S. had a military that had been rapidly downsized after World War 2. The forces were understrength, out of shape, ill led, and illequipped. Some of their bazookas couldn't even penetrate North Korean armor. It tooks months to straighten out the situation during which thousands of U.S. troops were killed or captured. At the beginning of WW 2, the U.S. forces suffered from problems with equipment(non exploding torpedoes) and poor intelligence. Reagan showed the need for a strong defense. The U.S. has to do it because no one else is stepping up to the worldwide committments.
Posted by: David | 2009-02-05 3:16:16 PM
"He then lays out an Austrian-friendly (though he admits not pure Austrian) plan for dramatically cutting government as the ultimate economic stimulus."
Janet,
I don't think he admits anything of the sort. The "purists" he refers to are not ultra-Austrian purists of the subjective value theory or methodological individualism (although, like Murphy, they might be), but rather purists of the non-aggression principle, i.e. libertarian/market-anarchist purists (they can be predictably found in the comment thread: http://blog.mises.org/archives/009354.asp#comments)
In any case, fantastic article. My favourite suggestions were numbers 9 and 10.
"9. Allow unrestricted immigration so long as the incoming folks had a secure job in which the employer (a) paid three years in advance on any state and local taxes that would accrue from the employment and (b) bought at least a $100,000 house for the immigrant and his or her family. (Yes, yes, the last point is silly, but it will help sell the package.)"
I like this one because it's so rare that I hear a reasonable proposal for immigration reform. I don't think anyone is happy with the current policy. There's no appropriate word for the US lottery system other than "bonkers". Here we have a proposal which gets much closer to open borders, but has practical measures to reduce the taxpayer burden of these immigrants and there is an attempt to screen for potential welfare dependents. While these immigrants and their families could use tax-funded services like roads and public schools, they'll be contributing to their expense as much (or more) as anybody else.
"10. Abolish the minimum wage. That — coupled with the elimination of the income tax — will take care of unemployment within 6 months."
There's little else to say but "duh!" There is no reason for a significant amount of long-term unemployment during a period of economic adjustment (even more so during good times) in the absence of the minimum wage and other interventions and attempts at price-fixing in the labour market. I think that most economists would agree with the preceding sentence, but virtually no politicians ever propose eliminating these measures to solve the ever-so-vexing problem of unemployment.
Posted by: Kalim Kassam | 2009-02-05 6:57:13 PM
David.
" A few Canadians on the web even talked about how this would be good because American soldiers were more expendable than Canadian soldiers and their deaths were deserved".
That is a low blow and certainly does not represent the mainstream. We have our share of nuts just like the US has it's share. To single these fools out as a example of Canadian thinking spoils a otherwise excellent article. Bad dog.
Posted by: peterj | 2009-02-05 9:21:30 PM
I agree David and I think we get sidetracked by obsessing over the US military budget. In a twisted way I think the Bush Administration didn't mind too much the fingerpointing at the military budget because it obscurred the fact that the real measures hurting US finances were elsewhere. It is the expansion into government interventionism that is the problem. The massive new drug plan. Record agricultural and steel subsidies. Record education funding. And now trillions on so called fisal stimulus.
I agree completely with Von Mises and the Austrian School that we are foolish to try to destroy the business cycle. Doing so has added suffering that was uneccessary.
But Von Mises fled a collectivist state for the freedom of the US and I am sure he was happy for the US military machine that was built to put an end to the ideology he fled.
Another argument can be made however for BETTER spending that money in the Pentagon. Now with Russia turning once again to our enemy, the US is wise to develop missile defense. A lot is wasted as well possiby because a lack of vision and focus. Much of US policy is reactionary rather than premeditated. Keeping troops to defend Europe is beyond its usefulness.
Posted by: Faramir | 2009-02-06 12:25:57 AM
" Keeping troops to defend Europe"
Faramir.. I would disagree with that simply because the reliance would then shift to nuclear response. As long as Americans are on the front lines the Soviets would have to go throught Americans to get to Europe. We all know that Nato is useless without the US to back it up and would fold like a wet paper towel. Without US troops on the ground I believe the Soviets would gamble far more than they do now to regain lost territory.
Posted by: peterj | 2009-02-07 12:04:13 AM
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